If you have a small business, you may find yourself needing a loan to cover everyday business expenses, equipment, or even payroll. Various high- and low-risk options exist for many different needs.

What is a small business loan? We’ll explain small business loans, the loan programs available to you, how to get a small loan, what type of credit you need, and the steps necessary to get a loan.

Small Business Loan Explained

What is considered a small business loan?

Small business loans allow existing or startup companies to borrow money from various lenders. Various loan types exist to help entrepreneurs meet different goals. The way each loan works depends on the type of loan.

What Loan Programs Are Available for Small Businesses?

There are several loan programs available to fit different business needs.

Small Business Line of Credit

A small business line of credit works similar to a credit card. Your business will have a credit limit and will pay back interest only on the amount of credit you use.

You can withdraw from and repay the line of credit over and over within your credit limit.

Small Business Credit Card

A small business credit card works like a personal credit card with interest that accrues on unpaid amounts.

Unfortunately, small business credit cards are exempt from the Credit CARD Act of 2009. So, watch for increases in fees and interest.

Accounts Receivable Financing

Accounts receivable financing allows you to sell outstanding accounts receivable or unpaid invoices to your lender. The lender will pay you what you would have eventually earned from those accounts or invoices.

You will need to pay the lender a fee, and the loan amount depends on the age and quality of the outstanding accounts. Accounts receivable financing can cost more, especially if your business doesn’t have good credit.

Working Capital Loans

Working capital loans finance everyday business operations, such as payroll, rent, and outstanding bills.

Working capital loans usually have shorter terms and are available in lower amounts than other types of loans. Because of the risks involved, lenders often will link these types of loans to your personal credit.

Equipment Loans

If your small business needs new equipment or needs to replace old equipment, they can get an equipment loan.

Equipment loans require less documentation, so you receive money more quickly than for some other loans.

SBA Small Business Loans

What is the safest way to carry a small business loan? SBA loans are the safest small business loans because they have flexible terms, lower interest rates, and provide a government guarantee to your lender.

The U.S. Small Business Administration guarantees SBA small business loans up to $5 million. The guarantee covers 85% of loans up to $150,000 and 75% of larger loans.

However, these loans are harder to get because of the SBA guarantee.

What is Required to Get a Small Business Loan?

What is required to get a small business loan is to decide on a lender, but typically you'll have to provide 3-6 months of business bank statements. When working with traditional banks may have to provide a business plan, and a large amount of documentation.

Decide on a Lender

Here are a few available lending options:

  • Direct online lenders: may cost more, so they are best for quick cash or if you can’t get a loan from a traditional lender.
  • Commercial banks: may be more challenging to get, but you can often lock in lower starting interest rates.
  • Community banks: focus on your entire credit report and business aspects, which may help if you don’t have a great credit score.
  • SBA-backed bank lenders: may be difficult to get but require lower down payments, lower interest rates, and have longer repayment terms.

Build Up Personal Credit

If your personal credit score is lower than you would like, pay off some debts to build up your score, or work with an agency to help boost your credit.

Build Business Credit

You should incorporate or form an LLC, open accounts in your business’s name, and get a federal Employer Identification Number (EIN). Doing these things starts to establish your business credit and build your business credit score, which in turn can help establish larger loan options to you in the future.

Create a Business Plan

Your business plan will show lenders how you plan to use your loan or how it will make your company more profitable. Business plans are typically needed when working with traditional lenders. When working with an alternative or online lender, business plans are generally not needed.

Consider Collateral

Some types of loans require collateral such as equipment or real estate that the lender can seize if your business cannot repay the loan.

If you don’t want to gamble with physical assets, you can choose an unsecured loan. However, unsecured loans usually have less favorable terms.

Do I Need Good Credit to Secure Funding?

Your personal credit score is something that lenders consider when deciding whether to lend money to your business.

What credit score is needed for a small business loan?

A good credit score is any score above 700, while an excellent score is above 800. 680 is usually the minimum score you need for a small business loan. However, you may find a short-term, high-interest loan with a credit score as low as 550. Typically alternative or online lenders have options for all credit profiles.

What is the interest rate on a small business loan?

You can expect to pay a 3%-7% interest rate on your small business loan, but it will vary depending on your lender and your credit score.

The Steps to Apply and Receive Startup Funding

What is needed for a small business loan for a new business?

  1. Outline the reason and amount for your business loan.
  2. Build up personal and business credit.
  3. Review borrowing options to determine the best loan and lender type.
  4. Use a business financing advisor to help if you’re still unsure where to start.
  5. Apply for the loan.

Our experienced financial business advisors are here and ready to help you through this process to get the business financing your business needs!

About the Author, Madison Taylor

Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates! Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.