10 Smart Ways to Get a Small Business Loan

By Damian Davila. Last updated 20 March 2021. 2 comments

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Money is the lifeline of any small business.

And using financing to maintain healthy cash flow can be essential for a sustainable operation. Still, when it comes to seeking financing, some business owners may not know where to begin. There are now more options than ever for the hopeful entrepreneur looking to get a bit of a boost to jump start a business. Here is a breakdown of some of the ways you can get financing for your business.

1. Business Loan

With over half of small businesses using them, traditional bank loans are still the most popular source of financing among small businesses. However, not every organization is able to secure one. According to a nationwide review of 10,000 loan applicants across 700 different industries, 82% of loan applications from small businesses are turned down by a bank.

There are two basic steps to increase your chances of landing a business loan.

First, you need to build and maintain a strong business credit score. Don't confuse your personal credit score with your business credit score. Two thirds of U.S. small business owners haven't checked their business credit report within the past two years. Before you apply for a business loan, find out your current business credit score, update any missing or incorrect information, and take steps toward improving it.

Second, you need to establish a solid business plan, which not only details how you plan to operate your business, but also provides projections of revenues and expenses for the next five years. The more that you can back up your claims and projections with factual information, the better your chance of landing a business loan.

2. SBA Loan Programs

The U.S. Small Business Administration (SBA) offers several loan programs for very specific purposes.

General Small Business Loans: 7(a)

This is the SBA's most common loan program, which is available to most small businesses that operate for profit in the U.S. and aren't delinquent on any existing debt obligations to the federal government. You can find more details about 7(a) loan program eligibility at the SBA website.

Microloan Programs

With an interest rate ranging between 8% and 13% and maximum repayment term of up to six years, the SBA Microloan program provides loans of up to $50,000 to help small businesses in securing working capital, purchasing inventory or supplies, acquiring furniture or fixtures, or investing in machinery or equipment. The average microloan is about $13,000.

Real Estate and Equipment Loans: CDC/504

A CDC/504 loan can be used for:

  • purchasing land, including existing buildings;
  • making substantial real estate improvements;
  • renovating or modernizing facilities; and
  • purchasing long-term machinery and equipment.

Disaster Loans

Most businesses whose real estate, property, machinery and equipment, inventory, or other business assets were destroyed in a declared disaster, may be eligible to a low-interest disaster loan. The SBA monies can be used to replace or repair the destroyed business assets.

3. Asset-Backed Loan

Trying to hire extra help during a busy season or taking advantage of a great opportunity to bulk up inventory for cheap can put your small biz in a cash crunch. One way to secure that much-needed capital is to use your accounts receivable or assets as collateral for a loan.

Before you run to the bank with a list of all your business assets, you should realize that lenders are only interested in specific high-quality assets:

  • accounts receivable under 60 to 90 days, depending on lender;
  • heavy equipment;
  • qualifying vehicles (e.g. trucks); and
  • business inventory.

To hedge the loans that they issue, banks generally appraise eligible receivables and finished inventory at 70% to 80% and 50%, respectively, of their market value. The reason is that if you were to default on your loan or miss several payments, then the bank would liquidate the assets as quick as possible at a lower price. If the sale doesn't cover your remaining loan balance, you're still liable for it.

By keeping in mind the lower asset valuations, associated loan fees, and applicable rules, asset-backed lending can be a useful source of financing for small businesses. This is why asset-based credit line commitments at the end of 2014 were nearly $216 billion, a 6.8% increase over 2013.

4. Kabbage

One of the main challenges of getting a loan for your small business from traditional lenders is that they base the majority of their decisions on a credit score. Even though small biz owners may lack the business credit score traditional lenders are looking for, they can still demonstrate a healthy cashflow through business data from connected sites, such as a QuickBooks, Square, Amazon, PayPal, or Etsy accounts.

Leveraging this second type of business data, Kabbage helps small businesses get the funding they need to grow. Through a fully automated, online platform, owners of small businesses can link their latest business data, allowing Kabbage to review the overall health of their business — not just a credit score — to approve and provide loans between $2,000 and $100,000 in minutes.

Kabbage loans aren’t for everybody. These are very short term loans that are payable within six months, requiring payment of one sixth of the total loan plus a monthly fee per month. Fees range between 1% and 12% of your loan for the first two months and 1% for each of the remaining four months. However, you can pay back your loan early without penalty and lower your financing costs.

5. Lending Club

The underlying idea of peer to peer (P2P) lending is to circumvent traditional lenders, such as banks, by crowdfunding funds from a large group of individuals. When one small business owner receives a P2P loan, his peers fund small portions of that loan and receive principal plus interest when the borrower repays the loan. In simple words: a peer lends to another peer. (See also: Prosper or Lending Club?)

Lending Club issues small business loans up to $300,000. Collateral is not needed for loans under $100,000 and no appraisals or business plans required. You must own at least 20% of the business and have fair credit. Their loans start at 8.05% and you can choose from 3-5 year terms. There is a one-time origination fee that ranges from 3% to 6%.

6. Prosper

The pioneer of P2P lending in the U.S., Prosper uses a credit score-based model for evaluating its P2P loans. Prosper has helped more than 900,000 with $16 billion in funded loans. Small business owners can apply for P2P loans between $2,000 and $40,000 and individual lenders invest as little as $25 in each loan listing they select.  Unlike Lending Club which prefers businesses to have been operating for at least two years with 75k in annual sales, Prosper encourages budding entrepreneurs to apply.

7. CircleBackLending

CircleBackLending is also a P2P operator but uses institutional investors. Small business owners can borrow between $3,000 to $35,000 at CircleBackLending.

8. PersonalLoans.com

Here you can find three types of personal loans: peer-to-peer loans, personal installment loans, and bank personal loans. However, due to applicable laws and regulations that vary by state, some of those loans may not available for you. Each type of loan at PersonalLoans.com has specific requirements. For example, the minimum requirements to qualify for a bank personal loan ranging from $1,000 to $35,000 are a credit score of 580, monthly income of $3,000, proof of employment or self-employment.

9. OneMain Financial

Depending on your state of residence, you can borrow between $300 and $15,000 through OneMain Financial. An important advantage of using this lender is that you can cancel your personal loan for any reason and return the money within 14 days without any early payment fees or other types of penalties.

10. Small Business Credit Cards

By choosing the right small business credit card, you can avoid a cash crunch and meet your financing needs to secure future income. Choose the card that offers the best bonuses for your purchases as well as additional benefits like travel perks if you travel frequently. Some cards also offer a cash bonus for new cardmembers that can help pay for startup equipment and bills. (See also: The Difference Between Business and Consumer Credit Cards)

Responsible use of a small business credit card can also help you to separate your business and personal finances.

The Bottom Line

No matter the source of your financing, you should only seek a loan if you're experiencing a cash flow gap. This means that you need the money to meet the operating expenses for a guaranteed source of revenue. For example, you need the capital to buy a piece of equipment for an order that is double your actual capacity, or to hire additional employees during the Christmas season rush.

There are several financing options available, so don't jump at the first loan offer that you receive, and always shop around for better rates.

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Guest's picture
Manuel Moquete

Awesome. Really helpful. I implemented all the points and got really good results. Thanks

Damian Davila's picture

Glad to help, Manuel. I'm really happy to have helped you in your business venture. Best of luck in this 2017!