At the moment, it could easily be the best time for small business loans since the subprime mortgage crisis in 2008. The better economic conditions, combined with a huge increase in competition, mean that more lenders are willing to lower their rates on loans to small businesses. companies to get good prospects.
Unfortunately, this does not mean that it is easy to obtain a loan for small businesses from traditional banks. You still have to try – you will usually receive a lower interest rate if you can qualify. But if you like most small businesses, it can be empty.
Fortunately, several online lenders are giving banks a run for their money (and customers) by working directly with small business owners. In many cases, these companies make the loan process more convenient, with faster payback, more transparent terms and more flexible loan criteria. However, be aware that you are likely to get a higher APR if you choose an online lender.
The best small business loans in 2020
If you are looking for a small business loan and have invested in your local banks and credit unions, there are several of the top online lenders that may be options for you. Here are some tips for getting the best financing for small businesses:
Best loans for small businesses from direct lenders:
Best point-to-point small business loans:
To find out what differentiates these lenders from the competition, read on. We will define the profile of each company and describe the most important criteria in choosing the best small business loan. We’ll also cover some basics on small business financing, including where to look first and tips for getting approved.
Best small business loans (direct lenders)
Unlike peer-to-peer lenders, who finance loans through individual investors, direct lenders finance their loan with equity, like a traditional bank. This means that you can get your money faster, but the APRs are likely to be higher. The lenders described below also work with a wide range of companies, including very new ones.
Bluevine has the distinction of offering invoice factoring, in addition to term loans and credit lines. It has a completely online process and seeks to have a transparent process with minimal fees.
For those who are good: Companies that need money to stretch payment terms and increase flexibility when paying suppliers. Bluevine is also a good option for companies that do not have an established track record and do not qualify for traditional bank credit.
Who should pass: Companies that have an established relationship with a bank loan provider are likely to be able to receive better rates and terms through these providers. Bluevine loans also reach $ 250,000 – entrepreneurs who need larger loans must turn to other lenders.
On deck offers term loans and credit lines. (Information on the difference between the two can be found here.) You can borrow up to $ 500,000 in less than a day with minimal paperwork. However, you will need to accept a higher interest rate and a shorter term (up to three years) in exchange for convenience and speed. There is also a list of industries that OnDeck does not currently lend.
For those who are good: Companies that need money quickly (and can pay quickly) are best for OnDeck. Less established companies will want to take a look, but keep in mind that high APR can become expensive quickly.
Who should pass: Proven companies that have less expensive options are likely to skip OnDeck unless the speed of the loan is their highest priority.
If your business is really in a jam, Kabbage can provide a loan of up to $ 250,000 almost immediately after filling out a simple application. You only need to have a commercial checking account or a PayPal account to apply, but Kabbage can also examine data from other channels that your company can use, including Amazon, eBay, Yahoo and QuickBooks.
Kabbage refers to your loans as “credit lines”, but that term only applies in the sense that you can continue to borrow, on a rotating basis, up to the approved limit. The repayment terms are like a loan, with interest paid on the principal for a fixed period of six or 12 months.
For those who are good: Kabbage is an attractive option for small online businesses that do not meet the more stringent requirements of other lenders. It is also a competitor for companies that need money with the shortest possible delay. In both cases, however, you should be able to repay what you borrow in 12 months.
Who should pass: Any larger company (or even a smaller company that has the luxury of time) should look elsewhere first because of the high APRs. Unless you repay your loan in advance, Kabage’s monthly interest can reach an APR of up to 90%.
Foundation offers up to $ 500,000 for term loans, but the term can be up to four years instead of three. They also offer credit lines up to $ 150,000, with payment terms similar to Kabbage: you pay each new balance in equal installments over 18 months.
You can receive your funding as soon as one business day after signing up – an advantage of going through a direct lender like Fundation, instead of a point-to-point lender like Lending Club or Funding Circle.
For those who are good: Any established company that needs a relatively high amount will quickly need to consult Fundation. Loans are available in all states, except Nevada, and there are no additional costs except the origination fee.
Who should pass: Financing will not be an option for any new business or sole owner. The application is also relatively time consuming and potential borrowers should be aware that it is a relatively new company, with little in the way of online reviews.
Best of the rest: point-to-point small business loans
Peer-to-peer loans connect borrowers directly to investors, each of whom typically finances a small portion of a diversified loan portfolio. While this option is generally not the best option for securing a low-interest commercial loan, the loan criteria are generally less stringent than in traditional brick and mortar banks.
Thrive it is similar to the Lending Club, but without the separate small business loan program. However, your personal unsecured loans can be used for small business purposes.
Financing Circle, a UK point-to-point lending giant dedicated exclusively to small business finance, launched in the U.S. in 2013.
Where to find the best business loans
We only compare online lenders, but you should definitely evaluate all of your options before committing to a loan. Here are some other options to consider when trying to get a small business loan:
Traditional brick-and-mortar banks are still your best option for borrowing the most money at the lowest interest rates. They can also offer longer payment terms, if you need them.
However, remember that these loans require a lot of collateral and can be notoriously difficult to obtain. Enrollment and approval can also be daunting – you will need to complete a huge amount of paperwork, cut it down by up to 30%, and possibly wait a few months to see some money.
Many credit unions also issue loans to small businesses, and the approval process is generally more personal than at a bank, with things like an interview and letters of recommendation with more weight. Rates are competitive and sometimes lower, as credit unions are non-profit organizations with less overhead.
You must be a member of the credit union, but the requirements for joining are usually as simple as living in a specific area. Remember that, although credit unions may be more flexible than large banks, they still lend mainly to established companies.
SBA Loan Program
The US Small Business Administration is not a direct creditor, but it does provide government support so that riskier companies can obtain financing through partner banks and credit unions, who are guaranteed to get a share of the money back, even if you default.
The SBA has several programs, but the most common is the 7 (a) Guarantee Loan Program. The rates are lower and the terms may be longer than non-SBA loans, but the main attraction is the more flexible requirements. Still, you may encounter disadvantages, such as lower dollar limits and stricter requirements for using the loan.
Small business owners who have trouble getting loans through more traditional channels have an increasing number of options online. As discussed above, some online lenders finance their loans on their own, while others associate it with individual investors, each of whom finances a portion of their loan.
Either way, the main advantage of going online is speed: most lenders can deliver your money in a week or less. Applications are also much less time consuming. Obviously, the main drawback is higher interest rates. It is common for small businesses to secure bank loans with single digit APRs. While this is technically possible online, two digits are more the norm.
You may also have to personally guarantee the loan, which means that your own credit and assets – and not just your company’s – are at risk if you use the standard.
How to get a small business loan
Getting a loan for small businesses involves a lot more work than getting a personal loan. You will need to stay organized, have a clear idea of your needs, and be tenacious to refuse. Here are some tips to ensure the best financing package for your small business:
Step 1: Clean up your personal credit
If you are trying to get a loan for a startup, your personal credit score is very important. Without a substantial business history, creditors will perceive a low personal credit score as a greater risk, as they have little more to judge. Increasing your personal credit before applying for loans is not a quick process, but it can save time, frustration and money in the long run.
If your company is very small or new, also consider taking out a personal loan for business purposes. This means that your own personal finances are the only thing under the microscope (and on the hook if things go wrong). Your loan amount is likely to be less, but the process – and the loan criteria – will generally not be the ones involved. For options, see our guide on best unsecured personal loans.
Step 2: Have a business plan (and a sales step)
If you are looking for a big part of the change, it is not worth being vague. Tell your lender exactly why you need the money in the most detailed way possible. Present your plan for the future and explain how potential lender financing makes that plan possible.
You will also need a wide range of documents to support your case, including bank statements and tax returns. Be sure to define what makes your company a better bet than others. This is especially important if you think you may not be a slam-dunk candidate.
Step 3: Don’t rush and compare options
Before embarking on what can be a lengthy application process, it is smart to purchase and evaluate all of your loan options. Consider your own bank first, especially if you have a long and responsible relationship with them. Banks that know your background can be more sympathetic to your needs. This also applies to credit unions that lend to small businesses – they generally have more flexible criteria and more willingness to listen while you stand up.
Sites like Lendio can match you with creditors who are more willing to make a deal. After answering questions about your company and its needs, you will receive a list of creditors that may be suitable, all without answering the phone.
If you are targeting specific lenders online, compare interest rates, terms and eligibility requirements. The loan calculators found on many lenders’ websites can help you compare apples to apples.
Step 4: target the most likely sources of loan for your company
Larger banks tend to make larger loans to more established companies. So if you and your spouse have been running an online business for just a year and need only $ 20,000 to fill orders, you should probably not ask a large bank for a conventional loan. SBA Loans or online lenders are probably better bets in that scenario. Also check to see if there are specific lenders who make a lot of loans in your industry, especially if the industry does not have a high success rate.
On the other hand, if you have an established, low-risk business with a long history of healthy profits, you are probably a good candidate for a traditional bank loan, so it makes sense to look for it first.
How to choose the best small business loan in 2020
Most online lenders cannot compete with the low APRs that large banks can offer, but they make it easier to finance smaller and newer companies. Whichever way you go, prioritize transparent terms and fees, a simplified application process and, most importantly, an interest rate that you can manage. Here are the factors we consider when choosing the best small business loans:
- High loan amounts: Online lenders do not normally offer the seven-digit loans that a large bank can offer. However, the best still offers considerable sums enough to make a real difference for a variety of small businesses.
- Clear eligibility requirements: We look for lenders in advance about what you need to apply for. The application process for online lenders is generally more streamlined than for traditional banks, but it is still frustrating to start an application only to find that your company does not meet the minimum eligibility requirements.
- Competitive interest rates: Large banks can usually make loans to small businesses with single digit APRs. Although the best candidates may receive similarly low rates from online lenders, double-digit APRs (up to 30%) are more common. Cash flow loans with very fast returns also tend to have higher rates.
- Flexible terms: Online lenders generally do not provide the long payment terms available on loans to large banks, but the best ones offer some flexibility: ideally up to four or five years.
- Detailed and transparent website: The best lenders have extensive FAQ pages and clearly detail the total cost of borrowing, including possible extra fees and variable interest rates.
- Quick application and quick return: You can apply for a loan with some of the best lenders online in five minutes, and some can obtain funds in just a day or two.
- Reputation: Since online loans are still a relatively new phenomenon, we place less weight on the longevity of each lender than usual. However, we were still looking for a significant number of positive reviews, BBB certification and at least a few years of business.
Researching the best small business loan rates
Despite the increase in alternative lenders online, it can still be tricky to get a small business loan. Even if you are a solid candidate, you may not be the right candidate for a creditor.
Your research on potential creditors is just as important to the process as your research on your business. The tools described above should help boost your search, but we also recommend that you check LendingClub if you have an established small business or a lender like Kabbage or On deck if you’re just getting started.
Finally, if you feel overwhelmed when it comes to dealing with your company’s finances, consider hiring a professional, such as a certified public accountant, to help you get organized. Many CPAs stand out as corporate CFOs and can be used part-time. Making this type of investment before applying for small business loans can pay off with faster acceptance and better terms. And if you need tips on how to keep your small business in black, read our booklet at Money traps for small businesses to be avoided.