Right now could be the best time to find a small business loan since the 2008 subprime mortgage crisis. The better economic conditions of 2016 and a big increase in competition mean lenders are willing to slash their rates for good prospects.
Featured Small Business Loan Companies
Unfortunately, that doesn’t mean it’s easy to obtain a small business loan from traditional banks. You should still try — you’ll usually receive a lower interest rate if you can qualify. But if you’re like the majority of small businesses, you may come up empty.
The good news is that a number of online lenders are giving banks a run for their money (and clients) by working directly with small business owners. In many cases, they make the lending process more convenient, with quicker turnaround, more transparent terms, and more flexible lending criteria. But be aware that you’ll likely be getting a higher APR.
The Simple Dollar’s Top Picks for the Best Small Business Loans of 2016
If you’re searching for small business loans, and have struck out at your local banks and credit unions, I’ve examined a number of online lenders to find several top options for you. Here’s a peek at my picks for the best small business financing:
Best Small Business Loans (Peer-to-Peer):
Best Small Business Loans (Direct Lenders):
To find out what sets these lenders apart from the competition, keep reading. I’ll profile each company and describe my criteria for picking the best small business loans. I’ll also cover some basics on small business financing, including where you should look for loans and tips for getting approved.
Best Peer-to-Peer Small Business Loans
Peer-to-peer lending directly connects borrows with several investors who typically fund small chunks of a diversified loan portfolio. While this option might not be the best low interest business loan opportunity, lending criteria is usually less stringent than it is at traditional brick-and-mortar banks.
You must have owned the business for at least two years and have at least $75,000 in annual revenue. Borrowers can request $15,000 to $300,000 and pay back the loans under flexible terms ranging from one to five years. The interest rates, ranging from 5.99% to 35.89%* APR. Best APR is available to borrowers with excellent credit. These rates are clearly disclosed and among the most competitive I saw.
There are a range of fees to know about: Lending Club charges an origination fee of roughly 1% to 6%, and there are $15 fees for unsuccessful payments and payments by check. Late payments will cost you $15 or 5% of your outstanding balance, whichever is greater.
Who it’s good for: Any relatively established small business that wants flexible repayment terms (options range from one to five years) from one of the nation’s largest, most established peer-to-peer lenders.
Who should pass: Very new or small businesses probably won’t qualify with Lending Club, and residents of Iowa and West Virginia aren’t eligible to borrow. And if you need cash fast, note that it can take up to two weeks for your loan to be funded.
Funding Circle, a peer-to-peer lending behemoth from the United Kingdom, is dedicated solely to small business financing. It launched in the U.S. in 2013 and will make loans from $25,000 up to a hefty $500,000 at rates from 5.49% to 27.79%. Terms are flexible and range from one to five years.
There are only two fees: a flat origination fee ranging from 1.49% to 4.99%, and a flat late payment fee equivalent to 10% of the missed payment. Funding Circle requires annual revenue of more than $150,000 and at least two years in business (one of which must have been profitable). Both business and personal tax returns as well as business bank statements are required to apply (even more documentation is required for loans over $300,000).
Who it’s good for: An established business that needs to borrow a larger sum up to $500,000. Residents of all U.S. states except Nevada are eligible, and Funding Circle is a particularly good pick for businesses that want to keep fees minimal and easy to understand.
Who should pass: Funding Circle requires $150,000 in annual revenue, so newer businesses may have to look elsewhere. And while the company says its online application takes just 10 minutes, gathering the required paperwork can prove time-consuming. Also note that the late payment fee (10% of your missed payment) is pretty high.
Prosper is similar to Lending Club, but it doesn’t have separate loans for small businesses. However, you can use its unsecured personal loans for small business purposes. This can make Prosper a good choice if you need a smaller amount (you can borrow up to $35,000) and your business doesn’t have the established track record to qualify for dedicated small business loans.
APRs range from 5.99% to 32.99%. It can take up to two weeks for your loan to be funded, and you can choose only a three- or five-year term.
Who it’s good for: Prosper would work best for a newer small business that needs a smaller amount ($35,000 or less) that doesn’t have the revenue or longevity to qualify for a dedicated small business loan. As one of the nation’s biggest peer-to-peer lenders, it’s a good pick for someone who’s nervous about getting a loan online.
Who should pass: Any small-business owner who doesn’t want to put his or her personal credit on the line will want to skip Prosper. The relatively low loan limit and inflexible terms may also be too restrictive for some. The two-week wait for funds also applies.
Best Small Business Loans (Direct Lenders)
Unlike peer-to-peer lenders, which fund loans via individual investors, direct lenders are funding your loan with their own capital, like a traditional bank. That means you may be able to get funds more quickly. The lenders profiled below also work with a wider range of businesses, including very new ones, but APRs can be higher.
OnDeck can lend up to $500,000 in as little as a day with minimal paperwork. However, you’ll need to be willing to accept a higher interest rate and shorter term (up to two years) in exchange for convenience and speed. You must have been in business for at least a year with at least $100,000 in annual revenue.
OnDeck offers two loans: Term and Term24. The former loan is for smaller amounts, aimed at less established businesses. OnDeck does not list an interest rate for Term loans, instead expressing payment as a fixed amount on every dollar borrowed. This can translate into a very high APR, as you’ll see in this example. Term24 loans are for more established businesses and have APRs from 19.99% to 39.99%.
Who it’s good for: Businesses that need funds quickly (and can pay it back quickly) are the best fit for OnDeck. Less-established businesses will want to take a look, but they should keep in mind that the APR might be fairly hefty.
Who should pass: Businesses with a proven track record that have less costly options should probably skip OnDeck unless lending speed is their biggest priority.
If your business is truly in a jam, Kabbage can provide up to $100,000 almost immediately after filling out a simple application. You are required only to have a business checking account or PayPal account to apply, but Kabbage can also examine data from other channels your business may use, including Amazon, eBay, Yahoo, and QuickBooks.
However, your repayment term will be a short six months, and the cost of convenience is high: 1% to 13.5% of the loan for two months, then 1% for the next four months. That could mean an APR as high as 90%.
Who it’s good for: Kabbage is a compelling option for small online businesses that don’t meet stricter requirements of other lenders. It’s also a contender for business that need money with as little lag time as possible.
Who should pass: Any larger business (or even a smaller business that has the luxury of time) should look elsewhere first because of high APRs.
Fundation offers up to $150,000 for working capital loans and $500,000 for business expansion loans. Interest rates range from 7.99% to 25%; terms are one to two years for working capital loans and two to four years for business expansion loans.
You can have your funding as soon as three days after applying — a perk of going through a direct lender like Fundation instead of a peer-to-peer lender like Lending Club or Funding Circle. There is an origination fee of up to 3% of your loan.
The application is a bit more complex than comparable lenders, and you’ll need an established business to qualify: Your business must be at least two years old, and you need to have at least two full-time employees, excluding yourself.
Who it’s good for: Any established business that needs a relatively large amount fast will want to check out Fundation. Loans are available in all 50 states, and there are no additional costs except for the origination fee.
Who should pass: Fundation won’t be an option for any new business or sole proprietor. The application is also relatively time-intensive, and potential borrowers should be aware that this is a relatively new company with little in the way of online reviews.
Where to Look for the Best Small Business Loans
Though I focus on online lenders in my analysis above, you should evaluate all your options before committing to a lender. Here are the places you should look when trying to get a small business loan:
Traditional brick-and-mortar banks are still your best option for borrowing the largest amount of money at the lowest interest rates. They may also offer longer repayment terms if you need them.
Sounds great, but these loans require a lot of collateral and can be notoriously hard to secure. Even though small business lending has rebounded this year, the nation’s largest banks were still approving only 20.8% of requests in November 2014.
Application and approval can also be daunting — you’ll need to complete a slew of paperwork, put up to 30% down, and possibly wait a few months to see any money.
Many credit unions are issuing small business loans, and they’re approving requests at twice the rate of big banks. Rates are competitive and sometimes lower since credit unions are nonprofits with less overhead.
You’ll need to be a member, though requirements are often as simple as living in a specific area. Note that though credit unions may be more flexible than big banks, they still primarily lend to established businesses.
SBA Loan Program
The Small Business Administration isn’t a direct lender, but it does provide government backing so that riskier businesses can get financing through partner banks and credit unions, which are assured they will receive a portion of their money back even if you default.
The SBA has several programs, but the most common is its 7(a) Guaranty Loan Program. Fees are lower and terms can be longer than those of non-SBA loans, but the main draw is the looser requirements. You may encounter drawbacks such as lower loan caps and stricter requirements on the use of the loan, however. For a more detailed look at SBA loans, check out our article on Navigating the Small Business Administration.
Small business owners who have trouble getting loans through more traditional channels have a growing number of options online. Some online lenders directly lend money themselves, while others use peer-to-peer models that allow individual investors to fund your request.
Either way, the advantage of going online is speed: Most lenders can get you your money in a week or less. Applications are typically much less time-intensive, too. Of course, the major drawback is that your interest rate will be higher. It’s common for small businesses to secure bank loans with single-digit APRs. While that’s possible online, double digits are more the norm.
You may also have to personally guarantee the loan, which means your own credit and assets — not just those of your business — could be at risk if you default.
Four Tips for Getting Best Small Business Loan
There’s a lot more legwork involved in getting a small business loan compared with a personal loan. You’ll need to stay organized, have a clear idea of your needs, and be tenacious if you’re turned down. Here are some tips for getting the best small business financing:
No. 1: Clean Up Your Personal Credit
When you’re trying to get a loan for a fledgling business, your credit score is as important as it is when you’re trying to get a personal loan. If you have a low credit score, your lender is likely to perceive you (and your business) as a greater risk. Try to boost your personal credit before applying for loans. It’s not a quick process, but it can save you time, frustration, and money in the long run.
And if your business is very small or new, you may want to consider taking out a personal loan to use for business purposes. This will mean your own financial health is all that’s under the microscope (and on the hook if things go south). Your loan amount will probably be lower, but the process — and lending criteria — usually won’t be as involved. If you want to check out your best options, see our guide on the Best Unsecured Loans.
No. 2: Have a Business Plan (and a Sales Pitch)
If you want a large chunk of change from your lender, don’t be secretive. Tell your lender exactly why you need the money. Present your plan for the future, and tell the lender how its funding figures into your plan.
Stay well organized: You’ll need a wide range of documents, including bank statements and tax returns. Be sure to lay out what makes your business a better bet than others. This is especially important if you think you might not be a strong candidate. Remember, for your business to sell, first you have to sell your business.
No. 3: Take Your Time, and Compare Several Options
Lenders hold more of the cards when it comes to small business loans, but you should still shop around before you start a lengthy application process. Consider trying your own bank first, especially if you have a long, responsible relationship with that lender. Banks that know your backstory might be more sympathetic to your needs. Also consider credit unions that make small business loans — they might have more flexible criteria and more willingness to listen to you make your case.
Sites like Lendio can match you with lenders who are more willing to make you a deal. After you answer questions about your business and your needs, you’ll receive the names of lenders that might be a good fit, all without picking up the phone.
If you’re targeting specific lenders online, be sure to compare interest rates, terms, and eligibility requirements. Fundtastic’s small-business loan calculators can help you make sure you’re comparing apples to apples.
No. 4: Target the Right Loan Sources
Bigger banks tend to make bigger loans to more established businesses. If you and your spouse have run a business online for just a year and only need $20,000 to fill orders, it probably doesn’t make sense to target a conventional loan from a large bank. SBA loans or online lenders might be a better bet. Ask around and see whether there are particular lenders who make a lot of loans in your industry, especially if yours doesn’t have a high success rate.
On the flipside, if you have an established, low-risk business with a long track record of healthy profits, it doesn’t make sense to expect a rock-bottom rate from most online lenders when you would be a good candidate at a large bank.
How I Picked the Best Small Business Loans of 2016
Most online lenders can’t compete with the low APRs big banks can offer, but they make it easier for small businesses that might be passed over by big banks to get funding. You’ll still want an interest rate you can handle, transparent terms and fees, and a streamlined application process. Here are all the factors I considered when picking the best small business loans in 2016:
- High loan amounts: Online lenders typically don’t offer the sizable, seven-figure loans that a big bank can provide. However, the best lenders still offer loans well into the six figures so that small businesses can get the cash they need.
- Clear eligibility requirements: Though online lenders streamline the application process significantly over traditional banks, it’s still frustrating to start an application only to find out your business doesn’t meet minimum eligibility requirements.
- Competitive APRs: Big banks can typically make small-business loans with single-digit APRs. Term loans available from online lenders may be available at similarly low rates for the best candidates, but double-digit rates of up to 30% are more common. Cash-flow loans with very quick turnarounds may have higher rates.
- Flexible terms: Online lenders often don’t provide the lengthy terms that may be available on big-bank loans, but the best ones do offer some flexibility, ideally up to four or five years.
- Detailed, transparent website: The best lenders have extensive FAQs and clearly detail the cost of borrowing, including potential interest rates and extra fees.
- Quick application and fast turnaround: You can apply for a loan with some of the best online lenders in five minutes, and some lenders can get you funds in only a day or two.
- Reputation: Since online lending is still a relatively new phenomenon, I was not as concerned with the lender’s longevity as usual. However, a significant number of positive reviews, BBB accreditation, and at least a few years in business were pluses.
Searching for the Best Small Business Loans
Despite the rise of alternative lenders online, it can be tricky to land a small business loan. Even if you’re a solid candidate, you might not be the right candidate for a certain lender.
Your research on the lender is as important to the process as the lender’s research on your business. The online tools mentioned above should give you a fast start to your research, but I also recommend checking out Lending Club if you have an established small business, or a lender such as Kabbage or OnDeck if you’re just getting started.
Finally, if you feel like you’re in over your head when it comes to handling your business’s finances, consider hiring a professional such as a certified public accountant who can help you get organized. Many CPAs moonlight as CFOs for businesses, and can be used part-time. Making that small investment before applying for small business loans can pay off in a faster acceptance and better terms. And if you need tips on keeping your small business in the black, read our primer on Small Business Money Traps to Avoid.