What is a business loan?
A business loan is a loan designed specifically for business purposes. With a small-business loan, you borrow money from a lender and pay it back over time, with interest. Business loans can be used to cover startup costs, purchase inventory or equipment, manage cash flow and expand your operations, among other uses.
Small-business loan options can include SBA loans, bank loans, term loans, business lines of credit and equipment financing. The best business loan for you will depend on a variety of factors such as:
Why you need funding.
How fast you need access to capital.
How much capital you need.
Your business’s qualifications.
Total cost of debt.
» MORE: Learn more business loan basics
Types of small-business loans
Business loans are available from banks, credit unions, online lenders, nonprofit organizations and community lenders. Loan terms, interest rates and qualifications vary by lender, but here are the features you can generally expect to find with the different types of business loans.
SBA loans
SBA loans are small-business loans partially guaranteed by the U.S. Small Business Administration, a government agency, and issued by participating lenders, such as banks and credit unions. SBA loans offer low interest rates and long repayment terms.
Although there are multiple types of funding within the SBA loan program, the SBA 7(a) loan is the most popular. These loans are available in amounts up to $5 million, with terms up to 25 years.
Loan amounts: $30,000 to $5 million.
Approximate APR range:
11.5
% to15
%.Best for: Large one-time and longer-term investments, purchasing real estate or equipment, buying existing businesses and refinancing debt.
Business term loans
A business term loan provides you with a lump sum of capital that you repay over a specific period of time, with interest. For short-term loans, the repayment period tends to range from three to 24 months, while repayment for long-term loans can extend up to 10 years or longer in some cases.
Traditional lenders, like banks and credit unions, are more likely to offer long terms, large loan amounts and low interest rates compared to alternative, online lenders.
Loan amounts: Up to $1 million.
Approximate APR range: 6% to 99%.
Best for: Working capital, large one-time investments, expanding your business.
Business lines of credit
A business line of credit provides access to flexible cash. Similar to a credit card, lenders give you access to a specific amount of credit (say, $100,000), but you don’t make payments or get charged interest until you tap into the funds.
Credit line range: $1,000 to $250,000.
Approximate APR range: 10% to 99%.
Best for: Managing cash flow, handling unexpected expenses and financing short-term business needs.
Compare financing and apply
We’ll start with a brief questionnaire to better understand the unique needs of your business. Once we uncover your personalized matches, our team will consult you on the process moving forward.
Equipment financing
Equipment financing is a form of asset-based financing where the equipment itself serves as collateral for the loan. You can get an equipment loan equal to up to 100% of the value of the equipment you’re looking to purchase — depending on the lender and your business’s qualifications — which you then pay back over time, with interest.
Loan amounts: Up to 100% of the value of the equipment, plus soft costs (e.g. installation, delivery, warranties).
Approximate APR range: 4% to 45%.
Best for: Purchasing machinery and equipment.
Microloans are small-dollar business loans that typically offer up to $50,000 in financing. These loans are designed for traditionally underserved entrepreneurs, such as startup founders, people with limited credit histories, minority groups and those located in low-income communities.
Loan amounts: Up to $50,000.
Approximate APR range: 8% to 30%.
Best for: Smaller business investments, covering day-to-day expenses, working capital needs.
Commercial real estate loans provide capital specifically for the purchase or renovation of commercial properties, such as offices, storefronts or residential buildings. These loans typically function like traditional term loans that you repay over a set period of time, with interest. Like equipment financing, commercial real estate loans are self-collateralizing — the property that you’re purchasing or renovating serves as collateral on the loan.
Loan amounts: Up to 85% of the value of the property you own or are looking to buy.
Approximate APR range: 4% to 15%.
Best for: Purchasing and/or renovating commercial properties.
Business auto loans are small-business loans used to purchase or refinance cars, vans or trucks for your company. These loans work similarly to consumer auto loans — you borrow money from a lender and repay it over time, with interest. The car you purchase (or refinance) serves as collateral on the loan and repayment terms often range from up to six or seven years.
Loan amounts: Up to 100% of the purchase price.
Approximate APR range: 4% to 45%.
Best for: Purchasing or refinancing cars, vans, trucks.
Government business loans
Aside from the most common type of government loan, the SBA 7(a) loan, small businesses can find additional financing options from the SBA, as well as other government agencies. These government business loans typically offer competitive interest rates and repayment terms. Some options are designed for entrepreneurs in specific industries or demographics, such as rural businesses, American Indian- and Alaska Native-owned businesses, farms and fisheries.
USDA business loans
The U.S. Department of Agriculture operates several business initiatives that are designed to provide financial assistance and development resources to rural businesses.
One of the most well-known programs is the Business & Industry (B&I) Loan Program. Through this program, the USDA provides a partial guarantee to lenders, like banks and credit unions, that issue loans to small businesses in rural areas (populations of 50,000 residents or less).
These businesses can use the financing for a range of purposes, including business repair and/or development, real estate purchases, debt refinancing, equipment purchases and certain acquisitions.
SBA disaster loans
Unlike other SBA loan options, disaster loans are funded and issued directly by the U.S. Small Business Administration. These loans are designed specifically to help small businesses recover from physical and economic damage caused by a declared disaster.
There are four types of SBA disaster loans: Home and personal property loans, business physical disaster loans, economic injury disaster loans and military reservist economic injury disaster loans.
SBA disaster loans have low interest rates, long repayment terms and may be faster to fund than other SBA loan options.
The ILGP is a funding initiative administered by the Bureau of Indian Affairs. This program is designed to help American Indian- and Alaska Native-owned businesses access financing from private sources — like banks and community development financial institutions — when they would not be able to do so otherwise.
Loans issued as part of the ILGP can be used for working capital, equipment purchases, construction, business acquisition and refinancing. You must have at least 20% equity in the project being financed, however, and the project must benefit the economy of a reservation or tribal service area.
The Farm Service Agency (FSA) offers a variety of loan options to help farmers and ranchers start, expand or manage their agricultural businesses. These farm loans have competitive interest rates, long repayment terms and may be available to borrowers with fair or bad credit histories.
To qualify for an FSA loan, you’ll need to meet industry-specific requirements and show that you’ll be able to repay your financing.
Small Business Investment Companies (SBICs) are privately-owned companies that are licensed and regulated by the SBA. Through the SBIC program, small businesses can get capital through debt, equity or a combination of the two.
SBIC loans typically range from $250,000 to $10 million, with interest rates between 9% and 16%. Equity investments usually range from $100,000 to $5 million; the SBIC provides funds in exchange for equity in your company.
To qualify for the SBIC program, you must be a U.S.-based small business in an approved industry. This type of government funding is geared toward established, profitable businesses.
The Fisheries Finance Program (FFP) offers direct government business loans through the National Oceanic and Atmospheric Administration, a part of the Department of Commerce. FFP loans are designed specifically for businesses in the fishing and aquaculture industries.
These loans have long repayment terms and fixed rates. FFP funding can be used for refurbishing or purchasing existing fishing vessels, fisheries facilities or aquaculture facilities, as well as covering the costs of harvesting privileges and individual fishing quota.
Fishing and aquaculture businesses can reach out to their regional financial services branch to discuss potential projects and learn how to apply.
Additional business funding options
If you don’t think you can qualify for a traditional loan — or simply want to explore all of your options — you might consider one of these products to finance your business. Many of these business funding options have flexible requirements and can be a good choice for newer companies.
Invoice factoring and invoice financing
Invoice factoring turns business owners’ unpaid invoices into immediate cash. You sell the invoices to a factoring company, which is paid when it collects from your customers.
If you prefer to maintain control over your invoices, invoice financing is an alternative to factoring.
Personal loans
A personal loan for business allows you to get funding based on your personal credit score and income instead of your business history.
These loans are usually available in smaller amounts, but they can be used for a variety of purposes and fund within days.
Business credit cards
A business credit card offers revolving credit, making it a solid option for short-term expenses.
Although credit card limits tend to be smaller than a line of credit, a business credit card may offer rewards, such as cash back or travel points.
Merchant cash advances
With a merchant cash advance (MCA), a financing company gives you an upfront sum of capital that you repay using a percentage of your debit and credit card sales, plus a fee.
MCAs are typically fast to fund and easy to qualify for, but they’re one of the most expensive types of business financing, carrying APRs that can reach triple digits. You should generally consider all other business financing options before turning to a merchant cash advance.
Small-business grants provide a free alternative to debt funding — offering access to capital that doesn’t need to be repaid.
Business grants are available from a variety of sources, including federal, state and local governments, private companies and nonprofit organizations.
A friend and family business loan is when you borrow money for your business from a close friend or family member.
These loans are typically informal; they don’t require an application process or credit check. Creating a written loan agreement, however, can help preserve your personal relationship — just in case things don’t go as planned.
Bootstrapping refers to entrepreneurs who use their own personal funds and resources (e.g. personal savings, credit cards) to start a business.
Bootstrapping can be a good way to finance your business in its early stages, but you also risk losing your personal assets if your company isn’t successful.
Crowdfunding allows you to use online platforms to raise money for your business. Supporters donate funds through your crowdfunding campaign, and in exchange, you usually offer rewards or equity in your company.
Crowdfunding can be a good option for businesses with a strong customer base or large internet presence.
Small-business loans by interest rate
Interest rates are an important factor to consider when comparing business loan options.
Small-business lending companies typically charge interest as an annual percentage rate, or APR. Some lenders, however, quote interest as a factor rate, which is multiplied by the amount of capital you receive to determine the total cost of your funding.
Your business loan rate will ultimately vary based on the lender, loan type and your qualifications. To access the lowest interest rates, you’ll need strong finances and good credit.
Minimum APR | Maximum APR | |
|---|---|---|
Accion Opportunity Fund - Small Business Working Capital Loan | 8.49 | 24.99 |
AltLINE - Invoice Factoring | Discount rate of 0.80% per 30 days an invoice is factored. | Discount rate of 3.00% per 30 days an invoice is factored. |
Bank of America Business Advantage Unsecured Term Loan | 7.25%. | Undisclosed. |
Bluevine - Line of credit | 20 | 50 |
Fora Financial - Online term loan | Factor rate of 1.13. | Factor rate of 1.28. |
Fundbox - Line of credit | 36 | 99 |
Funding Circle - Online term loan | 15.22 | 45 |
National Funding - Equipment Financing | Factor rates start at 1.11. | Undisclosed. |
OnDeck - Online term loan | 27.2 | 99.9 |
SBA 7(a) loan | 11.5 | 15 |
Wells Fargo BusinessLine® Line of Credit | 10.25 | 18.25 |
🤓 Nerdy Tip
How to decide if it’s the right time to get a business loan
Current economic conditions continue to bring challenges for small-business owners. Inflation has led to high interest rates and business lenders have tightened their credit standards. In fact, average interest rates on business bank loans increased from 5.26% to 11.32% in Q1 2023 to 6.13% to 12.36% in Q4 2023, according to data from the Federal Reserve.
As a result, some borrowers may want to wait to get small-business financing. If affordability is your top priority, you might wait until interest rates drop — or build up your credentials before applying.
On the other hand, you may need financing now — whether to take advantage of a new opportunity or cover working capital needs. In these situations, there are a few actions you can take to help you get the best rate on a business loan:
Build your credit score.
Offer collateral.
Pay down existing debt.
Improve your cash flow.
Shop and compare multiple financing options.
How do I qualify for a business loan?
Every lender has different underwriting guidelines, but they generally consider similar factors, including your personal credit score, time in business and business finances.
Personal credit scoreBusiness lenders use your personal credit score to assess your ability to manage and pay your debts. You can get your credit score online or check your credit score on NerdWallet for free. In general, the higher your personal credit score, the more likely you are to qualify for funding. A strong personal credit score can also help you qualify for lower interest rates and longer repayment terms.
Time in businessLenders use your time in business as a quick measure of success. The longer you’ve been operating, the more likely you are to have money to repay your debts. Most traditional lenders will want you to have at least two years in business. Online lenders, on the other hand, may only require a minimum of six months in operation.
Business financesLenders want to see evidence of stable cash flow to ensure that you can repay a loan.When applying for a loan, you’ll likely need to provide business bank statements, tax returns and financial statements. If you haven’t been operating for very long, it can be helpful to provide sales forecasts that illustrate the potential revenue your business will generate.
🤓 Nerdy Tip
Protect your business from predatory lenders and loan scams
Predatory lenders and scammers may target small-business owners looking for funding, especially those who are having trouble qualifying for traditional loan options. You can protect yourself by watching out for these red flags:
A promise of guaranteed approval.
An upfront fee to apply for a loan.
Aggressive sales tactics.
A lender that won’t disclose interest rates and terms.
Loan features that seem “too good to be true.”
How do I get a loan for my small business?
Getting a business loan doesn't have to be a painful process. You can increase your chances of approval by understanding your business's qualifications and then finding the financing option that fits your needs. Here are the steps you can follow:
Decide which loan option is right for your needs. If you want to finance a large purchase or business expansion, for example, you might consider a traditional term loan, whereas if you need funds for day-to-day expenses, you might prefer a business line of credit.
Check your qualifications. You’ll want to consider factors such as your personal credit score, time in business and annual revenue. Bank and SBA lenders will likely have the strictest eligibility criteria. Online lenders, on the other hand, may be more flexible.
Estimate what payments you can afford. You should look carefully at your business’s financials — especially cash flow — and evaluate how much you can afford to apply toward loan repayments each month. Your total income should be at least 1.25 times your total expenses, including your new repayment amount.
Determine whether and how you want to collateralize the loan. Business loans can be secured or unsecured. A secured business loan requires collateral, such as property or equipment, that the lender can seize if you fail to repay the loan. Putting up collateral is risky, but it can increase the amount lenders let you borrow and get you a lower interest rate. Keep in mind, however, that although some lenders don’t require physical collateral, they may still take out a UCC filing on your business assets. This official document allows a lender to claim your assets in the case of default.
Compare small-business lenders. You’ll typically want to get the business loan that offers you the best terms. But other factors, like funding speed or customer service, may matter to your business and different financing sources may be better in certain instances than others.
Apply for a business loan. Of the loans you qualify for, choose the one with the lowest APR and best terms for you — as long as you’re able to handle the loan’s regular payments — and gather your business loan application materials. These may include financial documents like tax returns, bank statements and cash flow statements. You may also be required to sign a personal guarantee.
Small-business loans: Frequently asked questions
With most small-business loans, you borrow capital from a lender and repay it, plus interest, over a predetermined period. Maximum loan amounts, interest rates and repayment terms will vary based on the type of business loan, the lender you’re working with and your business’s qualifications. Learn more about how business loans work.
The stronger your qualifications, the easier it is to get a business loan. Although requirements vary by lender, it’s helpful to have good credit, strong finances and multiple years in business to access a variety of financing options. Startups and borrowers with bad credit may have a more difficult time getting a business loan.
A private business loan is any type of small-business financing issued by a non-bank lender. Private business lenders include online lenders, factoring companies and merchant cash advance companies.
Compared to bank loans, private business loans tend to offer more flexible qualification requirements and streamlined application processes.
If you have good personal credit, strong finances and at least one year in operation, you should turn to a bank to get a new business loan. Banks will offer the most competitive rates and terms. If you can’t meet those qualifications, you can work with an online lender, as they tend to have more flexible requirements.
If you’re a very new business (less than six months in operation), you can consider alternatives like business credit cards or personal loans. See our list of startup funding options.
It may be more difficult for startups to qualify for traditional small-business loans. Banks and credit unions often require that you have at least two years in business to access financing.
If you have at least six months in business, however, you may be able to qualify for certain online loans. The SBA microloan program caters specifically to startups as well. Alternative financing options, like business credit cards, personal loans and grants, are also available if you can’t get a startup business loan.
Credit score requirements vary by loan and lender. Banks often require a credit score in the 700s for a small-business loan. But some online lenders will fund loans for borrowers with credit scores in the low- to mid-600s.
To qualify for an SBA loan, you typically need a good personal credit score (690 or higher), though some SBA loan programs are available to business owners with bad credit.
Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000, for business loans and lines of credit. If your revenue isn't high enough to qualify for those loan products, consider looking into business credit cards or SBA microloans.
Annual percentage rates (APRs), loan term and monthly payments are estimated based on analysis of information provided by lenders and publicly available information. All loan information is presented without warranty, and the estimated APR and other terms are not binding in any way. Lenders provide loans with a range of APRs depending on borrowers' credit and other factors. Keep in mind that only borrowers with excellent credit will qualify for the lowest rate available. Your actual APR will depend on factors like credit score, requested loan amount, loan term and credit history. All loans are subject to credit review and approval.
