Are you looking to start or expand your small business? If so, you might be considering a small business loan.
A small business loan can be a great way to jump-start your business’s growth, but the loans are a double-edged sword. Small business loans are often personally guaranteed, which means defaulting on the loan affects your personal credit score. It also means the lender still requires payment, even if your business goes defunct.
With this in mind, we’ve evaluated the best ways to use a small business loan, and the best online lenders. This includes lenders that offer PPP loans (Paycheck Protection Program loans) through the SBA.
Ways to Use a Small Business Loan
As a business owner, you may need some money (or even a lot of money) to start your new company. The U.S. Small Business Administration guarantees some loans for small business start-ups, but those loans can be difficult to acquire.
If you can’t fund your start-up from your savings or from a low-interest form of credit, a business loan may be your best option.
Even Out Cash Flow
Many businesses have to complete work and then wait weeks or months for payment. For those businesses, a working capital loan may make the difference between staying afloat and going out of business.
Expand a Business
Maybe you tested the market with your savings, plowed all your money back into the business, and you still have room to grow. If that’s the case, a business loan could help you buy more inventory, purchase new equipment, or take other steps to grow your business.
Pay Off High Interest Debt
Some small business owners start their businesses using high-interest credit card debt. If you’ve started to earn a profit, you may qualify to take out a small business loan. You can use these loans to pay off your credit cards and improve your cash flow.
Paycheck Protection Program (PPP)
PPP Loans are a helpful way for businesses to navigate the Covid-19 pandemic. These loans are forgivable loans, assuming you meet all the requirements. The basic requirements are that you use 60% of the loan for payroll, and you must maintain the same employee headcount as well as 75% of the total salary.
Business Owners Beware! Business Loans Can Be High-Interest Debt Traps!
If you’ve ever taken out a car loan or a student loan, or if you’ve carried a balance on a credit card, you probably know the ins and outs of consumer debt. But business loans are not regulated by consumer lending laws. That means that business owners are often tricked into taking out high-interest loans that will impede cash flow and prevent a business from growing.
Business lenders do not have to clearly disclose the interest rate (APR) on a loan. Many business loans (especially short-term loans or merchant cash advances) are “fixed-fee” loans. That means you’ll pay the same amount in interest whether you pay off the loan early or over a longer period of time.
This might not seem like an issue, but for many business owners it is. A study from the Federal Reserve showed that most small business owners could not figure out the interest rate on a small business loan.
Small business owners need to be very careful before taking out a business loan. You should consider all your funding options including raiding your savings, using a credit card, or taking out a personal loan. In some cases, these loans can be better than an online business loan.
Best Places to Get a Small Business Loan
When it comes to finding a loan for your business, one of your top priorities should be understanding what you’re signing up for.
Because of that, our top recommendation is to borrow from businesses that have signed the Small Business Borrowers’ Bill of Rights. These companies clearly disclose all the terms of their loans when you borrow. That makes it possible for you to make a clear decision about borrowing.
With that in mind, these are the top small business lenders.
One Park Financial
One Park Financial is a business loan company that offers loans from $5,000 to $750,000. They have incredibly competitive rates, and even better, they don't have a lot of high qualifications to get started.
They can also underwrite the loan very quickly to get funding to you in as little as 72 hours.
Kabbage is an awesome online business lender that provides funding for small business. They were recently acquired by American Express, but plan on offering small business funding again.
Funding Circle is a peer-to-peer business lending platform. It offers loans from $25,000 to $500,000 with rates starting at 4.99%.
Loan underwriting takes as little as a day, and funding can be completed within the week. You need at least two years of business tax returns and collateral or a personal guarantee to qualify for a loan from Funding Circle.
StreetShares is another peer-to-peer lending platform with a focus on funding businesses for veterans. You only need one year of business revenue to qualify for a loan from StreetShares (and you don’t have to be a veteran).
Loans range from $2,000 to $250,000 and include term loans and lines of credit. StreetShares also offers invoice factoring which is a popular form of financing for small businesses like those of lawyers and doctors who receive payment long after rendering their services.
LendingClub business loans are loans with interest rates that start at 5.99%. Business owners with at least 12 months of business revenues and at least $50,000 in annual revenue are eligible to borrow. LendingClub extends loans ranging from $5,000 to $300,000.
Consider Business Loan Marketplaces
If you want to compare multiple loans at the same time, you may want to consider a business lending marketplace. Small business lending marketplaces can help you consider all your best options so that you get the best deal. The following are a few of the leading small business lending marketplaces.
Fundera has signed the Small Business Borrowers’ Bill of Rights, but not all the lenders on its platform have. Still, you can use this site to compare multiple lenders.
Worthy does not issue business loans, but it compares rates so that you can find the best access to capital.
SnapCap is one of the leading marketplaces for short-term, unsecured business loans. While SnapCap emphasizes transparency, some of the terms on a loan may not be perfectly clear. Be sure to work with the loan officers to be sure you’re getting the best deal.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.