If you own a small business, then you’re in good company. Small businesses comprise a significant part of the U.S. economy, accounting for more than half of annual sales and jobs, according to the Small Business Administration. Whether you’re just starting your venture or want to expand existing operations, getting a small business loan may be just what you need. We’ve looked at popular lenders in this space and put together our top picks for small business loans in 2016.
Featured Loans for Small Businesses
Many business owners start searching for a loan by paying a visit to the local bank or credit union, but there are other options that may work better in your situation, especially if your business is new or you have less than stellar credit. These lenders cater to the specific needs of small businesses and offer competitive loan terms.
Using proprietary technology to analyze business trends, OnDeck looks at more than just the entrepreneur’s credit score to determine loan eligibility. The company also analyzes the length of time you’ve been in business and company revenue to determine whether or not you’re likely to pay back what you borrow. Rated an A+ company by the Better Business Bureau, OnDeck offers discounts for repeat customers and reports your payment history to credit bureaus. If your company has a proven track record, then an OnDeck loan can help you expand operations to increase sales.
Like OnDeck, Kabbage is a non-bank lender specializing in short-term loans for small businesses. It features a completely online and automated process for applying for and managing loans. It’s nice that you see the real-time status of your loan via the online portal. You can link your funds to your existing bank accounts so you can withdraw only the amount of money you need when you need it.
Lending Club is a peer-to-peer lender that uses money from investors to fund loans. Like many other non-bank lenders, Lending Club features an online application process that produces a quote in a few minutes. If you’ve been in business for at least two years, accrue more than $75,000 in annual sales and have a fair or better personal credit rating, then you can receive a small business loan through Lending Club.
Top Peer-to-Peer Small Business Loans
Peer-to-peer lenders are a great choice for some small businesses. Since they work with investors to supply funding, these lenders enjoy more flexibility to loan money to businesses that may not qualify for financing through a traditional bank or credit union. Here are some of our favorite peer-to-peer small business lenders.
Lending Club offers loans ranging from $5,000 to $300,000 with fixed interest rates as low as 5.9% for small businesses. These loans come with terms from one to five years depending on the loan amount and scope of the project. Fixed monthly rates make it easy to budget for repayment, and there are no prepayment fees or penalties if you decide pay off the loan early.
Founded in the U.K. in 2010, Funding Circle offers peer-to-peer loans between $25,000 and $500,000 in the U.S. Rates start as low as 5.49%, and loan terms range from one to five years. You can apply for a loan online or over the phone and receive an answer within 72 hours. If you qualify, then you get the money within 10 days.
Instead of traditional small business loans, Prosper offers personal loans that you can use for business purposes. This is a viable option if your business doesn’t have established credit or you need to borrow less than the minimum loan amount required by other lenders. When you apply for a Prosper loan, the company tells you how much you can borrow at what interest rate. You then have either three or five years to pay it back.
Top Direct Lender Small Business Loans
If you prefer working with a traditional lender such as a bank, credit union or non-bank lender, then look into small business loans from direct lenders. These organizations offer convenience, reliability and savings, and their loan programs have a history of working well for customers. You can also speak directly with the employees who review your application and manage your loan.
OnDeck has short- and long-term loan options as well as business lines of credit. Short-term loans of up to $250,000 have interest rates as low as 9% and average rates of 19% with fixed simple interest. You have three to 12 months for repayment. Long-term loans feature interest rates as low as 5.99% annually based on the loan value of up to $500,000, and repayment plans range between 15 and 26 months.
OnDeck also offers lines of credit up to $100,000. With a line of credit, you draw cash directly into your business bank account and accrue interest only on what you borrow during the draw period. During the subsequent repayment period, you can pay back the balance at any time or arrange fixed weekly payments. To qualify for a line of credit, you need to be in business for at least nine months, have $75,000 in gross annual revenue and be a majority owner with a personal credit score of at least 600.
Entrepreneurs who want to borrow less than $100,000 can look into a Kabbage small business loan. After you receive approval, you take the money you need when you need it. These loans have short six- and 12-month terms, and the monthly payment includes a portion of the principal plus a monthly fee, which ranges between 1.5% and 12% of the total loan amount.
Fundation offers loans ranging from $20,000 to $500,000, payable within one to four years depending on how the business uses the funds. These loans feature annual percentage rates that vary from 7.99% to 29.99% and fixed, bi-weekly payments. If you’ve been in business for at least two years with a minimum of $100,000 in annual revenue and have at least three employees and good personal credit, then you can qualify for an unsecured loan.
How to Get the Right Small Business Loan in 2016
In order to get the ideal small business loan for you, it’s important to implement a plan to maximize your creditworthiness in the lender’s eyes. At the same time, you need to carefully think about why you need the loan, how much you can afford to borrow and how you will repay the money if sales don’t increase as much as you anticipate. All of this information goes in a written business plan that you can share with the lender during the application process.
Bump up Your Credit
Your business’s credit score plays a similar role in your enterprise as your personal credit score does in your private life. There are three companies that evaluate businesses and assign them credit scores that lenders then use to determine loan eligibility. The steps to establishing a good credit history for your business are like those you follow for your personal credit. Open credit accounts in the business’s name, pay your bills on time and track your ratings on one of the three business credit monitoring companies: Experian, Equifax and Dun & Bradstreet.
Create a Business Plan
Lenders want assurance that you will pay back the money you borrow, especially when you seek small business startup loans. One way to do this is to write a business plan that gives an overview of the company, how you plan to use the loan funds and a debt repayment strategy. When putting together the business plan, include the following:
- Cash flow statement showing a history of income statements and balance sheets
- Collateral, such as machinery, real estate and inventory
- Marketing plans that show how you will compete in the marketplace
- Management description that profiles what you and your officers contribute to the company
Compare Several Options
Small business loan rates vary from lender to lender, so take time to compare what several companies can offer you. Look at the amount of money they are willing to lend, and check the interest rates for each loan, keeping in mind the way fixed and variable interest rates affect the projected total cost of the loan. A fixed interest is convenient and simple to work into your budget, but a variable interest rate can fall lower and save you money. The risk, though, is that a variable rate increases and eats up more of your budget than planned.
Small Business Loans for Bad Credit
Many lenders look at a business owner’s personal credit score when evaluating the loan application, so your individual history does play a role in your ability to get a loan for your company. Bad credit limits your loan options, but it doesn’t mean you cannot borrow money. It means you have to be creative about where you look for a loan.
Consider working with microlenders and web-based lenders instead of banks, as their requirements often make it easier for some business owners to secure financing. Before applying for loans, shop around to compare the rates and loan terms each company offers. If possible, try working with a lender that reports to a business credit bureau so that your responsible handling of the loan reflects positively on the company’s credit, making it easier to borrow money next time.
Small Business Loan Calculators
Before applying for a loan, use a small business loan calculator to estimate your monthly payments and the total cost of the loan with interest. These calculators help you evaluate the loan terms so you can select the loan that fits your company’s budget. The following loan calculators are easy to use.
This bare bones TD Bank loan calculator lets you input the total amount borrowed, interest rate and term for an estimated monthly payment.
Shopify’s small business loan calculator also estimates a monthly payment based on the borrowed amount, interest rate and term, but it also allows you to factor in an optional additional monthly payment if you want to repay quicker. The financial breakdown also displays how much monthly and total interest you’re getting yourself into.
The Minnesota Business Finance Corporation’s loan calculator has more bells and whistles, allowing you to add up the amount of money you need to borrow by breaking it down by its intended use, such as for real estate, renovation or equipment.
Small Business Loans for Women
Women who own small businesses have some special funding opportunities available to them. In an effort to increase the number of small businesses owned by women and improve their odds of success, the Small Business Administration offers incentives to lenders who fund small business loans for women. Some lenders, such as Wells Fargo, advertise business loans targeted to women along with educational programs and advice to help female entrepreneurs find the right loan for their company.
Small Business Startup Loans
Finding a lender is challenging for a startup business. Newbies often can’t provide a track record of financial responsibility to assure lenders that they’ll get their money back. For this reason, many startup owners turn to family, friends or credit cards for upfront financial needs, but they should know that the Small Business Administration offers alternatives. The SBA doesn’t directly fund loans, but it secures the loan so the lender receives repayment even if you later default.
Through the SBA’s Microloan program, business owners receive up to $50,000 to use for working capital, inventory, furniture, machinery and equipment. The maximum repayment term is six years, and interest rates range between 8 and 13%. To apply for a Microloan, ask your local SBA district office for a list of approved intermediaries in your area. You then work with the intermediary to discuss eligibility requirements and complete the loan application.
7(a) Loan Program
The SBA also offers the 7(a) Loan Program designed to help businesses acquire the funding they need to cover operational expenses, increase inventory, purchase equipment and real estate, or refinance business debt. These loans may not exceed $5 million and have fixed and variable interest rates determined by the SBA and the lender. You can apply for one of these loans as long as your business meets the eligibility requirements, which include operating the business within the U.S. and demonstrating reasonable need for the loan.
VA Small Business Loans
If you served in the military, then you can qualify for small business loans for veterans. Through the Military Reservist Economic Injury Disaster Loan program, small businesses receive money to cover operating expenses when essential employees return to active duty. To qualify for a loan of up to $2 million with a 4% interest rate, the business must offer collateral and meet credit requirements. The Small Business Administration also prioritizes processing of loans for small businesses owners who are veterans.
When shopping for a small business loan, consider all the available lenders. Your local bank or credit union may be able to help you, but non-bank lenders with competitive rates and terms sometimes provide better solutions to your funding needs. Take time to investigate your options and compare what different lenders have to offer before committing to a small business loan.