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How to Choose Right Lender for Your Small Business Loan

How to choose the right lender for your small business

Written by: Kelly Hillock

August 30, 2023

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How to choose the right lender for your small business
5 min read

Many small business owners will need extra capital for their business at some point. According to the Federal Reserve Bank Small Business Credit Survey, only 42% of small businesses have their financing needs met. Finding the right financing partner – one who you trust – plays an important role in making the experience stress-free and successful. Choosing the right lender for your small business financing solution is important. Every small business has unique financing needs and there’s no one-size-fits-all approach to lending. What may work for your business may not work for another.  

There are many factors that go into this critical business decision and this article outlines everything you need to know to find the right lender, including: 

  • The different types of lenders available 
  • Eligibility criteria  
  • Loan terms 

Top Small Business Lenders 

When you think of a loan, you probably think of calling your local bank and submitting tons of paperwork to apply for a lump sum of capital. Small business financing has expanded to include several options for small business owners to choose from, from government-supported lenders to online lenders. Each lender has its own set of advantages and disadvantages. Knowing what they offer can help you determine what might work best for your current business needs. 

Small Business Administration (SBA) 

The SBA is a government organization that supports small businesses through resources, mentorship, and loans. It backs small business loans for banks and subsequently reduces risk for banks, who typically are less likely to grant loans to small businesses. SBA loans are a popular choice among small business owners because they tend to offer lower interest rates, longer repayment terms, and higher funding amounts. The SBA offers a full suite of loans to choose from, including the popular 7(a) loan, 504 loan, and microloans. 

7(a) loans: Guarantees portions of the total amount, caps interest rates, and limits fees. 

504 loans: Long-term, fixed-rate loans to purchase, repair, or lease equipment, machinery, real estate, or other assets. 

Microloans: Offers loans up to $50,000 for working capital business needs. 

An SBA loan can be difficult to obtain – with strict eligibility requirements and long lead times, many small business owners can wait several months before their application gets reviewed.  

Conventional Banks 

Conventional or traditional banks are the banks you use in your personal and professional life. Conventional banks offer loans separate from the SBA, typically with higher amounts and longer repayment times. Similar to the SBA, banks have a full suite of loan types to choose from based on your business need. But without the support from the SBA, banks have a low approval rating. According to the Small Business Index, big bank lenders only approve 14% of their applications.  

Alternative Lenders 

An alternative lender is just what it sounds like – an alternative to the more traditional forms of small business lending from conventional banks or the SBA. An alternative lender – like the partners here at SmallBusinessLoans – offers quick financing solutions for immediate business needs. Alternative lenders are privately funded and can accept more flexible criteria, which allows a greater number of small business owners to receive financing.  

Many alternative lenders have streamlined applications and a quick-to-fund process, where many small businesses receive funding in as little as 24 hours upon approval. Alternative lenders usually specialize in offering short-term loans of up to $500,000 with a shorter repayment term of up to 18 months. These loans are best suited for small businesses with immediate financing needs or short-term projects. 

Small business grants  

A grant is money given to a small business that doesn’t need to be repaid. Small business grants are typically available to disadvantaged businesses, minority-owned businesses, or nonprofit organizations. The most well-known U.S. grant program is the SBA Grant Program, which includes the competitive Small Business Innovation Research Program and Small Business Technology Transfer Program. These programs are designed to assist small business owners in innovation and creative enterprises.  

Loan Eligibility Requirements 

Each lender has their own set of requirements. Typically, small businesses qualify for an alternative loan if they have: 

  • Fair to excellent credit 
  • At least $250,000 in annual sales (or $21,000/month) 
  • At least six months in operation  

Of course, the higher your credit score – both business and personal – the more likely you are to get approved for a business loan. Conventional banks typically require higher credit scores and at least 1-2 years in business in order to qualify for a loan.  

Comparing Loan Terms 

What does your small business need financing for? While funds can be used for a broad range of business purposes, knowing what you need to use funding for can go a long way in determining what lender is the right fit for your needs. For instance, if you need funds quickly for a vendor payment, a conventional loan might not be the best fit due to their standard application turnaround time. 

If your business is looking for long-term expansion and has ample time to plan for the future, consider applying with the SBA for its favorable terms and high amounts. If your business needs funds in the immediate future – whether to help offset operational costs or purchase new equipment – consider an alternative lender for its speed and simplicity.  

Here’s a quick comparison of the three main lenders: SBA, conventional, and alternative financing. 

  SBA Loans  Conventional Loans  Alternative Loans 
Loan Amounts  $5k-$5M   $5k-$5M   Up to $500k  
Repayment terms  5-25 years   5-25 years  6-18 months  
Turnaround time  1-6 months   1-3 months  As little as 24 hours  
Credit criteria  Good to excellent credit   Good to excellent credit   Fair to excellent credit  
Application requirements  Bank statements, business history, and more required with long application   Bank statements, business history, and more required with long application   Bank statements + short online application  

For illustrative purposes only. 

Ultimately, the right lender for your business should be a trusted partner for your business goals. Extra capital should help you reach your potential, and the right lender can provide customized terms to help you achieve that potential your way.  

About the Author

Kelly Hillock

Kelly Hillock is the content marketing manager for SmallBusinessLoans, where she writes and edits articles for small business owners. Kelly has over eight years’ experience in copywriting across a variety of industries, focusing on entrepreneurship and finance. She has a Bachelor of Arts in journalism from San Diego State University.

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