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We've updated our review to explain new changes to the Paycheck Protection Program and how it helps very small businesses.
Having access to capital when you need it is critical for small businesses. With so many lending options available to small businesses, we considered more than 100 lenders to determine which ones are best for various needs. We evaluated lenders on factors such as the types of loans they offer, their rates and terms, loan requirements, and customer support. Below are our choices for the best alternative lenders, as well as a detailed guide on what you should look for when trying to land a loan.
| Rapid Finance | Noble Funding | Fora Financial | Balboa Capital | Crest Capital | SBG Funding | |
| Collateral |
Collateral option |
Accounts receivable function as collateral; banks will also place UCC-1 filing on your corporate assets |
No collateral needed; loan is unsecured |
No collateral needed |
No collateral needed |
No collateral needed; loan is unsecured |
|
Time to funding |
Within a day |
Two or three days |
Within 72 hours |
Same-day funding |
Same-day funding |
12 to 48 hours |
|
Term length |
3 to 60 months |
One low interest rate up to 90 days past invoice date | Up to 15 months |
3 to 24 months |
24 to 84 months |
6 to 18 months |
|
Credit requirements |
No credit impact |
Score of 550 to 800 |
Approval not solely based on credit |
All credit considered |
At least a 700 Equifax score |
Score above 500 |
Small business loans always charge some form of interest, which can be either a fixed or fluctuating rate depending on your agreement. Many alternative lenders set a fixed payback amount at the beginning of the loan. This means you make weekly or monthly fixed payments to your small business lender toward both the interest and the principal of your loan. Sometimes, rates are adjustable, meaning they can fluctuate over the time of the loan.
Depending on your agreement, lenders charge either simple or annual percentage rates. While a simple interest rate would be the percentage of interest paid off on the total loan, an APR is an annualized interest rate that accounts for fees as well. The total cost to you is based on your agreement and the type of interest rate or repayment term you have, so it's important to analyze how much the loan will cost you in total (not just per month) before you sign.
In addition to a few different kinds of interest rates, loan companies may charge a returned-item or origination fee. As with any business agreement, make sure you read the fine print and understand the fees you'll be charged.
Some lenders also require collateral, which can take many forms. Banks and alternative lenders often require business or personal assets to back a loan. These assets can be liquidated in the event of a default. When you provide collateral, you enter into a secured loan. Unsecured business loans don't require collateral, but they sometimes require a personal guarantee. The personal guarantee is a legally binding statement that says you personally will pay back the loan if your business defaults on its payments.
When you research your financing options, consider these factors to narrow down your selection.
A laborious loan process, with an extensive application and a long turnaround for approval or denial, can be a real turnoff when you need financing. The lender collects information on how much you make and your existing debts to assess whether you will be able to pay back the loan, but some lenders' processes are more lenient and quicker than others. You want an application process that is easy to understand and straightforward.
This is how long the loan contract is or the amount of time the loan will last if you make the proper payments. It is critical to know how long it will take you to pay back the loan and any interest you'll incur.
You must understand the conditions and expectations lenders have for their borrowers before you choose one. The eligibility criteria usually depends on the lender, but your credit score and repayment ability are usually critical factors. If you haven't been in business a long time, a lender may look into your personal credit score.
Collateral is an asset you use to secure a loan. By agreeing to the determined collateral, you agree to give the property or other asset to the lender if you can't pay back the loan. A secured business loan requires collateral; an unsecured loan does not.
This is how long it takes for you to receive the funds from the loan. If you need business financing, you should know how long the waiting period is so you can plan accordingly.
Lenders often want to see more than just your credit score. Most want to see additional documents like your tax returns or your bank and credit card processing statements. Some ask for more documentation than others, but doing your research on what your preferred lender requires before you apply will help your loan approval process go faster.
Qualifying for a loan basically means proving to the lender that, based on your revenue and credit, your business is healthy enough to pay back the money you're asking for with interest. Individual requirements and qualifications depend largely on the type of lender you work with. Traditional banks, for example, have higher requirements and standards than alternative lenders. However, there are a few basic principles to keep in mind when looking for a loan from any source. Lenders generally have benchmarks for credit scores and revenue. This verifies that you have a history of paying back loans and currently have a business that can support monthly payments. In general, the less stable your business, the higher the interest rate.
Some alternative lenders will give you a loan without checking your credit score. Instead, they'll want a detailed picture of your business's cash flow so they know you can pay back your loan based on how much money you take in each month. Others give credit scores much more weight. While revenue benchmarks vary widely among lenders, credit scores are easier to quantify. You need a credit score of at least 500 or 600 to secure a loan from some companies. In general, the higher your credit score and revenue, the lower the interest rates.
The required financial documentation also depends on what type of lender you're dealing with. Almost all lenders at least want to look at your recent bank statements, so make sure you have the last six months of statements at the ready before you apply. Some lenders want to see your tax returns or business plan. The financial documentation required for a loan varies so widely that it's a good idea to ask your loan specialist upfront – especially if you're looking for quick funding. They'll be able to tell you exactly what the lender requires in your situation.
Ready to choose a business loan or other financing option? Here's a breakdown of our complete coverage:
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 getting a loan easier.
Some lenders require collateral, while others ensure your loan is covered by requiring personal guarantees. It is rare to find a small business loan that doesn't require some level of insurance. Personal guarantees are usually required, especially if the startup loan is unsecured. This is a lender's way of making sure your debt gets paid back, even if it's not directly through your business.
It is common for lenders to check your personal credit, especially if you are a new business owner. When you are just starting a company, you don't have a financial history for your business, which means you don't have any business credit. So, a lender's only option to determine whether you qualify would be to check your personal financial history.
It really depends on the lender. For some, a credit score of 550 will suffice, while others require a score of at least 600. Remember that the lower your credit score is, the higher the interest rate you can expect to pay.
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 just 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, it's possible to get approved for a startup loan from certain lenders.
There is a wide range of assets you can use to secure a business loan. Real estate, land, equipment, inventory and accounts receivable are all types of assets you can use as collateral.
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 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, too, does the amount you pay.
Repayments can be made on a monthly, weekly, or daily basis depending on the terms you agreed on with your lender. The preferred payment method is an automatic payment that pulls money directly from your account. This ensures that payments are made regularly and on time.
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 actually get approved 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 score will help you narrow down the list.
You must also weigh the cost to borrow, including the interest rate, fees and any prepayment penalties. The terms – 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 are applying for a loan that makes sense for your unique business.
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 statement 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.
Small business loans have varying interest rates and terms. Here are three of the most common options.
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.
Credit score has a big impact on small business loans. 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 said the average credit score is between 600 and 750.
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, Small Business Administration 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.
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 that are willing to work with you. After you compare rates, you 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 with them directly through their websites.
A business installment loan is a common method of financing an asset like property or expensive business equipment. With it, you pay for your purchase over a set period of time. The amount of the loan and the number of payments to repay it are fixed; you don't have access to an ongoing line of credit or credit card.
Installment loans can be used for 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.
A business line of credit differs from a business loan in terms of how you access the money you are borrowing and how you pay interest on it. With a business line of credit, you don't take out a lump sum and pay interest on all of it. Rather, a line of credit is similar to a credit card: You draw funds from the line of credit when needed and pay interest only on the amount you used.
Lines of credits can range from $1,000 to $250,000, or even larger in some instances, though that's not as common. Lines of credits tend to have variable interest rates, which means you'll pay less when rates are low and more when interest rates are high.
With an unsecured line of credit, you don't have to provide collateral, but the lender may require a personal guaranty. With a secured line of credit, you're required to offer something of value if you can't repay the loan. Common types of collateral include property or business equipment. [Read related article: Unsecured vs. Secured Business Loans]
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 CARES Act, giving small business owners access to forgivable loans if the money was used to keep employees on the payroll. The program was very popular, though funds quickly ran out, and provided a lifeline to countless businesses.
With the pandemic worsening as we enter 2021, Congress approved another round of PPP funding in late December of $284 billion in forgivable loans to 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.
Many business owners look for a loan when they need the money. They may have identified an opportunity to expand or noticed a shortage in cash flow. They then scramble to get the funding, focusing more on the time it will take to get cash in the bank than the terms of the loan.
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, charges little in the way of fees, and meets your terms. Having cash at the ready will better position your business to handle the unexpected.
For Kyndra McCrary, chef and owner of Swift Cafe in Los Angeles, finding the right loan amount and a flexible lender who met her at her level was important during her loan search. She found those qualities in OnDeck and used it to fund her business.
"It was more customized," McCrary told business.com. "And the terms and rates were more lenient."
When working with OnDeck, she found the company took time to understand her limits and goals as a small business owner and worked to accommodate her, which McCrary believes is an essential feature of a quality lender.
"I felt like it was more of a tailored situation," she said about OnDeck. "They worked more to meet the payments and terms that fit our timeframe."
This is the same reason Ryan Reiffert, owner of Law Offices of Ryan Reiffert PLLC, recommends using a community bank. In his experience, he's found it to be a better choice for small business owners because you can form a more hands-on relationship with your lender, which helps them better understand your needs.
"These people can really take the time to get to know you and get to know your business a lot better than the big boys," Reiffert said.
During McCrary's research, she also came across lenders that were inconsistent between the information on their websites and what their representatives said when she spoke to them. Transparency and uniformity in information is an important consideration when you're looking into financing options, she said. It's essential to moving the loan application process along smoothly and building trust. This is why McCrary found OnDeck to be such a helpful service.
"They were truthful, and I went to them more than once and they were honest with their information," she said.
Before McCrary found OnDeck, she narrowed her loan options down based on interest rates and terms that worked for her. She considered what she needed as a business owner and which small business lender would best serve those needs.
Brian Cairns, CEO of ProStrategix Consulting, found that long-term, low-interest loans worked best for his company and stood out to him in business financing options. He said he used and highly recommends loans backed by the Small Business Administration – if you can qualify.
"These are the most stringent with qualifying requirements," Cairns said. "If you do not qualify for an SBA loan, commercial loans from smaller banks and alternative lenders are a good fallback."
There are a few different kinds of alternative lenders that provide small businesses with funding for growth, each with its own requirements and qualifications. While traditional banks can be great funding resources, they are often the hardest to get financing from. They have strict underwriting processes and require a lot of financial documentation for a loan. You'll also have to put up collateral for loans from traditional banks. Wells Fargo is the only traditional lender we looked at that offers unsecured loans. In May 2018, big banks only approved roughly 25% of the small business loan applications they received, according to Biz2Credit.
In the same month, Biz2Credit found that alternative lenders approved around 56% of their applicants. Alternative lenders provide a wider range of loans and qualifications, such as unsecured loans and short-term funding. Interest rates with these lenders will likely be higher than with traditional banks, but if your business can't meet the standards of a traditional lender, alternative lenders can be a great option. They often provide instant quotes and prequalified information online without a hard credit inquiry, letting you see what amount you would qualify for without committing to a loan.
In addition to traditional banks and alternative lenders, small businesses can get funding through the Small Business Administration. The SBA has a lending program that provides various types of loans for small businesses. These loans are financed by banks, like Chase or TD Bank, and the SBA incentivizes these institutions to lend to you by guaranteeing a certain percentage of the loan. As with traditional banks, getting an SBA loan may be a longer, more difficult process than going with an alternative lender, but it's a great way to get funding from a reliable source.
Regardless of the lender you choose, there are a few types of small business loans you should know about before you decide:
Understanding the different types of loans and your business's needs can help you make the right decision when it comes time to partner with a company.
To find our best picks, we analyzed more than 130 lenders. We compiled this initial list by finding industry leaders, looking at requests we'd received from lenders wanting to be considered, researching other review websites, and revisiting our former best picks. We started by considering each company's loans, website, experience, online reputation and whether it caters to small businesses. From this stage, we narrowed our list down to roughly 30 lenders.
We took a deeper look at these 30 lenders, determining their loan amounts, specific loan options, online transparency and deposit times. This brought our list down to about 18 companies, each of which earned a review on business.com. We looked at each company's loan process, requirements, individual rates, term lengths and customer reviews. We called some companies' sales teams to find out more about their loans.
After this stage, we compiled potential best picks – about six lenders – and took an even deeper dive into each company's service. We posed as small business owners and called each company's sales team to test its customer service and learn more about its loans. We verified online information and asked for other information that wasn't available online. We looked at additional fees, repayment structure, other considerations and requirements for a loan, and restricted industries. Our best picks withstood each round of research and held up as the best lenders in the industry.
The COVID-19 pandemic has been particularly tough for small business owners, and more of the same is expected in 2021 as the coronavirus continues to surge. When the pandemic hit, small business owners were forced to close operations or spend extra cash on social distancing measures. Many businesses didn't survive. The ones that did needed government aid and loans.
The government responded with the CARES Act, providing business owners with forgivable loans through the PPP. That has since expired, but more help from the federal government may come in 2021.
In lieu of more forgivable loans, in late October, the Federal Reserve Board reduced the minimum loan size for loans available through its Main Street Lending Program from $250,000 to $100,000. The Fed also clarified that PPP loans up to $2 million can be excluded from determining how much a business can borrow under the Main Street Lending Program.
These moves are designed to spark interest with business owners who favored PPP loans over the Fed's lending program. In 2021, small business owners who took advantage of PPP will need guidance on how to receive forgiveness on their loans and whether they will face a tax hit as a result.
Without a clear idea whether additional stimulus is coming, small business owners will continue to turn to online and alternative lenders for cash in 2021. Banks and credit card issuers have been less willing to lend to small businesses during the pandemic. Online and alternative lenders have stepped in to fill that void. In 2020, the Federal Reserve slashed interest rates, nearly to zero, and they aren't expected to rise dramatically in 2021.
Business owners who tap online and alternative lenders in 2021 will not only receive low interest rates, but advances in technology may improve the process. Artificial intelligence and machine learning are reducing loan approval wait times. Credit scores still matter, but lenders are increasingly scrutinizing other aspects of a business owner's finances to ascertain their creditworthiness. Altogether, these changes are designed to make it easier and quicker to get a small business loan in 2021.
As in 2020, the number of companies that offer online and mobile lending is expected to grow. Since digital options provide extensive financing opportunities and faster approval, they are expected to be increasingly popular choices compared to traditional banks and credit unions.
In recent years, large companies like PayPal and Amazon have made a big impact on the small business lending market. By 2019, PayPal had provided $10 billion and Amazon over $1 billion in loans to American small business owners. Along with Square, they have become top loan options for small businesses.
Digital lenders' use of personalized offers makes them more attractive to small business owners. Brands have learned to target consumers based on their specific interests, and we expect more lenders to follow suit. To provide entrepreneurs with the specialized funding they need at the right time, we predict digital lenders like PayPal and Amazon will increase their personalized offers to small businesses.
Peer-to-peer lending is also projected to increase among small businesses. With peer-to-peer lending, interest rates and loan offers are based on a business's earning potential rather than its credit score. As peer-to-peer loans become more common, the camaraderie within small business groups is likely to strengthen and grow. Transparency Market Research predicts the global peer-to-peer lending market will reach $897.85 billion by 2024.
March 2021: The Paycheck Protection Program has proven to be a lifeline for small business owners, but many have been shut out of the process. To ensure more small business owners get access to forgivable loans, the Biden administration made changes to the PPP. Those revisions include a 14-day designated period from February 24 to March 10, 2021, during which time only small businesses with fewer than 20 employees can apply for a PPP loan.
In addition, sole proprietors, independent contractors, those who are self-employed, individuals with nonfraud felony convictions or student loan delinquency are now eligible to apply for a PPP loan. Noncitizen business owners who are lawful U.S. residents can also now apply for a PPP loan using their individual taxpayer identification numbers.
