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Which Loan is Right for your Small Business?

Before talking to a lender about a loan for your small business, you should understand the basics of your funding options. Having a better understanding of your options at the outset can save you a lot of time, energy, and money. We’ve identified the most popular types of loans for small business owners as well as their features and things to consider before applying for funds.

Some information on this page is adapted from content that originally appeared on Nav.com, a Venturize supporter.

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Traditional Bank Loans

Banks are the largest small business lenders and probably the first place you think about when getting a loan. They offer some of the lowest cost loans, but qualifying can be difficult; about 72% of small business owners who apply get rejected. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials. Applying also takes significant effort and time — completing the process can take from one to three months.

Credit Score Requirements: 
High
Loan Wait Times: 
Varies
Interest Rates: 
Low
Quick Overview
Features: 
  • Very low, fixed interest rates
  • Predictable monthly payments
  • Helps build business credit
  • Professional banker relationship
  • Available for many uses
Things to consider: 
  • Extensive paperwork
  • Longer wait time
  • Requires strong credit
  • Usually requires collateral

Small Business Administration (SBA) Loans

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, but usually require strong personal and/or business credit.

Credit Score Requirements: 
Good
Interest Rates: 
Low
Quick Overview
Features: 
  • Lowest down payments
  • Longest payment terms
  • Reasonable interest rates
  • Suitable for wide range of business purposes
  • Multiple programs available
Things to consider: 
  • Lengthy paperwork
  • Longer approval times
  • May require collateral
  • Strict acceptance criteria
  • May be restricted from taking on another loan

Mission-Driven Loans

Mission-driven loans are offered by institutions committed to supporting job-creating enterprises in underbanked and low-income communities where other financial opportunities may be limited or include rates that are not favorable to borrower.

Credit Score Requirements: 
Good
Interest Rates: 
Varies
Quick Overview
Features: 
  • Lower credit scores may be accepted
  • Include fixed- or adjustable- rate loans
  • Helps build business credit
  • May include mentoring from lending expert
Things to consider: 
  • Longer approval times
  • Extensive paperwork
  • May require collateral
  • Repayment terms vary

Microloans

Microloans are available for small business owners or startups that have a thin credit file or can’t secure funds through a traditional bank. Microlenders are non-profit organizations that offer smaller loan sizes, which max out at $50,000 but tend to average much less than that. They charge slightly higher rates than big banks, but have less stringent underwriting criteria. Microlenders will typically mentor you through the application process, which is a big plus. Their goal is to help you build your credit and financial history, so that you can eventually qualify for bank funding.

Credit Score Requirements: 
Good
Loan Wait Times: 
High
Interest Rates: 
Low
Quick Overview
Features: 
  • Reasonable interest rates (8-18%)
  • Favorable repayment terms
  • Good way to establish business credit
  • Available for many uses
  • Collateral usually not required
Things to consider: 
  • Limited to businesses with 5 or fewer employees
  • Small loan amounts, average $6000
  • Extensive paperwork required
  • Past credit issues can still disqualify you
  • You may have to take a business training class

Personal Sources

Personal funding can be a viable option for your small business needs, but doing it successfully requires you to thoroughly calculate all of your costs, so that you don’t run out of money before your business can support itself. Your goal should be to finance your business so it can stand on its own, without co-mingling personal assets and credit. This will be important as you provide financial reporting to tax agencies, potential lenders, and other entities.

Credit Score Requirements: 
Low
Quick Overview
Features: 
  • Low credit score requirements

Online Marketplace Loans

Non-bank loans have become an increasingly popular alternative for borrowers who have been denied a loan by the bank, or don’t have the time to go through a lengthy application process. A new generation of online-only “marketplace loans” is designed to appeal to business owners who have lower credit scores, or who have been in business for a short time. These loans tend to have much higher interest rates than bank or SBA loans, and to have more lax credit score criteria. Typically, these loans are for 1 – 5 years and come with a fixed monthly payment. Online marketplace loans can be used for virtually any business need.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Quick Overview
Features: 
  • Quick turnaround time (compared to banks)
  • Less effort and documentation needed
  • Fixed, predictable monthly payments
  • Helps improve business credit score (with on-time payments)
  • Available for many uses
Things to consider: 
  • Higher interest rates than bank loans
  • Little to no mentorship
  • May have pre-payment penalty
  • May require collateral
  • Typically requires two years of business history

Merchant Cash Advance

Merchant Cash Advances (MCAs) are a pricey option that’s available to businesses that have credit or debit card sales. MCAs are probably the most expensive borrowing option, with APRs between 25% – 350%. Usually, they require a minimum daily payment regardless of your sales. Merchant cash advances can usually be approved in a day or two—with very little paperwork. After approval, the loan is repaid with a portion of your future credit card sales each day. Some online only marketplace lenders provide merchant cash advances.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Fast access to cash
  • Flexible repayment terms
  • Strong credit not required
  • You choose how to use funds
  • No collateral required
Things to consider: 
  • Very, very expensive (70-200% APR)
  • Minimum daily payments hurt cash flow
  • Doesn’t help business credit
  • My lock-in merchant processor
  • Must accept credit cards.

Cash Flow Loans

With cash flow loans a lender provides you funds and accepts your expected future cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future, and giving the lender the rights to a predetermined amount of these receivables. These loans are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role than with other loans. After you apply, the lender will inspect your account’s cash flow and make a quick (if not instant) decision on whether or not to offer you a loan, and at what interest rate.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Fast access to money (usually within a week)
  • Poor credit scores may be ok
  • Less documentation needed
  • No physical collateral required
  • Can improve your credit score
Things to consider: 
  • High interest rates (20-90%)
  • Lender has direct access to bank account
  • May have pre-payment penalty
  • Typically requires 2 years of business history

Business Credit Card

Though not necessarily a “loan” in the traditional sense, a business credit card can help you obtain financing without the hefty process of loan approval.

Business credit cards are a popular choice among entrepreneurs who have limited business history and don’t qualify for lower-cost financing, such as bank lines of credit. 65% of small businesses use them on a regular basis. Business credit cards, like personal credit cards, provide a revolving line of credit that you use for business expenses. A business credit card should not be tied to your personal credit – because maxing out personal credit cards for business expenses can kill your personal credit scores. But if you pay your bills on time, business credit cards can actually help build your business credit profile. Most major credit card companies provide business credit card options.

Credit Score Requirements: 
Good
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Less stringent approval criteria
  • Quick turnaround time
  • Rewards like cash back or 0% intro. interest rate
  • Interest paid may be tax deductible (unlike personal cards)
  • May help build business credit score
  • Can use for any business need
  • No collateral required
Things to consider: 
  • Higher interest rates than bank credit lines (13% – 25%)
  • Variable interest rates could move higher
  • May have annual fee
  • Limited funding amount (max usually $20,000)