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Small business loans are an essential part of survival for many companies. Knowing what kind of loan to look for and which lenders to work with can be overwhelming. In this article, we look at the different types of financing available to small businesses, what kind of lenders are best to work with, and how long the loan approval process takes.

What are SBA loans?

An SBA loan is one loan option for small businesses that is partially guaranteed by the U.S. Small Business Administration (SBA). These loans are not funded by the SBA, rather, the SBA guarantees a portion of the loan, so that they are lower risk to SBA lenders and can qualify for lower interest rates. In order to be approved for an SBA loan, you must apply through one of the SBA's preferred lenders. The SBA will guarantee up to 75% of the total loan amount approved and back loans up to $5 million.

SBA loans are great for small businesses that need capital for a variety of reasons, including purchasing equipment or raw materials, payroll, construction or improvements, real estate, debt refinancing, or non-specified working capital. They often come with an attractive low interest rate, although there may be some restrictions on the use of funds. Some of the different types of SBA loans include:

SBA 7(a) loan

The most common SBA loan is the SBA 7(a) loan. It is similar to traditional term loans and can be used to fund loans up to $5 million for working capital, refinancing, equipment, and real estate.

SBA Express loan

Express loans can be used for working capital needs up to $350,000. There is little restriction on what these funds are used for which makes these loans a flexible option for many businesses.

SBA microloans

The SBA guarantees microloans up to $50,000 for working capital. The balance is required to be repaid in a maximum of 6 years. These smaller loans are best suited for startups and new businesses.

SBA 504 loans

504 loans are often used by small businesses that want to purchase or repair equipment or real estate. The SBA works with Community Development Companies (CDCs) to guarantee these loans. They come with 10 or 20-year repayment terms and their interest rates are based on 5-year and 10-year U.S. Treasury issues.

PPP loan

Paycheck Protection Program (PPP) Loans were made possible by the CARES Act of 2020 to help businesses recover from the pandemic. They are low-interest, forgivable loans. The deadline for applications was May 31, 2021, but any business that was approved before then can still be funded.

EIDL loan

The Economic Injury Disaster Loan (EIDL) program offers an alternative to any small business that missed the PPP loan application deadlines. They are a type of low-interest loan that can be used to cover physical and economic losses with similar eligibility guidelines to the PPP loans.

Credit score, a business plan, and credit history will come into play when applying for financing. Small Businesses need above average to good credit to get approved for an SBA loan program since the lending institution, or fund provider is still assuming some of the risks. Any variety of businesses, including startups, can be eligible for an SBA loan so they are an appealing financing option to many small businesses.

How long does it take to get a loan?

The SBA loan approval process can take longer than traditional loans since SBA loans come with strict rules for both the borrowers and the lenders issuing the funds. That being said, there is no concrete timeframe for SBA loans. Approval time is determined by the type of loan and the lender who is issuing the funds. However, an approximate turnaround time for common SBA loans is given below.

• SBA Express loan – 3 business days
• SBA 7(a) loan – 5-10 business days
• PPP loan – 10 business days
• EIDL loan – 21 business days
• SBA microloan – 1 month
• SBA 504 loan – 1-30 months

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Tips to speed the loan process up

Speeding up the approval process of an SBA loan can be tricky because of the additional variables. There is a scramble to meet the needs of the lender you’ve chosen to work with and the requirements set by the SBA loan process. However, choosing a lender that promises fast delivery times on SBA loans is the first step. Many lenders advertise as SBA preferred lenders, but some handle more of these loans than others. An SBA preferred lender will have the authority to do the underwriting and credit checks in-house without pre-approval from the SBA, which speeds up the application process. This is information you’ll want to inquire about while shopping around for a lender.

Alternative lenders

Alternative lenders are online lenders or private companies that operate by lending funds to individuals and small business owners. They are independent of a large bank or financial institution’s underwriting process, and can frequently speed up the loan process. Some of the loans that may be offered by an alternative lender include:

Term Loans

A business term loan is the most common type of commercial financing. They offer set repayment terms and either a fixed or variable interest rate. They are most similar to a traditional bank loan, but with shorter terms and higher interest rates.

Business Line of Credit

Business lines of credit are a form of revolving credit, like business credit cards. The borrower can draw on the credit when they need capital and then repay it with interest. Once the amount is repaid it is made available for future capital needs. Banks also offer lines of credit, but small businesses will find shorter terms and greater approval odds at an alternative lender.

Invoice Financing

Invoice financing allows a business to borrow funds using their unpaid customer invoices as collateral. The lender will approve a percentage of the invoices and the remainder of the invoice will be paid to the business when the customer pays the amount owed. Banks and traditional lenders rarely offer invoice financing.

Merchant Cash Advance

A merchant cash advance allows a business to borrow a certain amount of money and repay the loan with a portion of their daily credit card sales. Merchant cash advances offer quick solutions to businesses experiencing unexpected cash flow needs. They come with high lender fees and are not the first choice for many small businesses wishing to secure financing.

Equipment Financing

Alternative lenders are also a source for equipment loans, as most will allow a small business to borrow up to 100% of the equipment’s value. Because the equipment becomes the collateral for the loan, the risk to lenders is low and the approval rates are high for the borrower. Equipment loans are also offered by banks, but with different terms and approval requirements.

Alternative lenders can be an attractive option for small businesses because they offer more flexibility in their borrower requirements. Companies that have less than ideal credit scores, length of operations, or annual revenues are more likely to get approved for financing with alternative lenders than traditional banks, as alternative lenders look at more than just the business’s creditworthiness.

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How long do alternative lenders take to approve loans?

Once again, the length of time from application to funding varies from lender to lender and changes depending on the type of financing a business is applying for. Alternative lenders can generally get a small business loan approved and funded faster than a traditional brick and mortar lender because of their online application process and flexible requirements.

Many alternative lenders can approve and fund a loan in as little as 24 hours. Talk with the lender you’ve chosen to understand how long the application, approval, and funding processes are expected to take.

Tips to speed the loan process up

While most online lenders pride themselves on providing fast financing options, there are some things you can do to speed up the turnaround time of a loan with an alternative lender.

• Look for lenders that advertise quick funding
• Carefully and accurately complete the online application and send all required documents with the initial application
• Respond immediately to any questions or requests the lender may have

Brick-and-mortar small business loans

What are they?

Brick and mortar lenders include banks and credit unions. They provide traditional financing options for large and small businesses. Traditional lenders like banks and credit unions offer many of the same types of loans as alternative lenders like term loans (business loans), business lines of credit, equipment loans, and SBA loans. Taking out these types of loans at a bank may offer lower interest rates and fees than alternative lenders and are a good option for financing needs that are not immediate.

Brick-and-mortar lenders are also the main source of commercial mortgage loans. While some alternative lenders offer loans for real estate if you are looking to make a big purchase or take out a construction loan a bank is a safe bet. Commercial real estate loans come with low-interest rates and long repayment terms when working with a traditional lender.

How long do they take?

Traditional bank loans take longer to get than SBA loans or financing through an alternative lender. The application for a bank loan usually requires a meeting at the institution and hard copies of documents like financial and bank statements. Working with the lender to get together the necessary paperwork could take as long as 30 days.

Once the application is complete, the lender will start the underwriting process which can take up to two weeks. Once the underwriting process is complete, the lender will send a commitment letter to you and schedule the closing. The time between completing the application and being funded can be anywhere from a couple of weeks to another 30 days.

Tips to speed the loan process up

• Thoroughly gather documents – the lender you choose to work with should provide you with a preliminary list of required support. You’ll want to take the time to gather all requested documents before completing the application. This may include tax returns, bank statements, appraisals, revenue reports, and financial statements. It may be helpful to involve your business’s accounting team in the preparation of loan documents.
• Be prepared for additional requests or questions – The lender may need additional documents or have some questions. Make yourself available to the lender and try to answer all questions as soon as possible.
• Choose electronic funding – Choosing to receive your funds via ACH or electronic deposit will speed up the amount of time from approval of the loan to when it is fully funded.
• Have a business account – Some banks or credit unions will require that funds be deposited into a bank account in the business name. If your small business does not have a business bank account, it is smart to get one opened before the loan is approved.

The Takeaway

There are many financing options available to small businesses and entrepreneurs. SBA loans are a good option for many that offer a quick turnaround and reasonable approval requirements. They are available at both alternative and traditional lenders. There are a variety of other types of loans offered at alternative lenders and at brick-and-mortar lenders. Alternative lenders tend to offer more flexible approval requirements and faster turnaround times than banks and credit unions. As always, your best bet is to plan ahead with your finances so that you have plenty of buffer time in case you run into any delays.

FAQs

How to get a small business loan?

When pursuing small business loans, it’s essential to consider the following factors:

• Eligibility: Ensure your business is registered and has a clear purpose for obtaining the loan, along with a solid repayment plan.
• Credit History: Maintain a good credit score and positive credit history, which are critical for loan approval.
• Business Plan: Develop a comprehensive business plan that outlines your business model, financial projections, and repayment strategy, helping lenders assess your ability to repay.
• Documentation: Prepare to provide legal and financial documents, including tax returns, business plans, and bank statements.

How to apply for a small business loan?

When applying for a small business loan, consider these factors:

1. Eligibility: You must meet the SBA's size requirements, demonstrate creditworthiness, and show the ability to repay the loan. Additional criteria may include reliable cash flow and at least two years in business.
2. Credit Score: Minimum credit score requirements vary by lender and loan type, typically ranging from 500 to 680, with traditional banks requiring higher scores.
3. Loan Types: Options include SBA microloans, Express loans, online loans, short-term loans, and business lines of credit.
4. Disqualifiers: Poor credit history, insufficient collateral, and lack of a solid business plan can lead to disqualification.

How hard is it to get a small business loan?

Securing a small business loan can be challenging, especially if you lack a strong financial foundation or have a low credit score. However, options exist for businesses with poor credit or startups. Factors that may hinder your ability to obtain a business loan include the lender type, credit score, the application process, and the specific requirements of SBA loans. Understanding these challenges can help you explore alternative financing options and improve your chances of securing the funding you need.

What do you need for a small business loan?

To secure a small business loan, you'll need to meet several requirements:

1. Collateral: You may need to provide assets, such as real estate or equipment, which lenders can seize if you default on payments.
2. Financial Documentation: Prepare to submit documents showing your business's annual revenue, profits, cash flow, tax returns, and other financial information.
3. Credit: While lenders consider your credit score, it's not the sole factor; many require a minimum score of 500.
4. Time in Business: Most lenders prefer businesses with at least two years of operation, though some may consider startups.
5. Business Plan: Some lenders may request a business plan detailing how you intend to use the loan.

What is the interest rate on a small business loan?

Interest rates for small business loans can vary widely, influenced by the lender, type of loan, and the borrower’s qualifications. Depending on these variables, rates can range from as low as 3% to as high as 99%. Understanding these factors is essential for finding the best loan terms for your business.

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