Deciding on financing is a major step for entrepreneurs. Over half of small firms seek funding to grow or manage cash flow, according to Fundera. This guide helps weigh the pros and cons before committing.
Credit scores, repayment terms, and lender options impact approval chances. Government-backed SBA loans offer competitive rates, while online lenders provide faster access to capital. Each choice has unique requirements and benefits.
CNBC Select experts recommend comparing offers carefully. Factors like interest rates, collateral needs, and loan flexibility matter. A clear plan for fund usage strengthens applications and improves approval odds.
Key Takeaways
- Over 56% of small businesses explore financing options
- Credit history and business plans influence approval
- SBA loans feature low rates but stricter requirements
- Online lenders offer speed with potentially higher costs
- Compare terms, rates, and repayment flexibility
Understanding Small Business Loans
Navigating financial support requires understanding key loan structures. Entrepreneurs access capital through banks, credit unions, or online platforms. Each lender offers distinct terms, rates, and approval processes.
What Is a Business Loan?
Commercial financing helps companies cover expenses or expand operations. Traditional institutions provide secured or unsecured business loans, often requiring collateral. The 2023 Fed Survey notes a 76% approval rate at regional banks versus 66% at national chains.
Common Types of Business Loans
Four primary types cater to different needs:
- Term loans: Lump sums repaid over 2-10 years, ideal for long-term investments.
- Equipment financing: Uses machinery or vehicles as collateral, with rates as low as 8%.
- Microloans: Under $100,000, perfect for small business startups (average $13,000).
- Lines of credit: Flexible borrowing up to a set limit, like credit cards.
| Loan Type | Interest Rate | Approval Time | Best For |
|---|---|---|---|
| Bank Term Loan | 7.75-8.50% | 2-4 weeks | Established businesses |
| SBA Loans | 10.50-15.50% | 30-90 days | Real estate purchases |
| Online Lender | 9-75% | 24-48 hours | Urgent funding |
SBA loans stand out with government-backed guarantees and 10-25-year terms. However, they demand 650+ credit scores and extensive paperwork. Digital alternatives like Funding Circle streamline applications but cost more.
Should I Get a Small Business Loan? Key Considerations
Choosing the right financing option impacts long-term business success. Compare repayment terms against projected cash flow to avoid strain. Lenders like Capital Bank offer tailored solutions, but eligibility hinges on financial health.
Banks typically require two years in operation, while online platforms accept startups after six months. SBA loans take 30–90 days for approval but demand 650+ credit scores. Personal loans average 9.58% APR—lower than credit cards’ 16.30%.
Collateral requirements vary by loan type. Equipment financing uses assets as security, whereas unsecured options rely on creditworthiness. Startups may face stricter requirements than established firms.
Debt-to-income ratios below 36% improve approval odds. Some institutions charge prepayment penalties—review fine print carefully. Separate business and personal accounts to streamline documentation.
“SBA 7(a) loans fund working capital, equipment, or refinancing. Microloans under $50,000 suit inventory or machinery needs.”
Align loan purposes with revenue potential. Strong business loan applications include profit margins and growth plans. Compare offers from multiple lender types to find optimal terms.
Pros of Small Business Loans
Financial flexibility often determines a company’s competitive edge. Access to capital through business loans supports growth, stability, and strategic investments. Explore four key advantages below.
Access to Larger Funding Amounts
Traditional banks provide loans exceeding $500,000—double the cap of most online lenders. SBA options reach $5 million for major expansions like real estate or acquisitions.
High-limit funds enable bulk inventory purchases or franchise openings. Compare lender ceilings before applying.
Competitive Interest Rates
Bank loans average 7–9% APR, lower than credit cards (16.3%). SBA loans offer sub-10% interest rates for qualified borrowers.
| Lender Type | Rate Range | Best For |
|---|---|---|
| Banks | 7.75–8.50% | Established firms |
| SBA | 10.50–15.50% | Long-term projects |
Longer Repayment Terms
Extended repayment terms (up to 84 months) ease cash flow pressure. Online lenders typically limit terms to 24 months, while banks allow 5–7 years.
*Autopay discounts* at institutions like Chase reduce rates by 0.25–0.50%.
Building Business Credit
Timely payments report to commercial bureaus (Dun & Bradstreet). Strong credit profiles unlock better terms for future financing.
Equipment loans offer dual benefits: Section 179 deductions and asset-backed security. Regional banks often provide mentorship alongside funding.
“SBA 7(a) loans fund everything from equipment to refinancing, with rates often below market averages.”
Cons of Small Business Loans
Accessing capital often comes with trade-offs entrepreneurs must evaluate. High rejection rates, collateral demands, and lengthy waits impact feasibility. Weigh these challenges against potential benefits before applying.
Strict Eligibility Requirements
Traditional banks reject 85% of startup applications due to rigid requirements. A credit score above 700 is typical for unsecured loans. Startups under two years old face stricter scrutiny.
Collateral like real estate or equipment secures most term loans. Personal guarantees tie debt to your assets—default risks garnished wages or tax refunds.
Lengthy Approval and Funding Times
SBA loans average 45 days for approval. Banks take 2–4 weeks, while online platforms fund in 24 hours. Delays hinder urgent needs like inventory restocks.
| Lender Type | Approval Time | Documentation |
|---|---|---|
| Banks | 14–30 days | Tax returns, business plans |
| SBA | 30–90 days | Financial statements, collateral proof |
| Online | 1–3 days | Bank statements only |
Risk of Debt Accumulation
High-interest business loans strain cash flow. SBA rates cap at 16.50%, but compounding increases total repayment. Cross-collateralization risks multiple assets if payments lapse.
“Defaulting on an SBA loan can trigger personal liability, including federal benefit garnishment.”
Compare repayment strategies: Snowball (small debts first) versus avalanche (high-interest priority). Crowdfunding’s 2.9% fees may cost less than loan interest.
Top Reasons to Get a Small Business Loan
Strategic financing fuels growth for ambitious entrepreneurs. Over 43% of business owners use loans for working capital, per Federal Reserve data. Whether expanding operations or upgrading tools, targeted funds create measurable impact.
Starting or Expanding Your Business
A $150,000 term loan helped Sweet Rise Bakery double its production capacity. Franchise acquisitions drive 22% of SBA approvals. Key expansion scenarios include:
- Inventory financing: Cover seasonal demand spikes with 90-day repayment terms
- AR advances: Access 85% of unpaid invoices within 48 hours
- USDA REAP grants: Fund solar panels or energy-efficient equipment
Purchasing Equipment or Inventory
Manufacturers secure $40,000 average loans for machinery upgrades. Compare options:
| Option | Advance Rate | Term |
|---|---|---|
| Semi-truck loan | 80% LTV | 60 months |
| Equipment lease | $1 buyout | 36 months |
“FEMA disaster loans cover up to $2 million in physical damage at 3.24% fixed APR.”
Crowdfunding platforms like Kickstarter offer alternatives, but all-or-nothing models carry risk. Match financing to specific expenses for optimal cash flow management.
Alternatives to Small Business Loans
Multiple financing pathways exist beyond traditional bank loans. Entrepreneurs access capital through SBA loans, digital platforms, or revenue-sharing models. Each option suits different timelines, credit profiles, and funding needs.
SBA Loans and Online Lenders
SBA loans split into two primary programs: 7(a) for general use (up to $5M) and 504 for real estate (fixed 10–20-year terms). Approval takes 30–90 days but offers rates below 11%.
Online lenders like Fundbox provide 12–24-week repayment cycles. Kabbage extends lines of credit from $2,000 to $250,000 with 24-hour approvals. Trade-offs include higher APRs (14–99%) versus banks.
| Option | Max Amount | Speed |
|---|---|---|
| SBA 7(a) | $5M | 30–90 days |
| Online Lender | $500K | 1–3 days |
“SBA 504 loans fund heavy equipment or commercial real estate at 90% LTV.”
Business Credit Cards and Crowdfunding
Credit cards like Amex Blue Business Plus offer 0% intro APR for 15 months. Chase Ink Preferred® rewards 3x points on shipping—ideal for e-commerce.
Crowdfunding platforms like Indiegogo feature *Flexible* (keep funds even if goals aren’t met) or *Fixed* (all-or-nothing) models. Equity financing trades 20–40% ownership for capital, common in tech startups.
- Revenue-based financing: Repay 10–50% of monthly sales until the cap is met.
- Equipment leases: Hyundai Capital structures $1 buyout options for machinery.
Y Combinator’s SAFE notes simplify startup investments without debt. The global crowdfunding market will hit $28B by 2028, reflecting its growing appeal.
Conclusion
Securing financing requires careful evaluation of multiple factors. A credit score above 670 significantly improves approval odds across all lender types. Traditional banks offer relationship benefits, while digital platforms provide faster access to capital.
Compare repayment terms and rates from at least three institutions. Credit unions often negotiate better deals for members. The SBA’s 90% guarantee reduces risk, making their business loan programs particularly attractive.
Equipment financing differs from working capital solutions—match the loan type to specific needs. Free mentorship through SCORE helps navigate these options effectively. Strategic borrowing fuels growth when aligned with clear financial goals.
