Best Small Business Loans in December, 2024

Business loan payment calculator

What is a business loan?

A business loan is a type of financing provided by financial institutions or lenders to support the financial needs of a business. It is specifically designed to help businesses cover various expenses, such as starting a new venture, expanding operations, purchasing equipment, managing cash flow, or investing in other business-related activities.

Business loans typically come with a predetermined amount, repayment term, interest rate, and other terms and conditions. The loan amount and terms are often based on factors such as the borrower's creditworthiness, business performance, collateral (if required), and the lender's criteria.

How does a business loan work?

If you run a business, you may be able to apply for a business loan to help fund your growth. They work in the same way personal loans do for consumers – you apply for a loan with terms that meet your needs, and if approved you’ll get a lump sum in your business account within hours or days. You can then use this money to pay for any business expenses, and you’ll pay it back over a fixed term of weeks, months, or years, plus interest.

There are other types of business loans that have more flexible terms – well talk about those shortly.

What type of businesses typically get a business loan?

Almost any business can seek funding via a business loan of some kind, though it is more common for some industries than others. Some of the types of businesses that typically get a business loan are:

• Startups or new ventures looking to fund their initial operations.
• Small businesses aiming to expand their operations or enter new markets.
• Established businesses seeking to invest in new equipment or technology.
• Retail businesses in need of inventory financing to purchase goods for sale.
• Manufacturing companies requiring capital to scale their production capacity.
• Service-based businesses, such as consulting firms or marketing agencies, needing funds for business development or hiring.
• Restaurants or hospitality businesses seeking working capital or funds for renovations.
• Construction companies requiring financing for projects, equipment, or materials.
• Medical practices or healthcare facilities looking for funds to upgrade equipment or expand facilities.
• E-commerce businesses needing capital for website development, marketing, or inventory management.
• Seasonal businesses requiring funds to cover expenses during slower periods.
• Franchisees looking to open new locations or upgrade existing ones.
• Agricultural businesses requiring funds for equipment, land purchase, or crop cultivation.
• Non-profit organizations seeking funds for program development or operational expenses.
• Professional service providers, such as lawyers or accountants, needing funds for office expansion or technology upgrades.

How do you get a business loan?

To get a business loan you need to decide on the type of loan that’s right for you, compare rates and terms, and then apply via an application form. The lender will then review your application and decide whether or not they believe you are a good company to lend to. Most lenders are upfront with their requirements so you’ll have a good idea of whether you’ll be approved or not before you start the application process, and some lenders offer preapproval.

Types of small business loans

• Business term loans: this is the traditional type of loan that works in the same way as a personal loan, only the loan is to a business and can only be used for business purposes. You borrow a lump sum over a short, medium, or long-term, and pay it back each week or month in fixed monthly payments. The interest rates on these loans are generally between 5% and 30%, depending on the term and your circumstances. Bank term loans have lower rates and longer terms but are difficult to get. Loans from online lenders are easier to get and have more flexible terms but usually come with higher rates.
• SBA loans: SBA (Small Business Administration) loans are loans that are guaranteed by the government, so often come with the lowest interest rates on the market. Most of their loans are term loans with a maximum term of 10 years, but they also offer commercial real estate loans with terms up to 25 years. The downside of SBA loans is they’re hard to qualify for, and the application process is long – often taking 2 months to complete and receive funding.
• Business lines of credit: this is a type of loan where a lender agrees upon a maximum amount of credit you can use, which you are then granted access to. You can use this line of credit for anything you need, withdrawing money as and when you need to. The great thing about these types of loans is you only pay interest on the amount of money you’ve actually used, so it’s a great option if you want a flexible way to borrow or will be staggering how you spend the money. Most lines of credit also allow you to reuse credit again once you’ve paid it back, like a credit card, though some add up until you reach the total credit allowed, and then the line is closed. The downside of these types of loans is they often come with additional fees, and they are generally fairly difficult to qualify for.
• Merchant cash advance: this type of financing is for those who process card payments for the majority of their transactions. The card processor you use lends you a lump sum amount which you then pay back through a percentage of your transactions until the loan is paid back. The benefit of these loans is they rarely care about your credit score because they already know about how much money you make and how consistently you make it. Many also now offer low interest rates or a flat fee. The downside is you have little control over how much you pay back each month, so if you wanted to use that additional money for another purpose you couldn’t. That said, you can usually pay them back much faster than other loans.
• Equipment loans: equipment loans work like a car loan, in that you borrow the full value of the equipment you want to buy, and the loan is secured against the equipment you purchase. You then make monthly payments to pay off the loan and the interest. The benefit of these loans is, because they’re secured, they’re often easier to get and/or have lower rates. The downside is if you default on your payments, they’ll take the equipment back which may be catastrophic if your business relies on it.
• Invoice financing: if your business works with big companies and have invoices with net-30 or more terms, you can look into invoice factoring or invoice financing to help you manage your cash flow. This is where you borrow against the value of the invoice.
• Commercial real estate loans: this is usually a mortgage for a commercial property, so the loan amount is secured against the property and can usually only be used to pay for real estate purchases and improvements.
• Peer-to-peer lending: peer-to-peer lending is like crowdfunding, but instead of seeking funding from potential customers and supporters, you get a loan from numerous small investors. If they believe in your business, they’ll fund your loan, which you’ll then pay back with interest. Interest rates vary, though are typically higher than traditional and online lenders.

Top Small Business Loan Comparison