Most small businesses will need extra cash at some point. Whether it's startup expenses, adding equipment, buying inventory, or general working capital, getting the money you need can be challenging. When you apply for a small business loan, you add money to your business to help it meet its goals. Banks and alternative lenders offer easy small business loans based on your credit score, business financials, and other factors. Learn more about the types of loans available, how to apply for a small business loan, and what documents you'll need.

6 Types of Business Loans

Small business owners have access to a variety of loans to meet their financial needs. Here are six different types of business loans that may be a good fit for your business.

Short-Term Loans for Working Capital

Short-term loans from online lenders may be easier to get approval than other types of loans. When you apply for a small business loan, the repayment term can vary from a few weeks to several years. Short-term loans are generally expected to be repaid within a few weeks. Installment loans typically range from six months to five years. Traditional banks may want you to come into a branch to complete your application, but many lenders allow you to apply for business loans online and receive a decision within minutes.

The rapid application process is one of the main attractions of a short-term online loan. Traditional loan approval often takes a couple of business days, but many lenders use technology to evaluate borrower eligibility for the loan amount much quicker. In some cases, you'll receive a response the same day (or even within minutes) the small business loan application is submitted. In addition to fast approval, short-term online business loans for working capital may include paying less interest, the chance to improve a bad credit rating, and flexibility.

Short-term loans generally have a term of 12 months or less. Payments on short-term loans are required frequently — sometimes as often as once a week. However, there may be early repayment penalties, so read your loan contract thoroughly to avoid unexpected fees. The eligibility requirements are not as strict for short-term loans as they are for regular-term loans. However, the frequent repayment terms may be a drawback for new business loans because someone starting may not have adequate cash flow to make those quick payments.

Equipment Loans

An equipment financing loan is secured by the equipment you're using the money to buy. Lenders may be able to provide lower interest rates and better loan terms since the loan has collateral. However, if your business can’t afford its payments, the lender may repossess the equipment used as collateral.

If cash flow impedes the purchase of vehicles or machinery, small businesses can turn to small equipment loans to finance the heavy-duty parts they need. A number of financial institutions, ranging from traditional banks to alternative lenders, are available to lend money for equipment. The rates for an equipment loan vary based on your credit score, business profitability, and the type of equipment. Average interest rates range from 7% to 20% or higher.

There are three reasons business owners would apply for an equipment loan:

Replace aging equipment

Upgrade existing equipment that, while still functioning properly, may be outdated

Expansion to meet higher demand

Business Lines of Credit

A business line of credit is a flexible financing option that only incurs interest when you use it. The lender provides pre-approved funding with a maximum credit limit. Depending on the lender, there may be an origination fee and an annual fee to keep the account open.

When a borrower applies for a small business loan and is approved for a business line of credit, the funds can be accessed whenever needed, up to the borrower's credit limit. As you repay your balance, additional credit becomes available for future transactions.

This form of financing typically has a variable interest rate based on the Prime Rate. The interest rate normally changes based on the economy. Because the borrowers pay interest on the amount that they withdraw, a business line of credit can be advantageous for business owners who are uncertain of how much money they need or when they need it.

The downside to a business line of credit is that the loan interest rate can increase dramatically, making monthly payments unaffordable. Compare that with a term loan that offers a fixed-rate and a monthly payment you can easily budget for.

SBA Loan

If you apply for a small business loan through the U.S. Small Business Administration (SBA), your lender will receive backing by the Federal government. The SBA offers several loan options, but the most common SBA loan programs are 504 loans (typically used for buildings or large equipment, like heavy equipment financing), SBA 7(a) loans for working capital or smaller equipment, and Express microloans for startups and loans under $50,000.

Business owners who want easy small business loans should evaluate their options with the SBA. They are often best suited to business owners who don't have the business history, credit score, or profitability to secure credit with other SBA lenders. For this reason, an SBA loan is an excellent choice for first time business loan applicants.

P2P Loan

A P2P loan(peer-to-peer) is offered directly to individuals without a bank or traditional lenders serving as “the middleman.” Online lending platforms, like Prosper, LendingClub, and Funding Circle, fund borrowers via institutional lending partners and everyday investors. Investors spread their money across multiple loans to reduce risk. Their money is pooled with other investors to fund business loans online through the P2P portals. Funding multiple loans at once allows investors to reduce risk by spreading their money across numerous loans.

Business owners with good credit who need a small amount of working capital quickly should apply for a small business loan through a P2P network. Peer-to-peer loans can meet small, short-term working capital needs without the traditional underwriting of a bank loan. Generally, this type of loan must be repaid with interest in one to five years.

Commercial Real Estate Loans

Real estate used exclusively for business purposes is considered commercial real estate. Business owners may purchase commercial real estate as a place to conduct business or as an investment property to rent out.

Small business owners often seek to buy a building or property to have ownership of their business location. This allows them to control their monthly costs and build deeper ties with the local community.

An owner of an existing business can apply for a small business loan to build a new commercial property or buy an existing piece of commercial real estate. CRE loans can be a variety of real estate properties, including office buildings, industrial buildings, restaurants, retail stores, multifamily dwellings, hotels, or land.

How to Apply for a Small Business Loan

Whether you apply for a small business loan in a branch location or try to get business loans online, most lenders require the same information from borrowers. Here is a list of basic information you'll need to get approved.

Credit score

Having good credit is key to getting the best interest rates and loan terms. Typically, the higher your credit score, the more likely you are to get approved when you apply for a small business loan.

If you're unsure of your credit score, many banks and websites offer free FICO scores. Additionally, all Americans are entitled to a free credit report once a year from each of the three major consumer reporting companies: Equifax, TransUnion, and Experian. Request your copy from AnnualCreditReport.com.

Bank Statements

Lenders review your bank statements to verify income and monitor your cash flows. They also use this information to determine if you have the cash reserves necessary to make payments on time. When you apply for a small business loan, lenders often require online access to your accounts or that you provide copies of the last three months of personal and business bank statements for all bank accounts. In some cases, the lender may need up to 12 months' bank statements to see a full year's worth of income and payments.

Personal and business tax returns

Tax returns provide an inside view of your income and expenses. This formal document presents information in a uniform fashion across all industries and allows the underwriters to verify information that may impact your ability to repay the loan.

Year-to-date Income statement

Since many borrowers apply for a small business loan during the year and not just during tax time, a year-to-date income statement is required. The profit-and-loss statement displays annual revenues and expenses for the year, highlighting whether a business is making a profit.

Balance sheet

While an income statement covers a specific period of time, a balance sheet lists the assets and liabilities of a company and the owner’s equity as of a particular date. Assets are what you own, liabilities are what you owe, and equity is the difference between the two.

When you apply for a small business loan, the lender can analyze your balance sheet to look for debt obligations and locate assets that may help it repay the loan if you stop making payments.

Cash flow statement

This financial document indicates the amount of cash entering and leaving your business in a given timeframe. A properly prepared cash flow statement will exhibit how much cash a company has on hand for a specific period. It also breaks down your cash flow into three primary categories – operations, financing, and investing.

Business plan

Writing a business plan with a standard structure entails going into considerable detail about why someone should invest in your company or lend it money. Business plans typically include a marketing strategy, SWOT analysis, use of proceeds, and biographies of owners, executives, and key employees. The business plan should also include a financial forecast to illustrate revenue and expense projections and how the money being raised will be used.

When applying for a small business loan, it is a good idea to write an executive summary that summarizes your business plan. The executive summary should also include how the money will be used and how it will be repaid. It should be no longer than one page long to keep the attention of the reader.

The Bottom Line

Entrepreneurs occasionally need access to cash to cover expenses, buy equipment, purchase a building, or expand their business. There are many different types of loans, so selecting the best loan for your business needs is crucial. Once you decide which type of loan to get, you can apply for a small business loan by visiting a bank branch, working with an online lender, or speaking with a banker over the phone. Compiling your bank statements, tax returns, and other financial information ahead of time will speed up the process so you can get approved for your money quickly.

Frequently Asked Questions (FAQs)

What is the Easiest Loan to Get for Business?

The easiest loan for business owners is typically from an online lender. These lenders specialize in quick loan approval and often have lower underwriting standards and credit score requirements than traditional banks. Qualifying for a term loan or line of credit is usually based on your credit score and business needs.

What Do You Need to Qualify for a Small Business Loan?

Qualification requirements when you apply for a small business loan vary by lender. Having Good to Excellent credit is usually the best path to getting approved for a new loan. Lenders also look for positive cash flow, increasing revenues, cash reserves, and industry experience. Some lenders are willing to lend to new business owners or those with bad credit, but the interest rates, fees, and loan terms you qualify for may not be as appealing.

Can a New LLC Get a Loan?

It is possible for a new LLC to get a loan or line of credit. When you apply for a small business loan, lenders often look to the owner's credit score, income, and assets as a source of repayment. So, even if your business is new, the lender may qualify you based on your personal credit, income and assets.

Is it Hard to Get a Small Business Loan?

Small business owners can apply for a small business loan and get approved, even if they have bad credit or are just starting out. While you may get approved, the interest rate and fees may be higher than you want. Work to improve your business financials and credit score, then refinance into a better loan when you're eligible.