How Small Business Loans Work (+List of Providers)

Natalie Mootz
Last Updated on February 26, 2020
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If your business needs a cash infusion, you’re probably wondering what financial options are available. One way to get cash for your business is with a small business loan.

Get ready for a rollicking tour of the modern lending marketplace where traditional banks, online innovators, and hybrids compete to fund you.

We’ll explain what small business loans are, how they’re different from other kinds of financing, and give you pro tips on getting one.

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

What are the best places to get a business loan?

In a rush? Here are three highly rated sources of business loans for you to explore:

  • Bank loans: Wells Fargo now has an online application and approval process
  • Term loans: OnDeck provides term loans from $5,000 up to $500,000. They accept FICO scores in the 600s and you only need to have been in business for 1 year.
  • SBA Loans: SmartBiz: SmartBiz streamlines the SBA loan process and has a large network of participating banks. Their average 4.5 star customer rating and A+ BBB rating stand out.

What Is a Small Business Loan?

A small business loan is a provision of capital, received via contract with a direct lender, paid back with interest and/or 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 — another form of a business loan — come with draw fees. Unlike installment loans, a line of credit can be used repeatedly, as previous draws are paid down.

Traditional Banks vs Online Lenders

Traditional banks and credit unions (sometimes referred to as traditional lenders) are often seen as providing loans at better interest rates than nonbank online lenders. Their application process is likely to be longer and more complicated. Traditional bank loans are typically harder to qualify for.

Nonbank online lenders (sometimes referred to as alternative finance, alternative lenders, or fintech lenders) provide a wider variety of qualification factors. They’re more likely to risk loans to less-established businesses or those with bad credit, no credit, or prior bankruptcies.

Many nonbank lenders use convenient one-page online application forms and little-to-no asset verification. They boast fast approval and funding times. 

Realize that the line between banks and nonbank online lenders is becoming blurred. Banks like Wells Fargo have entered the online lending space, and many banks have partnered with online innovators. So there’s not always a clearcut division between the two.

Small Business Loan Providers

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

wells fargo loans


Wells Fargo: Apply Online

Wells Fargo has three loan types: unsecured, equipment, and working capital. Some loans have fees but it may be possible to get them waived in some cases.

  • Loan amounts: $10,000 – $500,000
  • Special loan types: none
  • APR: 6.25% and up for vehicle loans; 7.75% and up for unsecured loans

bank of america loans


Bank of America: Apply Online . . . If You’re a Customer

Bank of America is the second largest US bank. It offers a wide array of loans for businesses. Some loans will incur an origination fee.

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

  • Loan amounts: $25,000 and up
  • Special loan types: equipment, real estate, healthcare industry, SBA, and auto loans
  • APR: 5.00% and up

Chase Loans


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: $5,000 and up
  • Special loan types: SBA loans, equipment, real estate
  • APR: not published

streetshares loans

StreetShares: Solutions For Veterans

StreetShares specializes in loans that target the needs of veterans and military members. But they offer a full range of financing options for all small business owners including SBA loans.

Thumbs up: they charge interest only on the outstanding balance of a loan, not on the original amount of the loan.

  • Loan amounts: $2,000 – $250,000
  • Special loan types: caters to veterans and military members, SBA loans
  • APR: variable

us business funding loans

US Business Funding: Equipment Financing Specialists

US Business Funding specializes in equipment leasing and financing, but they also offer SBA and working capital loans. The company states that they have funded over $2 billion to small businesses.

  • Loan amounts: up to $150,000
  • Special loan types: SBA loans
  • APR: 3.5% and up

smartbiz loans

SmartBiz: Streamlined SBA Loans

SmartBiz specializes in SBA loans of all types. They’re 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 – $5 million
  • Special loan types: SBA loans
  • APR: 6.75% – 9.00%

 

funding circle loans

Funding Circle: Peer-to-Peer Marketplace

Funding Circle charges loan origination fees of 3.46% – 6.99%. Their loan application only takes 10 minutes to complete.

  • Loan amounts: $25,000 to $500,000
  • Special loan types: Women- and minority-owned businesses
  • APR: 4.99% to 22.99%

 

credibility capital loans


Credibility Capital: Fast Funding, Transparent Fees

Credibility Capital has no application fees or monthly service charges.  However, they don’t loan to businesses in Nevada, North Dakota, South Dakota, or Vermont.

  • Loan amounts: $25,000 to $350,000
  • Special loan types: not stated
  • APR: 8% and up

quarterspot loans


QuarterSpot: Get Multiple Offers

QuarterSpot states that they funded $3 billion in business loans. They will fund an approved loan in 24 hours.

  • Loan amounts: up to $250,000
  • Special loan types: not stated
  • APR: not stated

ondeck loans


OnDeck: Minimum 1 Year in Business, 600 FICO

OnDeck requires one year of business operations, a FICO credit score of 600+, and yearly revenue over $100,000. They also exclude certain business industries.

  • Loan amounts: $5,000 to $500,000
  • Special loan types: industry specific loans for salons, real estate, auto repair, dental and medical practices, restaurants, and trucking companies
  • APR: 9.99% and up

Business Loan Portals

The next two providers, LendingClub and Nav, are not direct lenders. They’re online platforms where you can comparison shop and find a loan.

Lending Club loans


LendingClub

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

  • Loan amounts: $5,000 to $500,000
  • Special loan types: none
  • APR: 4.99% and up

nav loans


Nav

Nav is a business loan marketplace. They don’t offer loans, but they provide 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 credit score required.

Tips For Borrowers

Business loans can be a complex topic, so we’ve outlined a few critical recommendations to keep in mind.

  1. If you need a fast business loan, consider an online lender. (Just keep in mind they tend to have higher interest rates and fees.)
  2. Only take a business loan out if you are confident you can repay– especially for collateral loans where you use an items, such as equipment or real estate, to guarantee your loan.
  3. Consider all the fees when comparing lenders. Interest rates are just part of the puzzle, you may also be required to pay application fees, origination fees, and other costs.

How Much Do Small Business Loans Cost?

The cost of small business loans depends on many qualification factors, such as credit scores, credit history, previous bankruptcies, and average monthly revenue. 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.

Importance of Term Length

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

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

Term length Interest and FeesEstimated weekly payment
3 months$5,500$4,154
6 months$10,000$2,250
12 months$15,500$1,231
18 months$23,000$910

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

Note: OnDeck loan payments are deducted from a borrower’s business account on a daily or weekly basis, depending on the type of loan you are approved for.

Online Calculators: Interest Rates and APR

There are plenty of online calculators available that can be used for all types of business loans.

Use a calculator that will display the total cost of the loan as well as the monthly payments split up by principal and interest.

You’ll input the loan amount, the interest rate, (or your general credit score quality, e.g., “fair,” “good”), financing fees, and the term length.

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:

  1. Make sure you understand the lender’s loan requirements.
  2. Submit your application along with any required documents.
  3. If approved, your finance representative will meet with you to present an offer.
  4. 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 credit score and/or your business credit score (Paydex). Each lender has different minimum scores it will accept.

Soft Pull vs. Hard Pull

If the lender conducts a hard credit pull, that pull will likely decrease your credit score. Therefore it’s wise to exercise caution when considering applying to multiple lenders. You can get declined by simply having too many recent pulls on your credit.

Many online lenders can conduct a “soft pull” which does not affect your credit.

Vantage vs. FICO

There are two different credit score models: the Vantage model and the FICO model. Scores may vary between these models by as much as 100 points. Find out which one your lender requires. Then you can check your own score before applying.

Getting a Tri-Merge Credit Report

Some nonbank online lenders that do soft pulls request that you obtain your own tri-merge credit report and send it to them in PDF form. (“Tri-merge” means the report contains scores and data from all 3 bureaus: Experian, TransUnion, and Equifax.)

Other online lenders may ask you to create an account with a tri-merge provider and grant them login access.

By law you have the right to obtain a free report, once a year, from all 3 bureaus. The official FICO site explains that “Only one website is authorized to fill orders for the free annual credit report you are entitled to under law: AnnualCreditReport.com”

However, realize that your free report from AnnualCreditReport.com does not contain any scores — only credit history. If you use the official FICO site you’ll get your scores from all 3 bureaus and your credit history.

What Do Underwriters Look For?

Beyonds scores, underwriters are going to check to see if your report lists any derogatory items like recent late payments, charge-offs, or bankruptcies. How much debt your business is already carrying will be analyzed and compared to your assets or revenue.

How you’ve used credit will also be looked at. For example, one applicant may have been paying down a mortgage, on time, for 10 years, and have already paid off two vehicles, and business real estate. Another applicant may have used their credit for watching Netflix movies, eating out, and ordering from Amazon.

The Temporary “No”

If you get declined it may just be a temporary no. Your lender may direct you to pay off some accounts in order to obtain the loan you desire.

Some business owners who can’t qualify immediately for a term loan may qualify for other financing options, in smaller amounts. They can use one of those options to pay down their accounts and then obtain the term loan.

Types of Business Loans

Here is a quick run down of the most common types of small business loans.

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 is a type of loan that allows you to draw against a total amount (let’s say $60,000), repay, and repeat the process.

Lines of credit typically have draw fees.

Term Loans (Installment Loans)

Businesses with a good credit score may qualify for a term loan, which is based on creditworthiness and revenue. These loans may be secured or unsecured.

There are no limitations to how the money can be used. Interest rates are charged monthly and the term length is typically 6 months to 3 years. (Some term loans may range up to 7 years in length.)

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 like seasonal revenue fluctuations common in industries like construction.

They 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.

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 United States’ Small Business Administration (SBA), are among the most sought-after business loans.

The SBA provides guidelines which cap interest rates. The most popular SBA loan is the 7(a) loan, and there are a variety of 7(a) loans to choose from.

SBA  loan types include disaster loans, the SBA Express with its 30-day turnaround time, veteran loans, and options for import-export businesses.

The SBA guarantee means lenders are more likely to offer a lower APR and longer repayment plans. Loans range from $5,000 to $5 million and terms range up to 25 years.

Equipment Loans

Equipment loans are used for everything from purchasing vehicles to obtaining office technology like computers, software, and printers.

Most providers of equipment loans also offer lease programs and refinancing options.

Pitfalls to Avoid

Loans aren’t “free money,” and there can be plenty of drawbacks to applying for or obtaining them. Here are some pitfalls to avoid.

  • Using personal property like your home as collateral can mean that if your business fails, you’ll lose your home.
  • Paying down your loan doesn’t free up cash like paying down a credit line does.
  • Your debt obligation from a loan can make it harder for you to get other financial assistance, like credit lines.
  • Some banks can put restrictions on your business while you’re paying off your loan, like debt ratio limits.
  • New businesses can have difficulty finding banks that will lend to them. It will also start your business off in debt.
  • Applying for a loan may result in a hard credit pull, which means your FICO score may go down. However there are plenty of online lenders that use a “soft” credit pull that leaves your score unaffected.

Alternatives to Loans

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 an advance of cash in return for a portion of your future sales, minus a fee.
  • Business credit cards: This option can help build up your business credit and provide some cushion for unexpected cash flow hiccups.

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

Small Business Loan FAQs

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, length of time in business, average monthly revenue, and amount of debt you are currently carrying. Traditional banks tend to have more strict 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 which is 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 realize that SBA loans are difficult to qualify for and it’s likely that acquiring one as a startup is challenging. Review the qualifications before moving forward.

The Small Business Administration also provides information on investment programs that may benefit startups.

How do you 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 Program.

What Documents Do I Need For a Small Business Loan?

Regardless of which loan provider you decide to go with, you’ll need to gather information about your business and relevant documents when applying for a loan. Each financing provider sets their own credit requirements. Find out what their minimum acceptable credit score is and verify your own score before you apply.

Traditional banks and online vendors differ in the types of documents required. And SBA loans, which are among the most difficult — but coveted — loans to obtain, require perhaps the most paperwork.

Traditional banks — such as neighborhood community banks — require more documents than online lenders, and may take a longer time to process applications.

Nonbank online lenders typically offer simpler application processes and fast turnaround times.

Bank Lender Loan Checklist

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

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

☐ Information on any business lease you may have including address, landlord contact information, and terms of the lease

☐ Copies of business formation documents

☐ Profit and Loss (P&L) statement

☐ Average monthly revenue

☐ Annual income

☐ Your current business plan

☐ Financial projections

☐ List of aging AR/AP

☐ Business tax returns from the last 3 years to indicate your annual revenue

☐ Business bank statements for the past three to six months

☐ Personal tax returns from the last 3 years

☐ Itemized breakdown of how you intend to use your loan

 

Online Lender Loan Checklist

Note: If you are applying for more than $250,000, the online lender may ask for a list of aging AR/AP.

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

☐ Information on any business lease you may have including address, landlord contact information, and terms of the lease

☐ Average monthly revenue

☐ Annual income

☐ Business tax returns for the previous two years

☐ Identity document, such as driver’s license, passport

☐ Either a copy of a “tri-merged” (i.e. 3-bureau) credit report or a login and password you can share to a FICO score provider such as myfico.com. (Change your password after the underwriting process is complete.)

SBA Loan Checklist

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

☐ Any required business licenses or certifications

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

☐ Business plan

☐ Resumes of all principals

☐ Personal and business tax returns for the previous 2 years

☐ Profit-and-loss (P&L) statement for the last 3 years

☐ Balance sheet

☐ Complete current debt schedule

☐ List of loans you have applied for in the past

☐ Financial projections for upcoming year

☐ Completed SBA(a) 1919 form: Borrower Information (loan application form) (If your business is a corporation, you need to stamp your corporate seal on this form.)

☐ Completed SBA form 413: Personal Financial Statement

☐ Completed SBA form 912: Statement of Personal History

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

☐ Information about other businesses you own or have a controlling interest in including subsidiaries, affiliates, and franchises

☐ Information on any business lease you may have including address, landlord contact information, and terms of the lease

 

Equipment Loan Checklist

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

☐ Information on any business lease you may have including address, landlord contact information, and terms of the lease

☐ Average monthly revenue

☐ Annual income

☐ List of current business debt obligations and amounts

☐ Dealer invoice for equipment (Sometimes this is required only after you are approved)

 


Contributing writers: Danielle Antosz and Sherrie Gossett

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