Small-Business Loans of 2021

Small-business loans can help you start or expand an existing business. And during the coronavirus pandemic, small-business financing could help your business stay afloat amid disaster. Loan programs from direct lenders and the Small Business Administration, including the SBA Paycheck Protection Program, can infuse working capital loans and other financial support when you need it the most.

Read on to learn about the financing options small-business owners have, including SBA loan programs, working capital loans and real estate loans. Learn how small-business loans work and how you can find the best business loan to start, expand or maintain your small business.

What you’ll learn:

What Are the Best Small-Business Loans?

Methodology: U.S. News conducted an in-depth review of the best small-business loan companies to recommend the best business loans from traditional and alternative lenders. Factors including customer service ratings, product availability and loan terms were used to select the best small-business loan providers.

These lenders are a good starting point for most businesses. But there is no one-size-fits-all loan that is perfect for every business, so you should carefully research each small-business financing option yourself.

U.S. News Survey: Cash-Strapped Small Businesses Split Over COVID-19 Aid

How Do Small-Business Loans Work?

Small-business loans are used for business expenses. While some loans are for general business funding, others are for specific uses, such as working capital loans, real estate loans or equipment financing.

Typically, small-business term loans offer a lump sum that you’ll pay back with interest over time. But there are a variety of business loan types, so small-business owners should research their options to find the best fit.

What Small-Business Loans Are Available?

Consider the types of small-business loans you can choose from:

Term loans. A business term loan offers a lump sum with a fixed term and repayment amount. With each payment, you'll pay the principal and interest.

Business lines of credit. Business lines of credit are very similar to credit cards and can be used to purchase inventory or equipment, invest in marketing, or manage fluctuations from seasonal sales. They have a maximum limit you can borrow and repay. You’ll be charged interest for the amount of money you draw, not on the maximum limit.

Equipment loans. Equipment financing is a type of term loan that can be used to purchase and spread out the cost of a large piece of machinery or equipment for your business. Usually, the equipment serves as collateral for the loan.

Invoice financing. If your small business struggles with cash flow because you’re waiting on invoices to be paid, you can use invoice financing, also known as factoring. With invoice factoring, you sell your unpaid invoices to a lender at a discount.

Merchant cash advances. With a merchant cash advance, the lender provides you with a lump sum based on your future sales, usually at a high cost. You’re responsible for paying the amount of the loan plus fees, either as a cut of your sales or with fixed daily or weekly transfers from your business bank account.

Real estate loans. A commercial mortgage is a term loan used to buy, develop or refinance commercial property, such as a warehouse, mixed-use building or retail center.

Franchise loans. Franchise loans can be used for standard business opening expenses and franchise-specific costs, such as marketing fees or the franchise fee, which you pay upfront to open a franchise. Some franchisors may offer funding to help you establish your franchise.

How Do SBA Loans Work?

The Small Business Administration, a government agency that provides direct loans, loan guarantees, and other resources and support to small businesses. Small Business Administration-guaranteed loans are executed by commercial lenders that are approved by the SBA. Learn about typical SBA loans available:

7(a) loan program. The Small Business Administration’s primary lending program, 7(a) loans are the most common, flexible and simple type of SBA loan.

Financing under the SBA 7(a) loan program can be used for many purposes, including toward working capital, construction of new buildings, renovations, establishing new businesses, the expansion of existing businesses and debt refinancing. There are restrictions. For example, borrowers can’t pay themselves back for money they’ve already put into their business.

Loans of up to $5 million are available and are typically repaid in monthly installments. You can apply through a participating lender. The loan maturity depends on how the money is used but typically ranges from five to 25 years.

There are special types of SBA 7(a) loans to provide financial assistance for businesses with short-term capital needs and export and international trade.

For businesses that need quicker access to funding, the SBA Express loan program streamlines the application process. You will receive a response within 36 hours of submitting an application. The maximum loan amount is $350,000, and the SBA provides a 50% guarantee for loans granted through this program.

Microloan program. New or expanding small businesses are eligible for loans of up to $50,000. These loans can be used for working capital or purchasing inventory, equipment, furniture, supplies or machinery. Microloans can’t be used to pay existing debts or to purchase real estate.

Equipment and real estate loans. The 504 loan program from the Small Business Administration provides businesses with long-term, fixed-rate financing for major assets. The maximum amount of an SBA 504 loan is $5.5 million, and these loans are available with 10- or 20-year maturity terms.

Disaster loans. These low-interest loans are offered directly from the SBA and can be used to recover from a declared disaster. Businesses may use disaster loans to repair or replace real estate, machinery and equipment, and inventory and business assets that were damaged or destroyed.

The SBA also offers loans for economic injury following a disaster, such as the COVID-19 economic injury disaster loan and advance program.

Where Are Small-Business Loans Available?

Small-business loans can be obtained from banks, credit unions, online lenders and alternative lenders. Understand what you should expect from each.

Banks and credit unions. Banks and credit unions typically serve larger, more well-established businesses, including those that are categorized as small businesses. You’ll have a better chance of getting funding from a traditional bank if the loan is backed by the Small Business Administration. SBA loan programs reduce the risk for the lender and can make it easier to get approved for a small-business loan. Approval may be easier if you have an existing relationship with the lender, such as a business bank account.

Online lenders. Online small-business lenders typically offer products similar to those of banks and credit unions – but without a branch. Expect a quick and easy online application process for term loans, lines of credit and other small-business financing options. Some online lenders are considered alternative lenders, which offer more flexibility than commercial banks as their loan products are less regulated. Alternative lenders provide loans to borrowers who otherwise may not have access to small-business financing, such as startups or businesses with a shaky financial history.

“Small businesses should be aware there are multiple channels available for borrowing needed funds,” says S. Michael Sury, lecturer of finance at the University of Texas--Austin.

Online lenders may offer SBA loan programs. You can also find peer-to-peer small-business lenders online, which connect your business with several investors who usually have a diversified loan portfolio made up of small portions of loans. Borrowing criteria for peer-to-peer small-business lending is usually less stringent than at traditional brick-and-mortar banks, but because small-business financing through a P2P marketplace poses a larger risk to lenders, often the interest rates start higher than traditional business loans.

Who Can Apply for a Small-Business Loan?

Not every small-business lender offers loans to all types of businesses. You must convince the lender that your business is worth the risk. To understand your eligibility, you’ll need to know how much your business needs to borrow and have good credit and a solid business plan.

Determine how much funding your business needs. Examine your business expenses and consider how much of a loan payment you can afford. You can find out how large of a loan your business can afford by calculating your debt service coverage ratio.

The formula is a simple one: net operating income / total annual debt = DSCR.

Lenders are looking for borrowers with at least a 1.0 ratio. This means your cash flow is equal to your monthly loan payment. However, it’s ideal to have a bit of a buffer, so lenders prefer a 1.35 DSCR. For example, if your annual net operating income is $135,000 and your total debt is $100,000, your DSCR is 1.35.

Check your credit score. Your personal credit score is a crucial part of the small-business loan application process. Lenders often consider your personal credit, especially with startup business loans, though your business credit score may also be used if you have one. The minimum credit score required for approval varies, but in general, the higher your credit score, the better the repayment terms and the lower the interest rates you’ll get on a small-business loan. It’s important to clear credit inaccuracies before beginning the application process.

“As a sole proprietor, your personal credit may be considered in the business loan application if you are using personal credit to secure the business debt,” says Rod Griffin, director of public education for Experian, one of the three major consumer credit bureaus. “Doing so is fairly common for a small-business owner. Note that if the loan is made using your personal credit, failing to pay it may affect your personal credit history and your ability to qualify for new credit in the future.”

Draft a strong business plan. A solid, comprehensive business plan is the foundation of your small business and shows potential lenders your financial projections. Lenders will want to see your estimated costs and projections for revenue and balance sheets for at least two years.

Can You Get a Small-Business Loan With Bad Credit?

Bad credit business loans are available, but your options will be limited. It’s important to know what credit score is needed for a small-business loan, as many business lenders and loan programs have minimum credit score requirements. For example, if you have a 500 credit score, you may be ineligible for traditional small-business loans and need to consider alternative small-business funding sources.

Some bad credit business lenders offer term loans, lines of credit, invoice financing and merchant cash advances. Expect to pay higher interest rates, and your business plan and revenue will face more scrutiny. Also understand you may not be able to borrow as much as a small-business owner with good credit.

How Can You Get a Small-Business Loan?

Small-business loans require significant documentation. You’ll need to fill out an application and provide supporting documents, which you should be ready to submit to the lender. Required documentation often includes:

How Can You Choose the Best Small-Business Loan?

You should focus on eligibility requirements, loan options, costs and customer service when choosing the best small-business loan. Focusing on these factors will help you identify a lender that is most likely to approve your loan with acceptable terms and costs and that offers good customer service.

Eligibility Requirements

Knowing your chances of being approved for a loan can save you time. Some lenders require businesses to be in operation for at least two years and meet a minimum revenue requirement; if you’re seeking startup funding, you’ll need to look at other options.

When researching small-business loan eligibility requirements look for:

Loan Options

Small-business financing options vary widely. As you shop around, consider whether each lender’s offerings meet your needs.

Loan types: Find a company that offers the type of loan you’re looking for, such as a term loan or line of credit. To save time and ensure you get enough capital to start or grow your small business, consider what you need the funding for. For example, you might get a different loan for payroll than you would for real estate.

Loan limits: If the lender doesn’t offer loans in the amount you need, find one that will. Settling for a lower amount could burden you with a loan that falls short of adequately addressing your capital needs.

Loan term: Your loan’s repayment term is the time frame you have to repay the loan. Short-term business loans have higher monthly payments, but you may pay less in total interest. If you take out a loan with a longer repayment term, your monthly payments may be lower, but you may have to pay more in total interest over the life of the loan.

Costs

Keeping loan costs minimal allows you to invest profits back into your business and not back to the lender. Look for a lender with the lowest costs, including:

Customer service

A lender’s reputation can tell you what to expect. You can research a lender’s reputation by finding information on current and past customer experiences. Read business loan reviews and search the Better Business Bureau to learn more about a particular lender.

What Can You Do if You’re Denied a Small-Business Loan?

If you are denied a small-business loan, you aren’t at a complete loss for financing options. Consider the following:

Talk to a business mentor. A business mentor can help you tighten up your plans, connect with resources and more. You can find a business mentor through professional associations, former employers or networking mixers. Another option is Score, which is a nonprofit group with volunteer business counselors throughout the U.S.

Explore local resources for small-business owners. Some of these include SBA District Offices, Score chapters, Veteran’s Business Outreach Centers and Women’s Business Centers. You may receive free counseling, advice or financial assistance for your new small business. If you’re a veteran, you can get access to entrepreneurial development services through a Veteran’s Business Outreach Center.

Take out a personal loan. With a personal loan that allows for business expenses, you can spend the money on whatever you like, including business-related costs. However, many personal loans don’t allow for business use.

Get a business credit card. A business credit card may be a good option for a line of credit if you aren’t able to obtain a small-business loan. They are easier to get than a small-business loan. On the downside, the interest rates tend to be much higher than with small-business loans.

Some perks of a business card are that you have access to a revolving line of credit and may earn rewards points you can use for travel or purchases for your small business.

However, business credit cards have drawbacks. Business credit cards aren't included in the Credit CARD Act of 2009, which protects consumer credit cardholders from unfair practices, such as sudden rate increases or retroactive rate increases on balances. Make sure you understand the card’s terms, avoid carrying large balances and keep an eye out for any changes made by the issuer.

Apply for a small-business grant. There are a number of grants available for small-business owners. For instance, if your small business is engaged in scientific research and development, you may qualify for federal grants under the Small Business Innovation Research and the Small Business Technology Transfer programs.

There are also grants specifically for women and minorities, those operating or planning to operate in a specific area, and franchisees. Some grants even include additional resources, such as mentorship and workshops.