When your business needs capital, speed can feel like the top priority. But choosing the wrong loan may strain cash flow, limit flexibility, or slow growth just when you’re trying to move forward. The lowest barrier to approval is not always the best long-term fit for your business.
The goal is not simply to get approved. It is to secure financing that aligns with your revenue patterns, repayment capacity, and growth plans. The right loan should support your strategy, not create additional pressure month after month.
These eight smart steps may help you get the funding you need while protecting your business’s long-term strength.
How to choose a small business loan in 8 easy steps
Choosing the right small business loan can be a lengthy process. However, each step is generally pretty straightforward. Use these tips to evaluate your options so you are able to make an informed decision.
1. Clarify why you need the loan
Small Business Administration (SBA) loans require you to disclose what you will use the money for. However, before you start filling out a loan application, determine why you need money. For example, if you need more money to increase your staff, your funding options will be different from those if you need to upgrade equipment. These differences are why simply saying, “My company needs more money,” isn’t enough.
Instead of this type of broad statement, aim for specifics. “I need to hire five more team members to meet customer demand” is a better explanation. Not only does this help you determine if and when you need to borrow funds, but it typically ensures that your lender may help you obtain the right type of loan.
2. Determine how much money you need
Knowing how much money you need allows you to look at the right type of loan. For example, if you need to invest in a piece of equipment that costs $150,000, a $50,000 SBA microloan is not a good fit. When you eliminate certain options, you can take a more intentional, focused approach to your loan.
3. Verify that you qualify for a loan
If your business is new, applying for loans may be especially difficult. This is because some options are unavailable to companies that haven’t existed for a certain amount of time. Your personal information may also impact your eligibility. Age, credit score, citizenship status, and bankruptcy history are all part of the equation that lenders typically use to determine whether to approve a loan. Spend some time evaluating the qualification requirements for loans that you’re interested in, and make sure that you’re eligible.
4. Calculate how much you can pay each month
Obtaining a loan means that you’re taking on a monthly payment. In addition to the principal amount of the loan, you’ll also be responsible for interest and fees. Use the percentages or flat amounts for these additional payments to determine whether your total monthly payment will fall within your budget. Keep in mind that some loans are amortized, meaning that the interest you pay on them decreases over time.
5. Determine if you’ll put up collateral
Some small business loans require collateral. These secured loans provide the lender with an added layer of assurance in case the borrower defaults. In that instance, the lender may seize and sell the collateral to recoup their costs. The fact that these loans exist means that you need to determine if you’re willing to take out a loan that could result in you losing certain assets. If so, which assets will you put up? Before proceeding, ask yourself those questions.
6. Evaluate your loan options
Once you’ve worked through these first five smart steps, you should have everything that you need to eliminate certain types of loans from your list. For instance, if you want to use a loan to refinance existing debt, you can trim your list down by eliminating options that cannot be used for that, which is the case with SBA microloans.
7. Get all your paperwork together
Applying for loans requires a lot of paperwork, and the more documents that you have together at the beginning of the process, the faster things may be able to move along. You may need to provide multiple documents, ranging from business plans to tax returns. Spend some time researching the paperwork requirements for multiple loan options, and then gather everything that you’ll need. Consider consulting with a professional lender before you apply to make sure that you have everything you’ll need.
8. Choose a loan and apply for it
Since the loan application process can take some time, consider applying for just one type of loan. If the lender doesn’t approve that application, you can switch to other options. Don’t be discouraged if your initial application is rejected. Plenty of other loans exist, and you can apply for those.
Types of business loans
There are six primary types of business loans. Some of these loans are best for applicants with subpar credit while others are only available to borrowers with high credit scores. There are also loans for applicants who fall somewhere between the two.
Learn more about what you need to know about these options and what types of credit scores they’re best suited for.
1. For good credit: SBA loans
SBA (Small Business Administration) loans are generally considered the best option for small businesses. A portion of these loans is guaranteed by the SBA, making it possible for lenders to approve funds to a wider variety of companies.
- 7(a) loans: SBA 7(a) loans have long been considered the gold standard of business loans. You can use them to obtain working capital, consolidate your debts, hire new staff, or invest in marketing. Their interest rates are typically low and can be either variable or fixed. Their repayment terms can be as long as 25 years, and their amounts may be up to $5 million. They’re often fully amortizing.
- 504 loans: A Certified Development Company (CDC) and an SBA-backed lender cover the rest if your business and the CDC share similar goals. Most 504 loans have a maximum amount of $5 million and require a small down payment. Your term will span 10, 20, or 25 years. You can use your loan proceeds to buy commercial real estate.
- Microloans: This SBA loan program offers very small businesses loans of up to $50,000. Their interest rates are typically fixed. Your microloan proceeds can cover working capital, inventory and supplies, equipment, and furniture. You can’t use your loan toward debt refinancing or real estate purchases.
It’s worth noting that SBA loans may take a bit longer to process, largely because the underwriting process involves government oversight. However, the more favorable terms that they provide typically make it worthwhile.
2. For good credit: bank term loans
If you don’t qualify for SBA loans, bank term loans can be a viable alternative. Amounts range from $30,000 to $500,000 and repayment terms are typically from one to five years.
As the name “bank term loan” suggests, banks offer these small business loans. That said, credit unions, online lenders, and alternative lenders offer term loans as well. You may be able to use these loans to invest in working capital or consolidate debt.
Since bank term loans lack SBA backing, they don’t require as much paperwork from their applicants, so funding can sometimes be faster. However, this expedited process comes with a potential downside. Fixed interest rates typically result in higher payments over the life of the loan, meaning that you’ll repay more than you might if you opt for a slower-paced SBA loan.
3. For OK credit: business lines of credit
Business lines of credit are similar to credit cards, but they expire after you use their balance. You’re not required to use the full credit line, and you’ll only pay interest on the portion you do use. Small business owners often use them to fund payroll, inventory, equipment purchases, and marketing campaigns.
Business credit lines often have high interest rates, which can make them disadvantageous. Their rates typically increase as your credit score decreases. That said, they can be easier to qualify for than SBA or bank term loans.
4. For OK credit: equipment financing
Equipment financing may be a reliable loan option if your personal credit score is in the 600 to 675 range. You’ll use equipment loans, as their name suggests, to buy new equipment or update old machinery. Once your loan term ends – often after five years – you can buy the equipment. If you fail to repay the loan, the lender will likely seize the equipment as collateral. This arrangement may put your business back at square one, but it does protect your other assets.
5. For bad credit: merchant cash advances
If your credit score is low, merchant cash advances (MCAs) can help you maintain your cash flow. For starters, many MCA providers won’t ask for your credit score. MCAs are also convenient: You’ll receive a loan, and then every day, you’ll funnel a portion of your credit card revenue to the lender. This arrangement is an especially passive form of loan repayment.
MCA providers may check your credit card processing statements to determine your eligibility. If your transaction volume is high enough, you’ll likely qualify. However, your loan will probably come with extremely high interest rates and fees. You also can’t take out a merchant cash advance if your business doesn’t accept credit card payments.
6. For bad credit: invoice factoring and financing
Like merchant cash advances, your access to invoice factoring services is mostly independent of your credit score. Notice the word “services” there: Invoice factoring isn’t a loan in the traditional sense. Instead, an invoice factoring service buys any invoices that your clients or customers haven’t paid. The company will lend you the total invoice amount, charge you a fee, and interact directly with the client or customer for payment.
If clients sitting on unpaid invoices is your main obstacle to cash flow, invoice factoring may be a reliable funding option. That said, you’ll pay a weekly fee until your client repays, though the invoice factoring service often refunds some of this fee.
Why is a business loan the best funding option?
A business loan gives you access to the funds that you need to scale your business. In some instances, lenders may make funding available in a matter of days, giving you quick access to the funds you need. However, it’s important to understand that faster isn’t always better. Loans that take a bit longer often provide more structured and manageable monthly payments. When evaluating speed and affordability, think about when you need the funds and how they will impact your business.
Some business owners opt for angel investors and venture capitalists when they need a cash infusion. However, this option means forfeiting some of your equity in the business. Business loans present no such issue.
While there’s certainly nothing wrong with having a credit card for company use, the fact remains that large purchases on a credit card are rarely a good idea. The exorbitant interest rates can restrict cash flow and leave your company drowning in debt for the long haul.
Making the right choices
Any loan you choose should be eligible for use in ways that suit your needs. It should also come with eligibility requirements that you can easily fit. You should also seek low interest rates and long repayment terms to make your payment installments smaller. Just as importantly, you should borrow from a lender that makes its team readily available to you whenever you need help.
Choosing the right lender is just as important as choosing the right type of loan. When you work with a lender who takes the time to understand you, your business, and your goals, you’ll get access to the funds you need while also prioritizing the type of long-term strategy that’s necessary in today’s competitive business landscape.
See if you pre-qualify today to start the process of obtaining the funding that your business needs.
FAQs
How do I compare small business loans beyond the interest rate?
Interest rate is only one part of the total cost. Compare fees, repayment terms, payment frequency, prepayment penalties, and whether the rate is fixed or variable. You should also consider flexibility, funding speed, and how well the loan structure fits your cash flow. Looking at the full cost of capital over time gives a more accurate comparison.
What factors should I consider before choosing a business loan?
Start with the purpose of the loan and how quickly you need the funds. Then evaluate repayment terms, total borrowing costs, required collateral, and qualification requirements. You should also consider how predictable your revenue is and whether the payment schedule fits your cash flow cycle. The right loan supports your business operations without creating financial strain.
How do I know if I can afford a small business loan repayment?
Review your business cash flow to determine whether you can comfortably make payments even during slower months. Many lenders look at your debt service coverage ratio, which measures how much income you have available to cover debt. It also helps to run projections that include the new payment alongside your existing expenses. If repayment would significantly limit working capital, the loan may be too large or poorly structured.
Should I choose a faster loan or a lower-cost loan?
That depends on how urgent your funding needs are and how sensitive your business is to borrowing costs. Faster loans often come with higher rates or shorter repayment terms, which can increase total costs. Lower-cost loans typically require more documentation and time but may save money long term. Ideally, choose the option that balances timing with affordability and supports your overall financial goals.
