Small business owners are dealing with widespread economic uncertainty. From higher inflation rates to constantly shifting consumer habits, many small businesses are looking for funds to grow, hire employees, consolidate high-interest debt, and more. However, there are also many more lender choices than ever before. Choosing the right small business lender is an important decision that may impact the success of your business.
So how should the financially savvy business owner choose a lender that’s a good fit? Here are some considerations.
Type of lender
There are multiple types of lenders to consider, including traditional banks, online lenders, credit unions, and alternative lenders. All offer pros and cons:
- Traditional banks offer stability and a wide range of services. However, they may have stricter lending criteria and longer application processes.
- Online lenders offer faster applications and more lenient eligibility. They may be a good option if you need funding fast.
- Credit unions are nonprofit financial institutions that may offer competitive rates. However, you must become a member to access their services and rates.
- Alternative lenders offer unique funding options, including peer-to-peer lending and crowdfunding platforms.
Loan options, eligibility, and applications
Different lenders offer different types of loans, including term loans, lines of credit, equipment loans, SBA loans, and more. If you are unsure of what kind of loan may be best for your business, here is a helpful article to compare term loans, lines of credit, and SBA loans.
Eligibility criteria may also vary depending on the lender and type of loan. Check if your business meets the lender’s credit and collateral requirements before applying.
Evaluate the ease and speed of the application process across lenders. Online lenders may provide quicker applications and approvals compared to traditional banks.
Transparency
Lenders should disclose an annualized interest rate or APR in an easy-to-understand manner. Although APR is widely recognized as the standard for loan cost, consider using the "loan constant" to discover the true cost of a loan. Learn more about the loan constant. While shopping for a lender, be sure to compare interest rates.
It’s important to note how interest rates are currently impacting small business loans. Rates have been elevated for the last few years, and unfortunately, they show no signs of returning to the lows that businesses experienced in the early 2020s. While this doesn’t mean that they won’t eventually drop, the fact remains that small business owners may need to budget for higher repayment terms when determining how much capital they need to borrow.
Speed
Many small business owners wait until they’re in desperate need of funding before beginning the loan application process. Unfortunately, this approach often leads borrowers to obtain loans with less than favorable terms. This may include everything from higher-than-normal interest rates, shorter repayment terms, and other potentially damaging factors.
While speed shouldn’t be the only thing you consider, you still might want to find a lender who may get you the capital you need quickly. This is why AI-powered lenders are becoming more popular. By expediting the application and underwriting processes with AI, some lenders may process loans in weeks instead of months.
No surprise fees
When researching loans, don't forget about additional packaging or other types of fees. Lenders should clearly state the fees that will be due before a loan is funded and during the loan’s life. Review all your terms and conditions and compare fees from various lenders to avoid surprises.
Some of the fees associated with many types of small business loans may include:
- Origination fees
- Prepayment penalties
- Draw fees on lines of credit
Plain-English terms
If borrowers don’t completely understand the fine print, they may get trapped in a high-cost loan with payments that may be difficult to manage. Some lenders even require daily payments. Information that should be easy-to-understand includes the total loan amount, the payment amount and frequency, collateral requirements, and any prepayment penalties. Read Business and Finance Terms for Small Business Owners for a quick and easy glossary of small business lending terms.
Customer service and access
Good customer service may be a boon to busy small business owners, especially if you have questions or concerns during the application process or as you access your loan. Read reviews and ask for recommendations from other small business owners. Look for a lender that understands your business’s unique needs and is willing to help work with you if unexpected challenges arise.
You might want to consider if you would prefer to work with a local or national lender. A local lender may understand your business landscape better, but a national lender may have access to broader resources. Some lenders also specialize in certain industries, which may be advantageous.
Access to your lender is also an important factor. Is there a quick and easy way to reach their team? If you’re working with an online lender, may you pick up the phone for any questions or concerns? When you call, you should have a dedicated representative who is familiar with your business and your application. An unresponsive lender could be a red flag.
Consider an SBA loan
The Small Business Administration (SBA) offers loans designed to meet the financing needs for a wide range of business types. The government isn't directly lending small businesses money, but it provides a partial guarantee. As a result, SBA loans typically have some of the lowest interest rates and longest terms available for business financing.
If you’re interested in an SBA loan, SmartBiz Bank® may be able to help. Find out if you pre-qualify in minutes.
Frequently Asked Questions
What's the most important factor to consider when choosing a small business lender — interest rate, speed, or reputation?
The right lender depends on your business's priorities and financial situation. While interest rates are important, they should be considered alongside repayment terms, fees, funding speed, customer service, and the lender's experience working with businesses like yours. For example, if you're financing a long-term expansion project, a lower interest rate may outweigh a faster closing. If you need working capital quickly, speed may be more valuable.
How do I know if an online lender is legitimate and trustworthy, or if I should stick with a traditional bank?
A reputable online lender should clearly disclose its loan terms, fees, repayment requirements, and customer support options before you apply. Look for an established operating history, positive customer reviews, transparent pricing, and secure website practices. Traditional banks may offer lower borrowing costs and relationship-based service while online lenders often provide faster application processes and more flexible qualification requirements.
What red flags should I watch out for when reviewing a lender's terms and conditions?
Be cautious of lenders that advertise guaranteed approvals, pressure you to sign immediately, or are unwilling to clearly explain rates and fees. Watch for excessive origination charges, prepayment penalties, confusing repayment structures, or contracts that lack transparency. If a lender cannot clearly explain the total cost of the loan or avoids answering questions, it's worth exploring other options before committing.
Does applying to multiple lenders at the same time hurt my credit score?
Submitting several loan applications within a short period may result in multiple credit inquiries, which may have a small impact on your personal or business credit profile. However, many credit scoring models recognize that borrowers often compare financing options and may treat multiple inquiries made within a limited time frame as a single shopping event.
How does my credit score and business history affect which type of lender I should even approach?
Businesses with strong credit profiles, established operating histories, and stable financial performance may qualify for conventional bank loans or SBA-backed financing that often offers competitive rates and favorable repayment terms. Newer businesses or those with less-established credit may find more flexibility through community banks, credit unions, online lenders, or alternative financing providers. Understanding your financial strengths before applying may help you focus on lenders whose qualification requirements best match your business.
Is an SBA loan always the best option for a small business, or are there situations where another loan type makes more sense?
SBA loans may be an excellent option for many small businesses because they often provide competitive interest rates, longer repayment terms, and relatively low down payment requirements. However, they are not always the best fit. Businesses that need funding very quickly, require a small amount of short-term working capital, or don't meet SBA eligibility requirements may benefit more from conventional business loans, business lines of credit, equipment financing, or other financing solutions such as factoring.
