How Small-Business Loans Work (Plus a List of Providers)

One way to get much-needed cash for your business is with a small-business loan. Businesses have options in the business loan marketplace where traditional banks, online innovators, and hybrids compete for your business.

Read on to learn what small-business loans are, how business loans work, how business loans differ from other financing, and get pro tips on getting business loans.

You’ll also get a checklist of the documents you need to apply for a small-business loan.

What Is a Small-Business Loan?

A small-business loan provides capital received via contract with a direct lender and paid back with interest and fees. Some lenders charge fees, such as origination, service, or application fees.

Installment loans are typically paid back over a set term, ranging from months to years. Payments are usually made monthly.

Business lines of credit are another form of business loan. Unlike installment loans, lines of credit can be used repeatedly within the draw period, as previous draws are paid down.

Where Can You Get Small-business Loans?

Banks

Banks are typically the institutions you think of when considering a loan. These can range from Wells Fargo, JPMorgan Chase, and Citibank to local community banks.

Credit unions also fall under this category. Banks are known for low-interest rates and long-term repayment options, as well as strict criteria and a slow approval process.

SBA affiliate lenders

SBA loans from participating lenders are backed by the government. Depending on the type, many can offer large sums but also have strict criteria and a slow approval process.

Online lenders

Online lenders are available for many different loan types. There are direct lenders, which you work with directly to get loans, and peer-to-peer (P2P) lenders, which work with direct lenders to get you loans. Online lenders typically offer fast approvals, although fees and interest rates tend to be high.

Microlenders

Microlenders are a great option if you don’t need that much money as these loans often offer less than $50,000. These lenders are also good if you don’t have a detailed credit history. Many, but not all, microlenders offer SBA-guaranteed products.

Other small-business lender options:

Nonprofit lenders
Private lenders
Venture capitalists
Crowdfunding

Types of Small-business Loans

Here is a quick rundown of the most common small-business loan types.

Small-business term loans

A small-business term loan is a standard loan where the borrower receives a set amount of money to be repaid on a set schedule. This time is often between six months to three years for small businesses.

These loans can often be for larger figures as they are usually associated with high-priced business operations, business growth or expansion, or large purchases like equipment or real estate.

Working capital loans

A working capital loan is typically used to cover the everyday operating expenses of a small business, including payroll, rent, and debt payments for a short time. These loans can offer sums between $5,000 to $100,000, and the duration of the loans can be between 30 days and one year.

Small businesses with little or no credit history might find such a loan appealing. However, if you fall into this category, you might have to provide collateral or a personal guarantee to qualify for a loan.

Micro-loans

These are small loans, typically under $10,000, provided by online lenders or peer-to-peer services.

Business lines of credit

A line of credit loan allows you to draw against a total amount (say $60,000), repay, and repeat the process. Lines of credit typically have draw fees.

Short-term loans

A short-term business loan (sometimes called a working capital loan) is typically used to take advantage of imminent opportunities or to solve short-term cash flow issues. These can include seasonal revenue fluctuations common in industries like construction.

Short-term business loans commonly have a short-term length, being capped at a year. Like term loans, working capital loans can be secured or unsecured, depending on the creditworthiness of the borrower, average monthly revenue, and time in business.

Accounts receivable financing

Accounts receivable (A/R) funding allows a small business to get cash right away through their company’s A/R, which is money owed to them by their debtors. Small businesses can apply for this kind of loan through A/R lending companies.

The amount of money you can receive depends on your business’s A/R, while the interest rate for the loan can vary. The credit is paid down as your business makes money from its customers and replenishes its accounts receivable.

Equipment loans

Equipment loans are ideal for buying or leasing equipment, vehicles, and software associated with your business. These secured loans can offer figures between $5,000 and $500,000, but typically require a down payment of 20% of the purchase price of the equipment. Their interest can be accrued at a fixed or variable rate, with the loan set to be repaid usually within two to four years.

Collateral-based loans

Also called a secured loan or asset-backed loan, these loans are guaranteed by something you already own, such as real estate or construction equipment. The interest rates may be lower. However, you risk losing your collateral if you default.

SBA loans

These loans, guaranteed by the SBA, are among the most sought-after business loans because of their low-interest rates and long terms. The SBA provides guidelines that caps interest rates. The most popular SBA loan is the 7(a) loan, with a variety of 7(a) loans to choose from.

Types of SBA loans include disaster loans, the “SBA Express” with a 30-day turnaround time, veteran loans, and options for import-export businesses. The SBA guarantee means lenders are likelier to offer a lower annual percentage rate (APR) and longer repayment plans. Loans range from $5,000 to $5 million, with loan terms up to 25 years.

Small-business credit cards

Small-business credit cards can also be a simple method of loaning money in the short term. However, business owners often prefer to stay clear of this option due to the ease of getting out of control with credit card debt.

Typically, the main owner takes primary responsibility for the card, with the business as co-liable. Many standard credit card issuers, including American Express, Capital One, and Bank of America, also offer small-business credit cards.

While interest rates and credit limits might vary depending on the card offer and the credit history of the person applying, small-business credit cards often come with many of the perks seen with regular credit cards, including cash back, discounts on gas, and airline and hotel points, among others.

Small-business loan providers

Here’s a look at popular lenders for small business loans and top-line information about their offerings.

	Loan amount	Special loan	Interest rates	Which businesses is this best for?
Wells Fargo	Maximum of $6.5 million from Wells Fargo and $5 million from the SBA	None	Can be either fixed or variable.	Businesses looking for unsecured loans and long-term repayment plans.
Bank of America	$10,000 and above	Equipment, real estate, healthcare industry, SBA, and auto loans	7.50% introductory interest rate	Established businesses that have pre-existing BoA account
Chase	SBA 7(a) loan amount: up to $5 million. SBA 504 loan amount: up to $12.5 million	SBA loans, equipment, real estate	Can be either fixed or variable	Businesses looking for an SBA preferred lender
US Business Funding	From $10,000 up to $2 million	SBA loans	3.5% and up	Businesses looking for high-borrowing amounts and quick disbursements
SmartBiz	$30,000 to $5 million	SBA loans	8.25% to 9.25%	Established business owners with a personal credit score of 650 and above.
Funding Circle	$20,000 to $5 million	For women and minority-owned businesses	11.29% to 30.12%	For owners who’ve been in business for more than two years and have good-to-excellent personal credit scores.
Credibility Capital	$50,000 to $500,000	Not stated	8.99% and up	Owners with a strong personal credit score and more than two years in business.
On-Deck	$5,000 to $250,000	Industry-specific loans for salons, real estate, auto repair, dental and medical practices, restaurants, and trucking companies	29.9% and up	Businesses that don’t meet eligibility requirements of other lenders.

Wells Fargo: apply online

Wells Fargo has several loan options for small businesses. Some loans require some fees to be paid but it may be possible to get them waived in certain cases.

Loan amount: SBA 7(a) loan amount: up to $5 million. SBA 504 loan amount: up to $6.5 million (maximum of $6,500,000 from Wells Fargo and $5 million from the SBA.)
Special loan types: None
Interest rates: Can be either fixed or variable.

Bank of America: Apply online — if you’re a customer

Bank of America is the second-largest U.S. bank. It offers a wide array of loans for businesses. Some loans will incur origination fees.

You must already be a BoA customer to apply online. Otherwise, you can apply over the phone or in person.

Loan amounts: $10,000 and above
Special loan types: equipment, real estate, healthcare industry, SBA, and auto loans
APR: 7.50% introductory interest rate

Chase Bank: Apply in person

Chase Bank is one of the largest banks in North America. It offers just about any kind of loan you can imagine, but you must visit a branch to apply.

Loan amounts: Up to $12.5 million
Special loan types: SBA loans, equipment, real estate
APR: Fixed or variable interest rate

US Business Funding: Equipment leasing and financing

US Business Funding specializes in equipment leasing and financing and also offers SBA and working capital loans. It’s funded over $2 billion to small businesses.

Loan amounts: From $10,000 up to $2 million
Special loan types: SBA loans
APR: 3.5% and up

SmartBiz: Streamlined SBA loans

SmartBiz specializes in SBA loans of all types and is known for taking the “headache” out of the complicated SBA application process.

You’ll work with the same “relationship manager” throughout the process. The SmartBiz interactive “Intelligent CFO” tool walks you through the loan process as well.

Loan amounts: $30,000 to $5 million
Special loan types: SBA loans
APR: 8.25% to 9.25%

Funding Circle: Peer-to-peer marketplace

Funding Circle charges loan origination fees of 4.49% to 8.49%. Their loan application only takes 48 hours.

Loan amounts: $20,000 to $5 million
Special loan types: For women and minority-owned businesses
APR: 11.29% to 30.12%

Credibility Capital: Fast funding, transparent fees

Credibility Capital charges no pre-payment fees. However, the lender doesn’t loan to businesses in Nevada, North Dakota, South Dakota, or Vermont.

Loan amount: $50,000 to $500,000
Special loan types: Not stated
APR: 8.99% and up

OnDeck: Minimum one year in business, 600 FICO score

OnDeck requires one year of business operations, a FICO credit score of 600 or more, and yearly revenue over $100,000. Certain industries are excluded.

Loan amounts: $5,000 to $250,000
Special loan types: industry-specific loans for salons, real estate, auto repair, dental and medical practices, restaurants, and trucking companies
APR: 29.9% and up

Business loan portals

LendingClub and Nav are not direct lenders but online platforms where you can comparison shop and find a loan.

	Loan amount	Special loan	Interest rates	Which businesses is this best for?
Lending Club	$5,000 to $500,000	None	4.99% to 29.99%	Business owners who are looking for personalized loan offers.
Nav	Dependent on lenders	Dependent on lenders	Dependent on lenders	Startups looking for funding resources.

LendingClub

LendingClub is a loan portal, not a direct lender. Their tools will match you with loan providers that fit your needs.

Loan amount: $5,000 to $500,000
Special loan types: None
APR: 4.99% to 29.99%

Nav

Nav is a business loan marketplace that doesn’t offer loans but provides an interactive tool that can match you with a loan provider.

Just toggle the filters to get a personalized list of banks and other loan providers. Filters include APR, funding speed, loan amount, and minimum credit score required.

How Much do Small-Business Loans Cost?

The cost of small-business loans depends on many qualification factors, such as minimum credit scores, credit history, previous bankruptcies, and average monthly revenues. It also depends on what fees the lender charges, including origination fees; pre-payment penalty fees or application fees; the interest rate and APR; and the term length.

Why term length is important

Often, the longer the term length, the more the loan will cost you. Let’s look at a term loan estimate.

Example: You have good credit and are offered a term loan for $50,000.

Term length	Interest and fees	Interest amount	Estimated interest rate	Estimated monthly payment
3 months	$6,000	$4,501	8.3%	$18,167
6 months	$11,500	$10,000	16.7%	$10,000
12 months	$18,000	$16,504	24.8%	$5,542
18 months	$23,500	$21,496	30.1%	$3,972

Using a calculator, you can see the difference that changing your term length would make on total interest and fees, and your payment amount.

What’s the Business Loan Application Process?

After you’ve researched loan providers and figured out how much money your business needs to borrow, you’ll want to gather the documents you’ll need for your loan. After that, the process is straightforward:

Ensure you understand the lender’s business loan requirements.
Submit your application along with any required documents.
If approved, your finance representative will meet with you to present an offer.
If you accept the offer, and it’s from an online lender, you may receive the funds in your bank account in as little as 24 hours.

Credit scores and credit quality

When you apply for a loan, the provider will check your personal and business credit scores (Paydex). Each lender has different minimum scores it will accept.

Beyond scores, underwriters will check to see if your credit report lists any derogatory items like recent late payments, charge-offs, or bankruptcies. How much debt your business carries will be analyzed, and accounts receivable will be compared to your assets or revenue.

If you get declined, it may just be temporary until you can clear up issues with your credit. Your lender may direct you to pay off some accounts to obtain your desired loan.

Some business owners who can’t qualify immediately for a term loan may qualify for other financing options in smaller amounts.

Consider Loan Alternatives

Of course, loans aren’t the only way to get a financial boost for your business. If you’re not sure you want to take on the obligation of a loan, here are some alternatives.

Invoice factoring: You can sell your qualifying invoices to a factoring company for immediate cash, minus a fee.
Merchant cash advance: This is upfront money in return for a portion of your future sales minus a fee.
Business credit cards: This option can help build your small-business credit and provide some cushion for unexpected cash flow hiccups.

Note: Learn other ways to gather cash for your business by reading our Small-Business Financing Guide.

What Documents Do You Need for a Small-Business Loan?

Regardless of your loan provider, you’ll need to gather information about your business and relevant documents when applying for a loan.

Loan checklist:

1. ☐ Identification

☐ Identity documents, such as a driver’s license or passport

☐ Social security card

☐ Resident alien card

2. ☐ Proof of income and business ownership

☐ Business tax ID (EIN), industry, and launch date of your business

☐ Business overview and history, including challenges and how you plan to use the loan

☐ List of aging accounts receivable/accounts paid (AR/AP)

☐ Business tax returns from the last three years to indicate your annual revenue

☐ Business bank statements for the past three to six months

☐ Profit and loss (P&L) statement

☐ Any required business licenses or certifications

3. ☐ Assets and credit history

☐ A copy of your latest credit report

☐ Bank statements, all pages (last two to three months)

☐ Money market statements (last two to three months)

☐ 401k statements

☐ Debt schedule

☐ List of prior loans you have applied for

☐ Insurance policy or preferred insurance provider

☐ Financial projections for the upcoming year

Frequently Asked Questions About Small-Business Loans

Here are some answers to common questions about business loans.

Are small-business loans hard to get?

The difficulty of obtaining a loan depends on variables like personal credit score, business credit score, time in business, average monthly revenue, and amount of debt you are currently carrying. Traditional banks tend to have more strict business-loan requirements than online lenders.

Can I get a small-business loan from the government?

The U.S. government is not a direct funder of business loans. However, through its Small Business Administration (SBA) you can obtain an SBA loan guaranteed by the government. There are a wide variety of loan types available, including the SBA express and loans for import-export businesses.

The SBA sets the guidelines for these loans, including capping the interest rates.

Do banks give loans to start a business?

SBA loans, which you can obtain from a bank or online lender, are available to startups. But SBA loans are difficult to qualify for, and acquiring one as a startup is likely challenging. Review the qualifications before moving forward.

The SBA also provides information on investment programs that may benefit startups.

How do I qualify for a small-business loan?

Qualification factors for business loans vary between traditional banks and online lenders (or “alternative finance” providers), with the former being more strict. Typically underwriters will look at your personal and/or business credit scores, length of time in business, quality of credit, average monthly revenue, and your current debt schedule, among other factors.

What is a minority business loan?

Some institutional or private lenders have diversity and inclusion loan programs that target women, minorities, and veterans. Usually, the loan products are exactly the same as those offered to all business owners. There are also SBA loans that target underserved communities. These options include the SBA Community Advantage loan and the SBA 7(a) and 8(a) development programs.

Small-Busines Loan Resources

Check out these resources for additional information.