In a perfect world, your business would be flushed with cash and you’d never have to worry about tightening your proverbial purse strings or funding your expansion plans. But every now and again, a business may need to tap into additional funding to fill cash flow gaps, seize growth opportunities, or weather unforeseen challenges.
Enter business loans.
Whether you’re a business that’s just starting out or already established, finding the best business loans for your needs will enable you to thrive and scale with confidence.
Let’s get started.
- Business loans provide capital to commercial entities for various purposes like operations, expansion, and equipment purchases.
- They come in different types tailored to specific needs, such as term loans, short-term loans, working capital loans, equipment financing, and more. These loans can be categorized as secured (requiring collateral) or unsecured (based on creditworthiness).
- To select the best loan, businesses must first understand their financing needs by asking questions about the purpose, amount needed, and repayment capabilities. You also need to research and choose the right lender that aligns with your objectives, considering factors like interest rates, terms, and customer service.
What Are Business Loans?
Business loans are a type of financing specifically designed for commercial entities rather than individuals. They provide businesses with the capital they need to fund operations, expand, purchase equipment, handle unexpected expenses, or take advantage of other business-related opportunities.
The Different Types of Business Loans
Business loans come in various forms, and before applying for financing you first need to understand the different types of business loans and which ones are the best fit for you.
A traditional form of financing where your business receives a lump sum of money and repays it in installments over a fixed term, with interest. Payments are made at fixed intervals, and depending on your loan that could mean making payments weekly, bi-weekly, or monthly.
The repayment terms for this type of business loan range from seven to over 25 years.
Pros of term loans
- Predictable monthly payments
- Suitable for long-term investments
- Competitive interest rates with established lenders
Cons of term loans
- Requires a good credit history for favorable terms
- Early repayment might come with penalties
- Lengthy approval process with traditional banks
Short-term loans are similar to traditional term loans, but they have a shorter repayment period. This type of loan is designed to address your immediate business needs. The repayment terms of short-term loans are usually three to 18 months, though there may be other lenders that offer longer repayment terms.
Pros of short-term loans
- Quick approval and funding process
- Less strict credit requirements
- Suitable for temporary cash flow gaps
Cons of short-term loans
- Higher interest rates
- Not ideal for long-term financing needs
- Can create a debt cycle if not managed well
Working capital loans
Working capital loans are a type of financing designed specifically to address a business’s short-term operational needs, such as managing cash flow, purchasing inventory, covering payroll, handling unexpected expenses, or bridging seasonal fluctuations.
These loans are not meant for long-term investments or assets, but rather to provide the necessary funds to ensure that a business can continue its daily operations smoothly.
Working capital loans can be subcategorized into more specific types, including merchant cash advance, business line of credit, invoice financing, etc. (Keep reading to learn more about these subcategories.)
Pros of working capital loans
- Fast approval and disbursement
- No long-term commitment
Cons of working capital loans
- Higher interest rates
- Potential debt cycle
- May require collateral
Business lines of credit
A business line of credit (LOC) is a financing option where businesses can draw money up to a set limit and only pay interest on the amount drawn.
With an LOC, the lender offers a fixed amount of money that you can borrow or draw from, and you only pay interest on the amount owed. You can continue to borrow funds from your LOC up to the established credit limit, and as you repay the principal amount borrowed, that money becomes available to draw from again, much like a revolving credit card.
Pros of business lines of credit
- Pay interest only on the amount used
- Continuous source of capital
- Can be secured or unsecured
Cons of business lines of credit
- Potential for over-borrowing
- Fees for unused credit lines in some cases
- Variable interest rates can increase costs
These loans are tailored for purchasing equipment, where the equipment itself often serves as collateral. With equipment financing, you can secure the necessary machinery, vehicles, or technology your business needs without draining your cash reserves.
The loan amount is typically determined by the value of the equipment being purchased. As you repay the loan, you build equity in the equipment, and once the loan is fully repaid, the equipment is entirely yours. However, failure to meet repayment terms might result in the lender seizing the equipment, given its role as collateral.
Pros of equipment financing
- Enables acquisition of updated equipment
- The equipment itself can secure the loan
- Potential tax benefits through depreciation
Cons of equipment financing
- Your equipment might become outdated before paying off the loan
- Can be more expensive than other financing options
- Loan amount is limited to the value of the equipment
Merchant cash advances
A merchant cash advance (MCA) is where businesses receive a lump sum in exchange for a portion of future credit card sales. When you use an MCA, the lender gives you the funds upfront, and you’ll need to repay using a percentage of your credit card sales, plus a fee.
Merchant cash advances don’t have a set repayment schedule; instead, lenders collect a fixed percentage of your daily (or sometimes weekly) credit card sales until the advance, plus a fee, is repaid in full. This means that during times when your sales are high, you’ll pay more, and during slower periods, your payments will be reduced.
The structure of an MCA can provide flexibility to businesses with fluctuating revenues, but it also means that the cost of borrowing can be unpredictable and, in some cases, quite high.
Pros of merchant cash advances
- Quick funding process
- Repayment aligns with sales volume
- No collateral required
Cons of merchant cash advances
- Expensive with high factor rates
- Reduces cash flow due to daily or weekly deductions
- Can create a burden on businesses with fluctuating sales
Invoice financing is a cash advance that allows businesses to get advances on unpaid invoices, providing immediate cash flow.
Sometimes referred to as accounts receivable financing or invoice discounting, this form of financing allows you to put up unpaid invoices as collateral, so it’s easier to qualify for them. Invoice financing can come in the form of a structured loan or a line of credit, depending on the lender.
Pros of invoice financing
- Helps manage cash flow gaps from unpaid invoices
- Quick access to funds
- Amount is based on the value of invoices
Cons of invoice financing
- Fees can accumulate if invoices remain unpaid for long
- Might require communication with clients regarding payments
- Not a solution for long-term financial challenges
Secured vs. Unsecured Business Loans
Business loans and financing options also come in the form of two main categories: secured and unsecured. These categories differ primarily in terms of collateral requirements, risk levels, and often, the terms they offer.
Here’s a breakdown of secured vs. unsecured business loans.
Secured business loans
These loans require borrowers to provide collateral, which can be seized by the lender in case of default.
Pros of secured business loans
- Lower interest rates: Since lenders have collateral as security, they might offer lower rates.
- Higher borrowing limits: Collateral can increase the amount lenders are willing to offer.
- Longer repayment terms: Secured loans might have more extended repayment periods.
Cons of secured business loans
- Risk of asset loss: If you default, the lender can take the collateral, whether it’s equipment, real estate, or other assets.
- Approval time: Valuation of the collateral might prolong the loan approval process.
- Stringent requirements: Lenders might require insurance on the collateral, adding to costs.
Unsecured business loans
These loans do not require borrowers to put up collateral. They’re based on the borrower’s creditworthiness.
Pros of unsecured business loans
- No risk to assets: Borrowers won’t risk losing assets as there’s no collateral involved.
- Faster approval: Without the need for collateral evaluation, the approval process can be quicker.
- Flexibility: Often used for various purposes without the stipulations that sometimes come with secured loans.
Cons of unsecured business loans:
- Higher interest rates: Lenders charge more due to the increased risk of not having collateral.
- Lower loan amounts: Typically, unsecured loans offer smaller borrowing amounts.
- Stricter credit requirements: Lenders might require a strong credit history to approve the loan.
How to Decide on the Best Business Loans for Your Company
Now that we’ve covered the basics of business loans and the financing options available to you, let’s discuss how you can decide which type of financing is right for your business.
Understand your needs
First things first. If you want to secure the best business loan, you need to select the right financing option for you. And the best way to do that is to understand your needs. Asking the following questions will help you decide which funding solution is appropriate for your business.
- Do you need funding for short-term or long-term business needs?
- What will you use the money for?
- How much capital do you realistically need?
- Do you have assets you’re willing to use as collateral?
- How quickly do you need the funds?
- Do you have a clear plan for repayment?
- What monthly payment can your business budget accommodate?
- Is your cash flow predictable or does it fluctuate seasonally?
Each of these questions will guide you in determining the right financing fit, ensuring you select a loan that aligns with your business goals and capabilities.
For example, if you have urgent funding needs, then it might make sense to apply for an MCA or invoice financing, as these options offer quicker access to funds. On the other hand, if you’re looking to fund a large purchase or initiative that you’re willing to pay off over the long term, then a traditional term business loan could be a better option.
Whatever the case, you won’t be able to figure out what’s best if you don’t take the time to understand your business needs. So, sit down, assess your company’s current situation, and map out a clear financial strategy.
Build a strong credit history
Your credit history plays a big role in determining the types of financing you can tap into. That’s why having a strong credit history (business and personal) is incredibly beneficial.
A strong credit score opens doors to better loan terms, lower interest rates, and a broader range of financing options. Conversely, a weak or patchy credit history might limit your choices and result in higher interest rates or more stringent terms.
As such, make it a point to proactively monitor and manage your credit. Doing so will provide you with a competitive edge when seeking the best business loan opportunities.
Choose the right lender
Different lenders offer varied terms, interest rates, and loan products, so it’s essential to select one that aligns with your business needs and financial situation. You can’t really implement “trial and error” with lenders because making multiple loan applications in a short time can negatively impact your credit score and create an impression of financial instability.
As such, it’s critical to do your research. Read up on the latest lender reviews and talk to other merchants who have experience with business loans and financing.
Once you’ve narrowed your options, read up on the offerings and fine print of each lender. Pay close attention to their:
- Interest rates
- Repayment terms
- Collateral requirements
- Prepayment penalties
- Customer service and support
- Loan duration or term length
- Eligibility criteria
- Processing times for loan approval and fund disbursement
- Any special conditions or covenants
- Grace periods, if any
- Additional fees or charges
From there, engage in open dialogue with potential lenders, asking pointed questions and ensuring that the terms align with your business objectives.
Top 10 Best Business Loans for 2024
Determining the best business loans for SMBs can be a bit tricky because the business financing landscape is quite dynamic. Between interest rate fluctuations and evolving lending regulations, what’s “best” for your business can change depending on the day or time of year.
That said, there are some reliable providers out there, and this section will give you an overview—and hopefully a starting point—so you can decide on the right option for your business.
|Lender||Loan Types||Credit Score||Funding Time||Interest Rates|
|SBA Loans||Term loans, lines of credit||Varies depending on the lender||Varies depending on the lender||Generally lower than other types of small business loans|
|Funding Circle||Term loans||None||Within 24 hours||Generally higher than SBA loans|
|Stax Lending||Various loan types||None||Can be as little as 24 hours||On par with most online lenders|
|OnDeck||Term loans, lines of credit||600+||Within 24 hours||Higher than some other online lenders|
|Credibly||Term loans, lines of credit||500+||Within 24 hours||Generally lower than other online lenders|
|FundBox||Business lines of credit||600+||Within 24 hours||Higher than some other online lenders|
|National Funding||Term loans, lines of credit, merchant cash advances, SBA loans||550+||Within 24 hours||Higher than some other lenders|
|Fundible||Term loans, SBA loans, business lines of credit||550+||Within 24-72 hours||High|
|Accion||Term loans, SBA loans, business lines of credit||550+||Varies depending on the lender||Generally lower than other online lenders|
|Bluevine||Term loans, business lines of credit||625+||Within 24 hours||High|
SBA loans are small business loans that are guaranteed by the Small Business Administration (SBA). This means that the SBA will repay a portion of the loan to the lender if you default on the loan. SBA loans are available to a wide range of small businesses and can be used for a variety of purposes, such as starting a new business, expanding an existing business, or purchasing equipment.
SBA loans are generally more affordable than other types of small business loans, and they offer longer repayment terms. However, the application process can be more complex, and you may need to provide collateral to qualify.
Stax Lending enables you to tap into various loan options so you can get funding for your business. The process is simple: fill out an application and get a credit decision in as little as 15 minutes.
From there, an advisor will get in touch to discuss your funding needs and options. You can choose from various loan types and execute your funding agreement online. If everything is in order, you can get funded in as little as 24 hours.
Funding Circle is a peer-to-peer lending platform that provides small business loans. Funding Circle matches small businesses with individual and institutional investors who are willing to lend them money.
Funding Circle loans are typically unsecured, which means you don’t need to provide collateral to qualify. However, interest rates can be higher than for SBA loans. Funding Circle also has a relatively quick and easy application process.
OnDeck is an online lender that provides short-term loans and business lines of credit to small businesses. OnDeck is known for its fast and easy application process, and it can fund loans within 24 hours. However, OnDeck’s interest rates can be high, and it requires a personal guarantee for all loans.
Credibly is an online lender that provides small business loans and lines of credit to small and medium-sized businesses (SMBs). Credibly is known for its fast and easy application process, and it can fund loans within 24 hours.
Credibly offers a variety of loan products, including SBA loans, merchant cash advances, and business lines of credit. Credibly’s interest rates are generally lower than other online lenders, and it does not require a personal guarantee for loans under $200,000. To qualify for a Credibly loan, businesses must have a minimum annual revenue of $50,000 and a credit score of at least 500. Credibly also considers the business’s industry, time in business, and cash flow when making lending decisions.
FundBox is an online lender that provides business lines of credit to small and medium-sized businesses (SMBs). FundBox’s lines of credit can be used to finance a variety of business needs, such as inventory, payroll, and marketing.
FundBox is known for its fast and easy application process, and it can fund lines of credit within 24 hours.
To qualify for an LOC with FundBox, your business must be at least 6 months old, have a minimum monthly revenue of $50,000, and have a credit score of at least 600. FundBox does not require any collateral to secure its lines of credit. Instead, FundBox bases its lending decisions on a business’s bank account statements and other financial data.
National Funding is a direct lender that provides a variety of small business loan products, including working capital loans, equipment financing, lines of credit, merchant cash advances, and more. The company is known for its fast and easy application process, and it can fund loans within 24 hours.
However, National Funding’s interest rates can be high, and it may require collateral for some loans. You need a minimum annual revenue of $50,000 to qualify for a loan and your credit score must be at least 550.
Fundible is an online lending platform that provides small businesses with access to capital. Fundible offers a variety of loan products, including term loans, SBA loans, and lines of credit. Fundible can fund loans within 24-72 hours. It also has a high approval rate, even for businesses with bad credit. To qualify, your business must be at least 6 months old, have a minimum monthly revenue of $10,000, and have a credit score of at least 550
Accion is a global nonprofit organization that provides financial services to underserved individuals and small businesses. Accion works to create a financially inclusive world by providing access to affordable capital, financial education, and coaching.
In the United States, Accion Opportunity Fund provides small business loans and other financial services to entrepreneurs who may have difficulty accessing traditional loans from banks. Accion Opportunity Fund is known for its flexible lending criteria and its commitment to helping underserved entrepreneurs succeed.
Bluevine is an online lender that provides small business loans and lines of credit to small and medium-sized businesses (SMBs). Bluevine is known for its fast and easy application process, and it can fund loans within 24 hours.
Bluevine offers a variety of loan products, including term loans and business lines of credit. Bluevine has relatively lenient qualification requirements for its minimum credit score, compared to other traditional and online lenders. Bluevine also has a faster funding time than many traditional lenders.
Business loans serve as vital tools for companies to navigate financial challenges, seize growth opportunities, and invest in resources. Given the variety of loan types available, you really need to assess your unique needs and diligently research potential lenders.
Doing so will help you select the best business loans—ones that align with your objectives and ensure sustainable growth. Remember, the right loan can propel your business forward, but it’s the informed decisions behind its acquisition that truly make the difference.
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FAQs about the Best Business Loans
Q: What are the best business loans for small businesses?
Determining the best business loans for SMBs can be a bit tricky because the business financing landscape can be quite dynamic. Between interest rate fluctuations and evolving lending regulations, what’s “best” for your business can change depending on the day or time of year.
That being said, some of the top lenders and providers include:
- SBA Loans
- Funding Circle
Q: How do business loans work?
Business loans work by providing companies with the capital they need for various purposes. Once the business gets the funds, they will pay it back—typically with interest or a set fee—over a specified period.
Q: How do you get a business loan?
That depends on the type of loan or funding option you’re looking to obtain. Generally speaking, the process of getting a business loan involves:
Application: You start by applying for a loan through a lender, which could be a bank, credit union, or online lender. The application process involves providing business details, financial statements, business plans, and sometimes a detailed reason for the loan.
Evaluation: The lender evaluates the application, checking factors like business creditworthiness, profitability, financial statements, and the overall health of the business. For some loans, especially secured loans, collateral (an asset that can be claimed by the lender in case of default) might be required.
Approval and terms: If your business is deemed a viable candidate for a loan, the lender offers terms that include the loan amount, interest rate, repayment period, and any additional fees.
Disbursement: Once terms are agreed upon, the lender disburses the loan amount. Depending on the type of loan and lender, this can be a lump sum or a line of credit that your business can draw from as needed.
Q: How long are business loans?
The terms of a business loan can vary widely, based on the type of loan you obtain. Short-term loans can have repayment terms between 3 to 18 months, while long-term loans can be repaid over decades—10 to 25 years.
Q: What’s the difference between secured and unsecured loans?
Secured loans require collateral and often offer lower interest rates, higher borrowing limits, and longer repayment terms. In contrast, unsecured loans don’t need collateral, usually have higher interest rates, and might offer smaller borrowing amounts based on the borrower’s creditworthiness.