Getting a small business loan is a key to long-term success. It’s simply not possible to survive in the modern age without a solid small business loan.
There are so many things that could go awry where only a supply of capital can fix – a low season, a change in customer attitude, a supplier going out of business, etc. There are also considerable upfront costs to consider, including the rental of a premise, the purchase of equipment, wages, and hires, utility bills, the list goes on.
Unfortunately, it is harder and more stressful to get a loan with a traditional bank, even though they offer the best rates. This is why online lenders are often the most appropriate avenue for new businesses that are starting out on their journeys. The worst-case scenario is that you spend months on a banking application only to get rejected, like many other applicants.
The short summary is that you need to get a small business loan, and you need the best one that you can find. Which is why we have created a list of the best business loans for 2020 to help you out.
Finimpact’s Top 5 Small Business Loans for 2020
Finimpact works with the best alternative small business loan providers to help out new business owners. Remember that you need to evaluate all of the terms and conditions of each lender before you contract with them. Pay particular attention to the payment structure and the loan term lengths.
Of all of the small business loan providers out there, some are a little more robust than others, and have stood the test of time. Here they are:
#1 – Kabbage
Kabbage is the perfect loan provider and offers only the business line of credit, not the term loan. The term loan is an upfront sum of money that is paid off in installments, while the business line of credit is cash that is drawn upon as needed. Kabbage offers lines of credit amounts up to $250,000 with a $10,000 minimum. There are no minimum credit requirements with Kabbage.
Kabbage stands out as it offers a very slick online dashboard and web application, making it easy to track and monitor spending. The business line of credit comes with a business credit card for easy purchase. Another advantage is that Kabbage does not charge any origination fees.
In order to qualify the Kabbage line of credit, you will need:
- $50,000 in annual revenue.
- At least 12 months in business.
#2 – LoanBuilder
Loan Builder is a PayPal brainchild that seems to have been deliberately created to undercut many of the existing alternative loan options. This is because it offers slightly lower credit score requirements and slightly lower capital threshold requirements for the purposes of qualification. If you want to qualify with Loan Builder, you will need:
- At least 9 months in business.
- A minimum credit score of 550.
- A minimum of $42,000 in annual revenue.
#3 – OnDeck
OnDeck is one of the more reputable loan providers on the market, and offers better rates than most. It also offers larger sums, up to $500,000, and provides both business lines of credit and term loans.
However, it is also a little more difficult to qualify for in terms of credit score and capital requirements. The $100,000 in annual revenue might be tough for some new companies to satisfy. In order to qualify with OnDeck, you will need:
- A credit score of 600 and above.
- A minimum of $100,000 in annual revenue.
- At least one year in business.
#4 – SmartBiz
SmartBiz is primarily a facilitator of SBA loans. These are loans guaranteed up to 85% by the Small Business Administration (‘SBA’). However, they tend to have very stringent approval procedures. SmartBiz streamlines the SBA(7)(a) approval process by connecting borrowers and financial institutions.
This is beneficial for businesses that are looking for an SBA (7)(a) loan but do not want to wait a long time to get one. The loan is processed much more quickly than going the traditional route, which is known for its complexity and slowness.
90% of businesses that are referred by SmartBiz to banks get approved, which is a high rate. This is a higher rate than what a business would get if it went to a bank straight off.
SmartBiz also provides customized solutions such as the term loan and line of credit. However, it is most well known for its SBA (7)(a) and real estate loans. In order to qualify with SmartBiz, you will need:
- 640 credit score
- 2 Years in Business
- Loan and personal guarantee
All of the 18 SBA loan programsRead
#5 – LendingClub
- A minimum credit score of 580.
- At least one year in business.
- $50,000 in annual revenue
- No recent bankruptcies or liens on the business.
How to Get a Small Business Loan
If you want to succeed with a small business loan application, there are definitely some steps that you need to take. For more information, check out our detailed guide about How to Get a Small Business Loan for comprehensive information.
As a general rule of thumb, the bigger your loan application amount, and the lower your rates, the more streamlined your business will need to be. To prepare for a credit loan application, you will need:
- To raise your credit score. More details on the credit score are given below.
- To raise your annual revenue, typically above $50,000 as a minimum.
- To get your documents in order – especially financial statements.
- To have a well-researched business plan and a superb sales pitch.
- To take the time to evaluate all of your options, possible in a comparison matrix.
Aside from this, getting a small business loan depends on what kind of loan you are applying for. If you are getting a collateralized loan, you will need to supply additional documentation. The bigger the amount and the lower the interest, the more documentation you will need to supply. Loans above $500,000 will require more detail and take longer to process.
Other Financial Opportunities
Aside from working with alternative lenders, there are a number of avenues that you may consider. Before taking out a small business loan, consider all of the choices available to you.
Banks are still the lending institution of choice when it comes to small business loans. This is simply because they offer the best rates and the most money. So if you are looking for amounts above $500,000 with long repayment terms and low rates, then banks remain the best option.
Unfortunately, they are also the loans that are the most difficult to qualify for. You will likely need a credit score above 680, two years in business, and annual revenue of $100,000. You will also need to post collateral and supply an enormous amount of documentation. This is why online lenders are often preferred.
If you have a new idea, then you could consider many of the crowdfunding options that are available. There are many crowdfunding variants and models on the market. But in most instances, you will get to keep 100% of the funds and put them towards your new project. It is free money.
However, you will need to reach your funding target and invest in an excellent fundraising campaign, as well as have a brilliant idea. Popular crowdfunding sites include IndieGoGo and Kickstarter, but these markets are now a little saturated, like most others.
There are many grant options available and you can even enter a contest to win a grant. If you are a minority business owner then you could easily be eligible for a grant program. Groups such as African Americans, Women, Latinos, and Veterans all have special grant options available to them.
Grant writing can be an entire industry in itself. You could consider hiring a good grant copywriter and applying for a number of the appropriate grant programs. However, it is not a trivial endeavor. Organizations will follow up and want to know what you have done with the money, and they are tough to attain.
Venture Capital and Angel Investment
Venture Capital (‘VC’) is a means through which you can get financed with an established venture capital firm. However, you will need to have an exit strategy in place for most VC organizations. They are looking to see explosive growth and then make a profit with a sharp exit.
Angel investment is a little different. This means you will have a dedicated ‘angel’ who will give you counsel with regard to the running of your business. However, for these options to work, you will have to give away equity and control of your own business. You will also need perfect numbers and an excellent business pitch to entice investors.
How to Evaluate a Small Business Loan Opportunity
Online lenders will not offer rates or the amounts that are available with big banks and other financial institutions. And it is a direct tradeoff between convenience and rates. But you can try an extensive SBA(7)(a) offering from a bank if you feel its worth a shot. With these SBA (7)(a) loans, you will obtain the best rates possible. But you will have to be prepared to spend months on the application and face a high possibility of rejection.
In terms of evaluating alternative small business loans, then consider:
- Total Loan Amount – Make sure that the amount available is in the range you need.
- Loan Type – Ensure that the loan provider offers the right type of loan – invoice financing, term loan, or business line of credit are the most common.
- Clear Requirements – Some loan providers are very clear about what they want. Avoid unclear requirements as these providers might not be legitimate and might refuse your applications.
- Good Rates – Of course, one of the most important things to look out for is low rates. The lower the better!
- Penalties – Always read the fine print. Don’t get caught with sharp late payment penalties or prepayment penalties. Know what you are getting into.
- Flexible Terms – Look for flexible repayment terms. Many online providers will offer 5 years and above.
- Reputation – Don’t bother dealing with dodgy lenders. Your loan is too serious to take this risk.
- Speed – Ideally, you will want a fast turnaround. Good online lenders can fund your account in less than 2 days.
You will likely need to identify which of the above is most important to you – each lender will have distinct advantages and disadvantages. There is no ‘one size fits all’ approach when obtaining finance for your business.
Understanding And Raising Your Credit Score
The most common credit scoring system in the USA is known as FICO. As a small business owner, you will need to become intimately familiar with it. As per the FICO credit scoring system, any score above 669 is considered ‘Good’, Any score above 580 is considered ‘Fair’, while any score below 580 is considered ‘Poor’.
600 is typically a minimum accepted standard among online lenders, with 680 being the minimum for formal applications to banks and credit institutions. Over 90% of lenders use FICO as the basis for evaluation, though there are many custom scores and combinations.
There is no single metric to raise your credit score. Just pay back your bills on time each month and your score will rise gradually, month by month. Remember to check your credit report (which you can do for free) and to dispute any errors. This happens more often than you might think. Credit reporting agencies have been known to make mistakes.
Avoid any quick tactics to artificially raise your credit rating, such as taking out a number of credit cards. Such tactics can easily backfire, and one loan/credit card should be enough. If you are diligent and patient, your credit rating will rise.
As a small business owner, it goes without saying that you need to find the right loan for you. Online lenders have the added advantage of the flexibility and quick finance. You can get funded in under 48 hours in many instances. Thankfully, you have multiple options in the modern age with the rise of online lenders and alternative forms of investment.
How Has Covid-19 Affected Small Business Loan Applications?
Despite all of the hype, Covid-19 has not actually had a major effect on loan applications. The main issues all seemed to have occurred during April, May, June, and July. And these issues were primarily due to funding and transparency issues with the PPP program, which was a fault at the Federal level. Many businesses were able to proceed as normal with loan applications. Repaying the loan is a bigger issue, but the PPP loan itself ameliorated a lot of potential problems. (i.e the PPP saves the day for many small business owners.). We’ve also made a guide about coping with the Covid-19 situation.
How to Qualify for a Small Business Loan?
Qualifying for an online small business loan is typically straightforward. You need to meet the minimum credit score and length of established, often a 550 credit score and 12 months in business for an online loan.
The most common process is that you will prequalify first, as the online lender performs a soft credit check (no affect on your score). Following this, you will be presented with a range of options, with terms and conditions as to what you can expect.
You then supply the necessary bank statements, personal identity verification, and tax information. Sometimes, you may need to hook up accounting software. After this has been processed, you sign electronically, and the funds are often within your account in as little as 48 hours.
How Does a Small Business Loan Work?
You must meet the minimum eligibility criteria, and repay the loan on a daily/weekly/monthly/ basis, depending on the nature of your contractual agreement. The lender first evaluates your business, often using proprietary software. You pay interest on the loan amount. Once you follow the terms and conditions, using the loan for business purposes, then you are good to go.
What Is the Definition of a Small Vs a Big Business?
Some people use different definitions. In the USA, a small business can actually be a large business! The SBA defines a small business as an organization with less than 500 employees. More often, people refer to a small business as one that has less than 50, and a medium-sized business as one that is between 50 and 250 employees. A large business is between 250 – 500 and a corporation has more than 500 employees. This is the most commonly accepted terminology, though different from the SBA definitions which guide many research studies.
What Are the Different Types of Small Business Loan Options?
The two most common small business loan options are the term loan and the line of credit. The term loan is of a fixed length with fixed repayment terms (such as a 3-year term loan with a 10 % APR). The line of credit is one that can be used as needed, with a small maintenance fee to keep it open. Other options include the Merchant Cash Advance and Invoice Factoring, which are suitable for certain industries (such as manufacturing and wholesaling). Another option would be the various SBA programs, for small businesses with an excellent track record.
What Is the Minimum Credit Score for a Small Business Loan?
The minimum credit score for a small business loan varies greatly, depending on your unique business, the loan type you are looking for, the term length, and the loan amount. Generally speaking, you can get an online term loan with a credit score of 550 or so. For a larger loan with a financial institution, you may need a credit score of 600 and above. For a large SBA loan above $300,000, you will need a credit score of at least 680. It depends on numerous factors. The better your credit score, the lower the rates. For some online lenders, there is no credit score.
Can I Get a Small Business Loan Without Any Credit or With Really Poor Credit?
Yes. As mentioned above, there are some lenders that have no minimums at all. But be prepared to pay a higher interest rate. This is necessary for lenders to offset their credit risk in the event of default. The typical minimum, however, is around 550. The better your score, the better the terms and conditions.
How Long Does It Take to Get a Small Business Loan?
With an online lender, it takes 10 minutes to apply, and you can get a loan approval given to you within the day. And the funding can be in your account as soon as the next business day, provided you have submitted all the relevant documentation. A realistic timeline would be 48 hours for the entire process to be complete. In other words, it’s very quick. With a bank, the process can take weeks or even months, so it really depends on the lender. But even with online loans, a larger amount will typically take longer to process.
How Do I Know My Financial Information Will Be Safe?
There is no way of knowing that your financial information is 100% safe. But the site of the lender will almost certainly be PCI compliant with an SSL certificate. PCI relates to the storing of credit card information, while the SSL ensures all submitted information is encrypted so hackers cannot gain access. Lenders work with banks and large financial institutions to underwrite the loan – in other words, there is typically a large level of regulation. Deposits are FDIC insured in the majority of instances. The only situation where you need to be concerned is with new lenders in the short term loan industry – this is where the majority of fraud can be observed.
Why Should I Choose an Online Lender?
There are many concrete reasons to select an online lender. The loan process is far faster. You will know if you qualify for pre-approval within minutes. And funding is typically within 24 hours. You also have far more options with transparent fees. The process of talking to a banking representative in a physical office is far more cumbersome and restrictive.
How Do I Evaluate the Different Small Business Loan Providers?
Save some time for yourself. We have done it for you. Our top picks include OnDeck, Kabbage, Lending Club, PayPal LoanBuilder, and SmartBiz. We have individual reviews on all of these, as well as comparisons between them. But a lot depends on what you are looking for specifically and your individual circumstances. For instance, if you want a short term loan, then LoanBuilder is perfect. If you have a good record, OnDeck takes priority. If you are looking for an SBA (7)(a), then SmartBiz is the way to go. While there are other lenders, we found that many of them lacked transparency in their terms and conditions.