How to Choose a Small Business Loan in 8 Easy Steps

2. For good credit: bank term loans

If you don’t qualify for SBA loans, bank term loans can be a viable alternative. These loans typically have fixed interest rates of 6.99% to 26.99% and repayment terms of one to five years. Their amounts range from $30,000 to $500,000.

As the name “bank term loan” suggests, banks offer these small business loans. That said, credit unions, online lenders, and alternative lenders offer term loans too. You can use these loans to buy working capital or consolidate debt.

Since bank term loans lack SBA backing, they don’t require as much paperwork from their applicants, so funding can sometimes be faster. Their fixed interest rates lead to consistent monthly payments that can help new entrepreneurs further bolster their business credit score. That said, fixed interest rates ultimately lead to more expensive loans since variable-rate, amortized loans result in lower payments down the line.

3. For okay credit: business lines of credit

Business lines of credit are similar to credit cards, but they expire after you use their balance. You’re not required to use the full credit line, and you’ll only pay interest on the portion you do use. Small business owners often use them to fund payroll, inventory and equipment purchases, and marketing campaigns.

Business credit lines often have high interest rates, which can make them disadvantageous. Their rates typically increase as your credit score decreases. That said, they can be easier to qualify for than SBA or bank term loans.

4 For okay credit: equipment financing

Equipment financing can be a reliable loan option if your credit score is in the 600 to 675 range. You’ll use equipment loans, as their name suggests, to buy new equipment or update old machinery. Once your loan term ends – often after five years – you can buy the equipment. If you fail to repay the loan, the lender will likely seize the equipment as collateral. This arrangement can put your business back at square one, but it does protect your other assets.

5. For bad credit: merchant cash advances

If your credit score is low, merchant cash advances (MCAs) can help you maintain your cash flow. For starters, many MCA providers won’t ask for your credit score. MCAs are also convenient: You’ll receive a loan, and then every day, you’ll funnel a portion of your credit card revenue to the lender. This arrangement is an especially passive form of loan repayment.

MCA providers check your credit card processing statements to determine your eligibility. If your transaction volume is high enough, you’ll likely qualify. However, your loan will probably come with extremely high interest rates and fees. You also can’t take out a merchant cash advance if your business doesn’t accept credit card payments.

6. For bad credit: invoice factoring and financing

Like merchant cash advances, your access to invoice factoring services is mostly independent of your credit score. Notice the word “services” there: Invoice factoring isn’t a loan in the traditional sense. Instead, an invoice factoring service buys any invoices that your clients or customers haven’t paid. The company will lend you the total invoice amount, charge you a fee, and interact directly with the client or customer for payment.

If clients sitting on unpaid invoices is your main obstacle to cash flow, invoice factoring can be a reliable funding option. That said, you’ll pay a weekly fee until your client repays, though the invoice factoring service often refunds some of this fee.

Why is a business loan the best funding option?

A business loan is important because it helps your company get funding, but there’s more value to it than that. Namely, a business loan is often a better option than other funding routes. Below are three reasons why business loans often prove superior.

  • Fast funding. Some lenders can make funding available to you in just a matter of days. With others, you’ll wait at most a few months for funding. By comparison, if you seek funding from angel investors or venture capitalists, you could wait up to a year to receive the money you need.
  • Business control. Angel investors and venture capitalists typically obtain ownership equity in your company for the money they give you. If you give them enough ownership equity, you could lose some control over your operations. Business loans present no such issue. Lenders don’t get a seat at your table.
  • Low interest rates. Many entrepreneurs have business credit cards, which are great for small purchases you know you can pay off soon. However, let’s say you use your credit card for a purchase you wind up unable to pay. In that case, the card’s high interest rates can quickly make your purchase much more expensive. Business loan interest rates are much lower and add relatively little to your business expenses for big purchases.

The right loan for your business

Any loan you choose should be eligible for use in ways that suit your needs. It should also come with eligibility requirements that you can easily fit. You should also seek low interest rates and long repayment terms to make your payment installments smaller. Just as importantly, you should borrow from a lender that makes its team readily available to you whenever you need help.

On that front, SmartBiz® is a great option. You can apply for SBA 7(a) loans, bank term loans, and custom financing with easy access to a dedicated support team. We’ll match you with the bank whose loans check all your boxes, and you’ll get the capital your business needs. Just create a SmartBiz account to get started.

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