Best Small Business Loan Choices for Startups, Small Businesses, and Solo Entrepreneurs

Last updated: Apr 10, 2024 at 03:29 pm

Small business loans can provide cash to start, grow, or sustain your business. There are several types of small business loans that meet different needs, like starting a franchise, buying property, or getting cash when you have unpaid invoices.

With so many loan options and business types, there is no one best choice for all. To help find the right loan, we reviewed 5 common types: term loans, equipment loans, commercial real estate loans, microloans and franchise loans.

We looked at key features for each loan: minimum and maximum amounts you can borrow, repayment period, personal credit score required, Better Business Bureau rating, and requirements to qualify.

The loans here are from private lenders – organizations or individuals not tied to a specific bank. Currently, many lenders are focused on Paycheck Protection Program loans, so there are fewer standard loan options available.

What are the different types of small business loans?

There are many loan options for different business needs. Below is an overview of 9 common types of small business loans:

1. Term loans

Term loans are very common small business loans. They provide a lump sum of cash that you repay over a set period of time. The monthly payments are usually fixed amounts that cover interest plus the principal balance.

Term loans offer flexibility to use the money for various needs, like daily expenses and equipment.

2. SBA loans

Small Business Administration (SBA) loans are appealing for their low-cost, government-backed financing. However, they are known for a lengthy application process that postpones receiving the money. Approval and funding can take up to three months. While you don’t get money quickly with SBA loans, if you qualify the lower interest rates and fees can be beneficial. So for business owners who don’t require urgent funding, they are a good option.

3. Business lines of credit

Business lines of credit work similar to credit cards, offering a revolving credit limit that you access through a checking account. You can spend up to your maximum limit, repay the balance, and then withdraw more as needed. 

These are ideal if you’re unsure how much you need since you only pay interest on the amount used, unlike term loans where interest applies to the full amount whether partially or fully drawn. Many business lines don’t require collateral to secure the loan. The flexible “pay as you go” structure helps manage cash flow changes.

4. Equipment loans

Equipment loans help finance large equipment purchases if you lack upfront capital. They are meant for expensive machinery, vehicles, or equipment expected to retain value – computers, furniture, etc. In most cases, the purchased equipment serves as collateral if the loan can’t be repaid. So these loans make it possible to acquire essential items you may otherwise struggle to afford.

5. Invoice factoring and invoice financing

If you’re a business owner having trouble getting paid on time, you might consider invoice factoring or invoice financing (also known as accounts receivable financing). With invoice factoring, you sell your unpaid invoices to a lender and get a portion of the invoice value upfront. Invoice financing allows you to use unpaid invoices as collateral to get an advance on the money you’re owed. The key difference is that with factoring, the company buying your invoices takes charge of collecting payments, whereas with financing, you’re still responsible for collecting payments to repay the borrowed amount.

6. Commercial real estate loans

Commercial real estate loans, also known as commercial mortgages, can assist you in finding either a new property or an existing one, such as an office, warehouse, or retail space. These loans function similarly to term loans and provide the opportunity to acquire a new commercial property, expand an existing location, or refinance an already existing loan.

7. Microloans

Microloans offer small amounts of funding, typically $50,000 or less, making them a suitable choice for new businesses or those with modest financial needs. Nonprofits or government entities, such as the SBA, often provide these loans. However, qualifying for microloans may require putting up collateral, such as business equipment, real estate, or personal assets.

8. Merchant cash advances

Similar to traditional cash advances, merchant cash advances come with a significant cost. This type of cash advance involves borrowing against your future sales. In return for a lump sum of cash, you repay it either through a portion of your daily credit card sales or weekly transfers from your bank account. While merchant cash advances offer quick access to funds, the high-interest rates associated with this type of loan pose a considerable risk. Unlike invoice financing or factoring, merchant cash advances use credit card sales as collateral instead of unpaid invoices.

9. Franchise loans

Becoming a franchisee offers a faster and easier path to business ownership compared to starting from scratch, but it still requires capital. Franchise loans are available to cover the upfront fee for opening a franchise, helping you kickstart your venture. Although you secure the loan from a lender, some franchisors may also provide funding support to new franchisees.

What information do I need to apply for a small business loan?

When applying for a small business loan, be prepared to provide a mix of personal and business details. You’ll likely be asked for:

  • Personal information such as your name and address
  • Tax identification number, which could be your employer identification number (EIN) or social security number (SSN), or both
  • Business details like name, address, and phone number
  • Information about your industry and company structure
  • The number of years your business has been operating
  • Your employee count
  • Annual business revenue
  • Estimated monthly expenditure

Additionally, the application process may require you to submit supporting documents like your business plan, financial statements, bank statements, and tax returns. Expect the lender to check your credit score to assess your creditworthiness.

What credit score is required for a small business loan?

To qualify for a small business loan, a fair to average credit score (580 to 669) is generally required, though the exact threshold can vary among lenders. If your personal credit score falls within the good/very good range (670 to 799) or excellent range (800 to 850), your chances of approval improve. Similar to many financial products, having a higher credit score can result in more favorable interest rates and fees.

Lenders typically consider your personal credit score as the primary factor for establishing minimum requirements, although they may also examine your business credit score. It’s worth noting that lenders usually don’t specify specific requirements for business credit scores.

Am I personally liable for a small business loan?

In many instances, as a business owner, you are personally responsible for a business loan. When securing a business loan, you usually have to provide collateral, which may include business assets such as property and vehicles, as well as personal possessions like your car or home. If your business faces financial challenges leading to bankruptcy and you’re unable to repay the loan, there’s a risk of losing your personal assets.

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