The Best Business Loan and Financing Options of 2021

Options abound for small business funding. From SBA loans to lines of credit, there are several ways small business owners can access cash.

SBA Loans

The U.S. Small Business Administration provides startups and small business owners access to capital through its lending program. The SBA backs up to 85% of these loans, which enables banks to extend funding to borrowers they may not have lent money otherwise. Some of the lending programs even provide ongoing support for the entrepreneur. Expect to pay comparable interest rates to a bank's on SBA loans.

• Standard 7(a) loan: With the SBA 7(a) loan, small business owners are eligible to borrow up to $5 million. The interest rate on this loan can't exceed the SBA maximum of 8%. The turnaround time from application to funding tends to be five to 10 business days. There's no collateral required for loans up to $25,000.
  
  
• SBA Express loan: The SBA Express loan is similar to the 7(a) loan, but funding may come in as little as 36 hours. You can borrow up to $350,000 and use it as a revolving line of credit or a term loan.
  
  
• 504 loan: This is a long-term, fixed-rate loan in which the SBA provides 40% of the funding, a bank covers 50%, and the borrower is responsible for 10%. Business owners can use 504 loans to purchase or fix equipment or property to help the business grow.

Traditional Bank Loans

Banks and credit unions offer small business loans. It may be easy to apply if you have an existing relationship with the bank, though that doesn't guarantee you'll get a loan. Banks and credit unions have gotten more stringent in approving borrowers. A bank loan tends to have a lower interest rate than you'd pay with an alternative lender, but only those with strong credit profiles need apply.

Business Lines of Credit

Similar to a credit card, a line of credit is a revolving loan that you can tap into as you need it. You only pay interest on the money you use. You can use it to fill cash flow gaps, to chase business growth, or simply for peace of mind. Business lines of credit can be secured (which means it requires collateral) or unsecured (meaning it doesn't require collateral). It's typically easier to get a line of credit with collateral, such as a piece of equipment or real estate, because that gives the lender something to take if you don't repay your credit.

Microloans

Ideal for small business owners starting out or in need of a small amount of cash, microloans range from $500 to $500,000. They typically have short terms and are offered by nonprofits. Microlenders aim to help small businesses in underserved markets and owned by members of traditionally underfunded demographics in particular. The SBA is a big player in the microloans market, providing the funding to nonprofits it designates as intermediary lenders.

Business Credit Cards

As with personal credit cards, you can use a business credit card to make purchases while paying annual interest and fees, which can get expensive if you carry a balance. Lenders look at both your personal and business credit scores when determining your creditworthiness. The higher your credit score, the lower interest you'll pay.

Alternative Loans

Not every small business owner is suitable for a bank, and that's where alternative lenders come in. These are non-bank lenders that provide an array of loans. Alternative lenders are typically more flexible than banks, with quicker application processes and funding turnarounds. They may cost you more, but if it means you get the funding you're unlikely to get from a bank, it may be worth it. Here's a look at three popular alternative loan types for small business owners:

• Merchant cash advance: A lender can offer you a merchant cash advance in exchange for a portion of your future credit card sales. You get access to cash quickly, sometimes within one day, and then pay it back as a percentage of your daily credit card sales.
  
  
• Equipment financing: This is a loan you take out to pay for business equipment. The collateral in this case is the equipment being financed. Most business owners can get approved for this, given the collateral component.
  
  
• Invoice financing: Similar to a merchant cash advance, invoice financing gives you an advance on your clients' unpaid invoices. It's often referred to as accounts receivable financing. With this type of funding, the invoicing company advances you up to 85% of the value of your unpaid invoices. You receive the final 15%, minus the financing company's fees, when your customers pay their invoices.

Tip: Before you start shopping for a small business loan, think about what you need the funds for. That will help you determine the length (term) of the loan you need. You don't want to be stuck paying off the loan long after the thing you borrowed it for has lost its value.

When you're researching your financing options, you have several factors to consider that will help you narrow down your selection. 

Loan Process

When small business owners need cash, they usually need it as quickly as possible. The last thing you want to do is get stuck with a lender that requires reams of paperwork or takes too much time getting the funding into your bank account. With many alternative lenders, it takes just minutes to apply for a loan, and some offer same-day funding once you're approved.

Term

This is the time you have to pay back your loan and the schedule for when you need to make payments. You may have six months to pay off a short-term loan, for example, or five years for a long-term loan.

Qualifications

Qualifications vary by lender, but in general, they look at your credit score, the financial health of the business, and how long you've been in operations. Some lenders only work with borrowers who have very good credit scores, while others are open to higher-risk borrowers. You should understand a specific lender's qualifications and know that you're eligible before you apply for financing from that lender.

Collateral

Depending on the loan, you may need to offer up personal or business collateral, such as paper assets (e.g., stocks or corporate bonds) or property (e.g., buildings, equipment or vehicles). If you default on the loan, the lender can come after that collateral. It's important to understand the lender's collateral requirements and the inherent risk before agreeing to the terms.

Fees/Repayment

The interest isn't the only fee you'll pay back to the business lender. Lenders can charge various fees that impact the cost of the loan, such as application fees, origination fees, late payment fees, prepayment penalties, and monthly and annual maintenance fees.

Time to Deposit

This is the time it takes to get money in your bank account once you are approved for the loan. Before you choose a lender, you should know how long its entire process takes. 

Special Documentation

Some lenders require you to provide a ton of documentation, including tax returns and bank and credit card processing statements, while others just need your credit score. Knowing ahead of time what paperwork your chosen lender requires (ideally gathering and preparing it before you start the application) will ensure a smooth and quick process.

Did you know? Most small business loans require you to provide a personal guarantee. This means that, if your business defaults on the loan, the lender can come after your personal assets.

For more information about business loan terminology, check out our glossary of business terms.

Whether you work with a bank or an alternative lender, their main goal is to get paid back. It's why they put you and your business through the paces before approving your loan. They consider how long your company has been in business, your business credit score, and your annual sales. Lenders also look at your personal credit score when issuing capital. If you have a strong credit profile and your business is growing, it should be easy to get a bank or SBA loan. If your credit has taken a hit, you don't have strong revenue growth, or your business is in the early startup phase, an alternative lender may be a better option for you than a bank. That's why it's important to understand the type of financing you need before you begin applying for a loan.

WHAT DOCUMENTATION AND FINANCIAL STATEMENTS DO YOU NEED TO PREPARE FOR A LOAN APPLICATION?

The paperwork required for small business financing varies from one lender to the next. But there is some documentation that most lenders require:

• Bank statements: Lenders want to see the last six months of your bank statements.
  
  
• Tax returns: Some lenders require copies of your tax returns.
  
  
• Business plan: To ensure your business model is solid and they won't lose money on you, many lenders will want to see your business plan.

The number of documents required varies so widely that it's a good idea to ask your loan specialist about it upfront – especially if you're looking for quick funding. They'll be able to tell you exactly what the lender requires in your situation. The more prepared you are with documentation, the quicker the process will go and the sooner the money will land in your bank account.

Bottom Line: Small business loans are often necessary to keep cash flowing and operations growing. Depending on your credit profile, it can be reasonably cheap to borrow money or extremely expensive. You need to weigh the benefits of borrowing against the cost to determine what will work for you.

WHAT IS THE EASIEST BUSINESS LOAN TO GET?

The easiest business loan to secure is one that has minimal requirements for your annual revenue, time in business and credit score. This makes it possible for startups to meet a lender's qualifications. Straightforward and simple application processes also make a loan easier to get.

DO STARTUP BUSINESS LOANS REQUIRE PERSONAL GUARANTEES?

Some lenders require collateral, while others protect their investment by requiring personal guarantees. It is rare to find a small business loan that doesn't require some level of insurance for the lender. So, yes, startup loans usually require personal guarantees, especially if the loan is unsecured. This is a lender's way of making sure they get your debt back, even if it's not directly through your business.

DO BUSINESS LOAN PROVIDERS LOOK AT PERSONAL CREDIT?

It is common for lenders to check your personal credit, especially if you are a new business owner and don't also have a business credit score for them to check. When you're starting a company, the business doesn't have a financial history yet, so a lender checks your personal credit score to determine if you qualify.

WHAT CREDIT SCORE IS NEEDED FOR A SMALL BUSINESS LOAN?

It really depends on the lender. For some, a credit score of 550 is sufficient, while others require a score of at least 600. Remember – the lower your credit score, the higher the interest rate you can expect to pay.

CAN YOU GET A STARTUP BUSINESS LOAN WITH BAD CREDIT?

It can be hard to get a loan or financing with bad credit, so if this is your situation, look into lenders that consider more than your credit score. Credit score will always hold some weight, but if there are other attributes of your financial history and behavior that make you look trustworthy, you could be approved for a startup loan from an alternative lender (not likely from a bank).

WHAT ASSETS CAN BE USED TO SECURE A BUSINESS LOAN?

You can use a wide range of assets to secure a business loan. Real estate, land, equipment, inventory and accounts receivable are all types of assets you can use as collateral.

WHAT ARE THE REPAYMENT TERMS FOR SBA LOANS?

There are different types of SBA loans, and once you qualify, your repayment plan options are based on the terms of the loan. If you have a loan with a fixed interest rate, you'll pay the same amount on each payment date. If you have a loan with a variable interest rate, the amount you pay may change – for example, if you have a cash advance or your loan is based on a prime rate. If that rate goes up, so does the amount you pay.

You may make repayments on a monthly, biweekly, weekly, or daily basis; you will agree on these terms with your lender beforehand. The preferable payment method is an automatic payment that pulls money directly from your account, which ensures you make your payments regularly and on time.

HOW DO YOU CHOOSE THE RIGHT LOAN FOR YOUR BUSINESS?

Small business loans come in many varieties, and shopping for one requires you to focus on more than just the interest rate.

Before you decide on the type of loan to pursue, you'll need to know which ones you'll qualify for. A quick look at your credit score and debt-to-equity ratio will clue you in. Some lenders require a high credit score, while others are willing to lend to subprime borrowers. Having a good idea of your credit profile will help you narrow down the list.

You must also weigh the cost to borrow, including the interest rate, fees and possible prepayment penalties. The term – the length of time you have to pay it back – and any application fees should also factor into your decision. By doing some homework, you can make sure you apply for a loan that makes sense for your business.

WHAT DOCUMENTATION DO YOU NEED TO QUALIFY FOR A BUSINESS LOAN?

When considering you for a business loan, lenders may require some documentation that is unique to them, but there are some key documents that every financial institution requires for the underwriting process. These include your business financial statements, such as a balance sheet, income or profit-and-loss statement, and your statement of shareholder equity.

Lenders may require three months' worth of your checking account statements. You'll also need to provide your income taxes for the last three years, paperwork pertaining to any businesses you have a financial stake in, and your business license or certification. If you're renting office space or equipment as part of your operations, you'll want to have those leases easily accessible as well.

WHAT TYPE OF LOAN IS A SMALL BUSINESS LOAN?

Small business loans have varying interest rates and terms. Here are three of the most common options.

• Business line of credit: This is a popular choice among business owners who need flexibility. Instead of receiving a lump sum, you draw money as you need it and only pay back what you use.
  
• Business term loan: Typically provided by banks and credit unions, this type of loan is usually funded in a lump sum, and you have a predetermined amount of time to pay it back. The interest rate is typically fixed.
  
• Small Business Administration loan: These are largely geared toward small business owners who are just starting out. Because the SBA backs most of the loan, banks, credit unions and lenders are more willing to extend money to small business owners who may not be eligible for term loans.

CAN YOU GET A BUSINESS LOAN IF YOU HAVE BAD CREDIT?

Banks and credit unions extend loans to business owners with excellent credit scores. Unwilling to take on the risk of not being paid back, they typically won't look at you if your score is under 680. That doesn't mean you can't get a business loan if you have bad credit, though. There's a whole industry of alternative lenders waiting to serve you.

Small business owners with bad credit can get loans with terms of three years or less from alternative lenders, but the interest on these loans will be higher for borrowers with poor credit scores. Hard money loans are another option if you're willing to put up collateral. Instead of judging you on your credit score, these lenders require an asset – usually real estate – to back the loan.

HOW IMPORTANT IS YOUR CREDIT PROFILE IN APPLYING FOR A SMALL BUSINESS LOAN?

Your credit score has a big impact on your small business loan. It dictates the interest you pay and whether you're even eligible. In many cases, you need a good credit score to be approved for a small business loan. According to credit rating agency Experian, a credit score of 700 or above is considered good; a score of 800 or higher is excellent. You can still get a business loan with a score in the mid-600s, but it won't be easy, and you'll pay more in interest. Experian says the average credit score is between 600 and 750.

WHAT PAYBACK TERMS CAN YOU GET FOR YOUR SMALL BUSINESS STARTUP LOAN?

The payback term is the amount of time you have to pay back a loan. Depending on the type of loan, the payback terms could be as short as six months or as long as 25 years. For example, SBA loans have terms from five to 25 years. Your funding needs will dictate the terms. Short-term loans last no more than two years, while a long-term loan has an average span of five years.

WHERE CAN YOU FIND AN SBA LOAN APPLICATION?

If you're looking for an SBA loan, a good place to start is the SBA's Lender Match tool. It's a free online resource that hooks up business owners with SBA-approved lenders. To use it, you answer a few questions about your business, and within two days, you'll receive an email with contact information for the lenders willing to work with you. After you compare rates, you can apply with whichever lender you choose. This tool is not for SBA disaster relief loans.

If you don't want to wait the two days for the SBA to match you with compatible lenders, you can do your own internet search for SBA-approved lenders and apply directly through their websites.

WHAT IS A BUSINESS INSTALLMENT LOAN, AND WHY WOULD I NEED ONE?

A business installment loan is a common method of financing an asset such as property or expensive business equipment. Rather than paying for the whole purchase upfront, you pay for your purchased asset in installments over a certain period of time. The amount of the loan and the number of payments you must make are fixed; you don't have access to an ongoing line of credit or credit card.

Installment loans can have many purposes, such as purchasing equipment, funding a startup or paying for property. If you are looking for an installment loan to fund a startup, you'll need good credit, collateral, a business plan, and potentially additional guarantees, depending on your credit standing and business prospects. Installment loans tend to have lower interest rates than credit cards, but you risk losing your collateral if you default on the loan. That's not true of a credit card.

WHAT IS A BUSINESS LINE OF CREDIT, AND HOW DOES IT WORK?

With a business line of credit, you draw money from the loan as you need it. You pay interest only on the amount you use. Small business lines of credit range from $1,000 to $250,000, going even larger in some instances. They tend to have variable interest rates, which means your interest payment amounts will fluctuate with the market.

With an unsecured line of credit, you don't have to provide collateral, but the lender may require a personal guarantee. With a secured line of credit, you must offer something of value that the lender can seize if you can't repay the loan. Common types of collateral include property and business equipment. [Read related article: Unsecured vs. Secured Business Loans]

WHAT IS THE PAYCHECK PROTECTION PROGRAM?

The Paycheck Protection Program, or PPP, is a loan program designed to help small businesses during the coronavirus pandemic. It was passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, giving small business owners access to forgivable loans if they used the money to keep employees on the payroll. The program was very popular, providing a lifeline to countless businesses, but funds quickly ran out.

In late December of 2020, Congress approved another round of PPP funding of $284 billion in forgivable loans for small business owners. If a small business previously received a PPP loan but sales still fell 25% or more, they can apply for a new PPP loan. More aid came in March when President Joe Biden signed a $1.9 trillion COVID-19 relief bill. Of that money, $41 billion was earmarked for small businesses.

WHEN IS IT A GOOD TIME TO TAKE OUT A BUSINESS LOAN?

Many business owners don't look for a loan until they need the money. They may have identified an opportunity to expand or noticed a shortage in cash flow. Then they scramble to get a loan, focusing more on the time it will take to get cash in the bank than the terms.

The better strategy is to line up funding before you need it. That will give you the time to shop for a loan that has a low interest rate, little in the way of fees, and favorable terms. Having cash at the ready will better position your business for the unexpected.