The Top 6 Business Lending Solutions

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

As an entrepreneur seeking first-time funding to expand your small business, it’s easy to become overwhelmed at the surprisingly wide range of business lending solutions available.

How do you know which offer to accept? And out of all the different possibilities, which one is the best business loan available?

The truth is that every business lending solution has its own unique pros and cons, so there truly is no single best option for every type of business. That said, there are certain business loan products that tend to consistently be the best choice for a wide range of business owners.

Read on below for the full breakdown on our top six lending solutions for small business owners. No matter what type of business you own or why you’re in need of extra funds, one of these options is likely to be a great fit for your financing needs.

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SBA Loan

Offering low down payment requirements, very reasonable interest rates, and a wide range of terms and uses, SBA loans—which are term loans partially guaranteed by the U.S. Small Business Administration—are often considered the gold standard of business lending solutions desired by small business owners.

Best fit for: Businesses with strong borrowing histories and high credit scores.

The terms: Borrow between $5,000 to $5 million. Loan terms extend from 5 years to 25 years and start at a 6.5% interest rate. You can receive an SBA loan in under three weeks.

The uses: A major benefit of SBA loans is that you can use them for almost any business purpose. Anything from adding to working capital to purchasing inventory or equipment, refinancing other debts, buying real estate, or even funding the acquisition of other businesses can be an acceptable use of an SBA loan.

The requirements: Two or more years in business, $100,000 or more in annual revenue, and a credit score of 620 or higher.

The downsides: Because SBA loans are highly sought-after, lengthy approval time and lots of paperwork are issues faced by applicants. These loans may also require collateral.

As one of the most desired loan products out there, SBA loans have high eligibility requirements, so make sure your finances are in good order before applying. The SBA offers a few different types of loans, including those intended to support veterans and other minority groups as well as microloans for under $50,000.

Term Loan

A term loan is your standard, everyday loan. You are loaned a lump sum upfront that you pay back, including fees, over a set period of time. This is the most common type of business lending solution and is all about predictability. Luckily, there’s also a wide variety of term loans. You can get a term loan for one year and make daily payments or get one up to five years and make monthly payments.

Best fit for: As long as you’re generating revenue, have been in business for a while, and have a good credit score, this loan can be a great option for you.

The terms: Borrow between $25,000 and $500,000. Loan terms run from 1 to 5 years, with interest rates from 7% to 30%. You can receive one of these loans in as little as two days.

The uses: As the most common type of business loan, you can use the funds from a term loan for almost any business purchase or need.

The requirements: One year or more in business, a credit score over 600, and more than $90,000 in annual revenue.

The downsides: If you anticipate being able to pay back your term loan ahead of schedule, be aware that doing so could involve prepayment penalties that might outweigh any savings on accrued interest.

Though any business owner who meets the minimum requirements will likely be approved for a term loan, the interest rate, length of term, and maximum loan size will depend on your business’s financial history, credit rating, and annual revenue.

Short-Term Loan

A short-term loan is just what it sounds like: a traditional term loan that you pay back over a short period of time. Short-term loans are typically paid back with daily or weekly payments (plus interest) over a period of 3 to 18 months. Short-term loans are designed to help businesses fix short-term financial needs.

Best fit for: Business owners with poor credit or who need fast access to cash.

The terms: Borrow up to $250,000 for periods of three to 18 months. Interest rates start at 10% APR with daily or weekly fixed payments.

The uses: Most often used to cover cash flow gaps, take advantage of short-term growth opportunities, or as a starter loan for new businesses seeking to build up credit in pursuit of a larger term loan.

The requirements: At least one year in business, $50,000 in annual revenue, and ideally a credit score of 600 or higher (though borrowers with credit scores of 525+ have been approved with higher interest rates).

The downsides: Annual cost of borrowing is generally higher than with longer term loans. Weekly repayments may present cash flow challenges.

In comparison to other loan types, short-term lenders will focus on a business’s cash flow more so than other financial information. Short-term loans are a great choice for businesses with a less-than-stellar financial history or those looking to build up a financial history on their way to a larger, longer-term loan.

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Business Line of Credit

With terms similar to a personal or business credit card, the business line of credit is a flexible business lending solution that allows business owners to maintain access to funds for day to day expenses, inventory purchases, seasonal cash flow gaps, and more while only paying interest when funds are drawn from the credit line.

Best fit for: Businesses that need access to funds for general working capital, rather than a single, large purchase.

The terms: Up to $1 million credit lines with terms up to five years. Interest rates range from 7% to 25%.

The downsides: Interest rates tend to be higher for borrowers with lower credit scores, and in some cases you may be required to provide additional documentation upon each draw from the credit line.

The requirements: Most approved borrowers have a personal credit score of at least 630 and have been in business for at least one year with annual revenues of at least $180,000. However, depending on the lender, you might be able to qualify with a lower credit score.

Qualified borrowers can be approved for a business line of credit in as little as one business day, but most business financing experts recommend that small business owners apply for a line of credit before they actually have a need for the funds. Doing so is a great way to build up your business’s credit, and it means that you’ll be able to access working capital more easily if your business is faced with a cash flow emergency or a pressing growth opportunity.

And remember—with a business line of credit, you only accrue interest when you actually draw funds from the credit line. If you never draw upon the line of credit, you won’t be charged a single cent—so there’s very little downside to securing this form of small business funding right away.

Equipment Financing

If your business is in need of equipment but can’t afford to pay for it up front, an equipment financing loan might be just what you need. Equipment financing works similarly to a car loan, using the equipment itself as collateral for the loan.

Best fit for: Small businesses with significant equipment needs, such as those in the manufacturing or IT sector.

The terms: Loans available for up to 100% of the equipment value for a period equal to the expected life of the equipment. Interest rates range from 8 to 30%.

The uses: Can be used to fund the purchase of machinery, vehicles, office computers, commercial kitchen equipment, and more.

The requirements: Typical borrowers have at least two years in business with annual revenues of at least $130,000 and a personal credit score over 630. Again, some lenders may accept a lower credit score.

The upsides: Because the equipment itself serves as collateral, most equipment loans don’t require additional collateral or a personal guarantee from the borrower.

The downsides: Equipment might be obsolete by the time the loan is fully repaid, and you might need to depreciate the equipment, meaning you can’t deduct the full amount each year.

Since the equipment that your business purchases will serve as collateral for the loan, the cost, type, and value of the equipment you’re looking to purchase will dictate the terms of your loan. Higher value equipment might let you receive better terms on your loan and a lower interest rate.

Invoice Financing

Invoice financing, sometimes known as accounts receivables financing, lets small business owners borrow funds on the basis of the business’s outstanding unpaid invoices. This unique business lending solution is a particularly great fit for service based business owners facing a cash flow crunch as they await payment on outstanding invoices.

Best fit for: B2B businesses with outstanding receivables and reliable customers who pay their invoices on time.

The terms: Funds are available for between 50% and 90% of the total invoice amount. The factor fee is approximately 3% plus the percent per week that’s outstanding. This type of loan is repaid when the customer pays the invoice. Once that happens, you receive the remaining 10% to 50% reserve, minus the fees. You can receive approval for invoice financing in as little as one day.

The uses: Loaned funds from invoice financing can be used for most business purposes, including taxes, payroll, and funding a new business project.

The requirements: Be in business for at least six months and have $50,000 or more in annual revenue.

The downsides: This loan type may have higher fees than other loan types and those fees are based off of how long it takes for the invoice to be paid—which isn’t under your control.

Invoice financing is a costly way to operate your business, but when you’re in a cash flow rut, this might be the best way to propel your business forward while you’re waiting for your customers to pay their bills.

Choosing Your Best Business Lending Solution

The truth is that there’s no such thing as a single best business lending solution for all types and styles of businesses. As you shop around for a small business loan, your goal should be to find the best loan product for your business, taking into consideration factors like your planned use of the loan, qualification standards, repayment timeline, availability of collateral, and how quickly you need cash in hand to determine the right loan choice for your business needs.

In fact, taking all these factors into consideration, two different business owners may compare the same loan products side by side and reach different conclusions about the best fit for their business.

As an example of this, let’s compare:

  • A 5-year term loan of $100,000 with a 6% interest rate

to

  • A 5-year $100,000 business line of credit with an 8% annual APR

Without thinking about a business’s individual needs, you might make the quick determination that the term loan—based on interest rate alone—is the better choice between these two products.

But let’s reconsider this scenario with some more facts. Imagine the business seeking the loan is:

  • A startup
  • In need of up to $100,000
  • Not in need of the full amount
  • If all $100,000 is needed, 30% of that would be paid off within two years

With those considerations in mind, which loan do you think is the better option for this business?

Even without making the specific calculations, it’s easy to see how a business line of credit—which offers flexibility in how much of the total line of credit is taken out at any given time—could be a better fit for this scenario than borrowing the first full sum of a term loan and accruing interest over five years on capital that may not actually be needed.

As you can see from this scenario, the loan type that is best for your business might not be right for the next business owner—and the type of loan that’s best for your business today likely won’t be the best loan for your business in three years.

To find the best loan for your business, you need to consider how much financing you need, how you plan to use the funds, how long it will take you to pay back the funds, your financial history, and much more.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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