Small Business Loans Guide: What to Know Before You Apply

Looking for small business loans can feel like a job. Before the application process, there’s the search for a lender to meet business needs. You also want to make sure the chances are high that they’ll approve your loan request. By learning about your options, you’ll know all you need to about small business loan types and how to get them.

Traditional Business Loans (Bank Loans)

Banks and financial institution offer commercial loans without backing from a government organization. They call this type of funding a traditional or conventional business loan. Most often, funds come from term loans, business lines of credit, or business credit cards. Qualifying for a conventional business loan, means less restrictions than with the SBA.

Business Financing Hub - Small Business Loans Guide: What to Know Before You Apply


Bank Loan Requirements

It’s not easy to get small business loans from a bank without the SBA’s help. Banks tend to deal less with small businesses and startups. The requirements are also a lot harder to meet. Most lending institutions want to see:

  • A business credit score
  • A high personal credit score
  • Personal guarantee and/or collateral
  • Business plan
  • Sustainable business

SBA Loans

The Small Business Administration (SBA) doesn’t lend money, but they do provide support. They help you prepare for the loan process and back the loan with a bank or SBA authorized lender. Meaning they guarantee to repay the loan up to 75 percent if the borrower defaults. The guarantee reduces lender risk and gives growing entrepreneurs options.

Types of SBA Loans and Requirements

There are several different types of SBA Loans; each with different requirements. Seeing the stipulations on fund usage may help you make a decision on which loan is best. The most basic requirements are that you:

  • Conduct business at a physical location in the United States
  • Are a for-profit business with official registration
  • Cannot get funding from any other lender
  • Invested your time and money in the business

7(a) Small Business Loans

Considered a general small business loan, a 7(a) loan is the most common of the SBA programs. It’s also the most flexible and most used. There’s a long list of ways borrowers can use the loan. Working capital, real estate, business startup/expansion, and debt refinancing top the list. The most you can apply for is $5 million and terms range from 10-25 years.

CDC/504 Loan

Businesses who need to finance  equipment or real estate would apply for this loan. Applicants should prepare to contribute 10 percent of the venture cost. The lender will provide 50 percent and the SBA takes on the remaining 40 percent. Loans are available for up to $5.5 million with 10 or 20-year terms.

Microloan Programs

This program gives loans to startups and  growing small businesses. Some not-for-profit daycare centers also qualify. Loan amounts are small (up to $50,000) with short repayment terms (6 years or less). The SBA allows borrowers to use the funds for most of the same purposes as the 7(a) loan. You can’t use the money to repay or refinance debt and you can’t buy real estate.

Disaster Loans

Any businesses and nonprofits that have been through a disaster can apply for loans of up to $2 million. You may use the funds to repair or replace:

  • Equipment
  • Machinery
  • Inventory
  • Real Estate
  • Business Assets

How to Get an SBA Loan

To apply for an SBA loan, you must have a loan package. The package will contain all the requirements to process the application. Each loan has different stipulations that they layout in the loan application checklist. After verifying you meet the requirements, get started with the application.

Alternative Small Business Loans

Even with  SBA backing, there still a chance you may not qualify for small business loans. You may need time to develop as a business owner or build your credit. There are still options to get business loans. In fact, alternative lending can help you get capital and build business credit. Loan applications give you access to alternative funding within hours.

Types of Alternative Loans

  • Business Line of Credit- a revolving account for small cash flow needs. Borrowers can use and repay the loans multiple times.
  • Working Capital Loan- a short-term loan for businesses to handle operational costs without exhausting their cash flow.
  • Purchase Order (PO) Funding- Issues loans for a company to fulfill a purchase order, then collects repayment plus the fees once the business completes the order.
  • Accounts Receivable Financing-Also called factoring, businesses sell accounts, or a percentage of them, to increase available cash. Most often, it’s to fund a large project like with PO funding.
  • Equipment Loans- A loan to buy large items for the business. Borrowers can use the equipment as collateral to secure the loan.
  • Crowdfunding- Borrowers make a pitch to get working capital for their business. Peers or perfect strangers can pitch in to fulfill the loan amount you request. Repayment terms range from a few months to a few years, and some interest rates are as low as 0%.

Advantages and Disadvantages of Alternative Small Business Loans

Most alternative loans have flexible requirements. You don’t need a business credit score or perfect personal credit. Loan approval does rely on personal credit, so you will need good credit and a history of activity. How you use the funds from alternative loans is the most lenient of all the options. The challenge with alternative loans are high fees, high interest, and short-term status.

What Type of Small Business Loans Should I Apply For?

Every business is different, and the loan choice depends on those situations. A first year business owner may not qualify for the same funding as a 20 year-old company. If you have collateral, options may be wider than a business owner without it. Answer a few questions about your business and personal finances to choose best loan.

  • How long have you been in business?
  • Have you ever had a business loan?
  • Have you ever applied for small business loans?
  • What loan amount will you request?
  • How exactly will you use the funding for your business?
  • Do you have a business credit score? If so, is it good?
  • What is your personal credit score?
  • Have you had a personal trade line or credit card? If so, for how long?
  • What business assets do you have?
  • What personal assets do you have?
  • Are you willing/able to provide collateral?
  • Do you have at least three references?
  • How do you plan to repay the loan?
  • What loan terms do you expect to have?
  • How soon do you need small business funds?

Compare your answers to what each loan type requires and what they can offer.

Learn More About Small Business Loans at Business Financing Hub

Our website specializes in helping businesses get financing. Some of the top financial professionals had a hand in creating it. They’ve also been helping entrepreneurs for years.  Use our website as a resource to gather more business loan information. If you want to start building with a credit card, you can also find the best options and apply on our website.