As a small business, it pays to know the ins and outs of small business loans and financing. Choosing a small business loan requires a lot of research and careful consideration about the best type of financing for your business. Weighing the pros and cons of a line of credit, SBA loan, or term loan takes time, but it’s important to understand your choices in order to make the smartest decisions for your business.
In many cases, your decision will be based on why and how soon you need the financing. If your business is looking to grow, you may need a different type of loan than a business in search of an emergency loan. In this guide to small business loans, we’ll walk you through the pros and cons of different financing options and then discuss three business scenarios and the top financing options to consider in each one.
What you need to know
- A business line of credit can give you access to working capital when you need it, while a traditional business loan is a lump sum of funds.
- SBA loans can have lower rates and more favorable terms, but you may not have access to funds for up to 90 days.
- The best financing option for your business may depend on whether you plan to use the funds to launch your business, grow and scale, or stay prepared for emergencies.
Pros and cons of business financing options
Picking the best loan for your business will depend on a variety of factors. While one loan type might offer a larger lump sum payment, you may sacrifice flexibility or long term usage. As we discuss the advantages and disadvantages of business loans, keep in mind your business’s financial goals and situation to determine which loan may be best for you.
Pros and cons of business line of credit
A line of credit is a good choice for business owners looking for more flexible working capital and ongoing access to funds. Unlike lump sum loan options like a term loan, as long as you remain in good standing with your lender, with a line of credit you can continue to make draws over time. Many lines of credit are also revolving, meaning that when you pay off your past draws, the line replenishes, and you can request draws again.
Some advantages and disadvantages of a line of credit are:
Advantages:
- Improves your cash flow when you need it
- Flexible usage of funds
- Accessible to younger businesses
- Find out if you’re approved quickly
- Predictable payment schedule for each draw
- Build business credit with on-time repayments
- Can continue to access capital as you make repayments
Disadvantages:
- Many lines of credit have draw fees
- Not a lump sum payment
- Likely smaller loan amounts compared to a term loan
- Rates are higher if you have poor/no credit
Fuel your business with a Bluevine Line of Credit.
Pros and cons of business term loan
Business term loans are lump sum loans which you pay back over a set period, usually at monthly installments. A term loan can be used to complete large projects that require much more capital up front, such as opening a new location or investing in a new venture. One thing to keep in mind with a term loan is that you’ll pay interest on the entire lump sum of the loan, versus a line of credit where you only pay interest on what you draw.
Some advantages and disadvantages of a term loan are:
Advantages:
- Come in short-term or long-term repayment periods
- Predictable payment schedule
- Typically quick approvals
- Lump sum payments for large, one time projects
- Build business credit with on-time repayments
Disadvantages:
- Might need to wait to access funds
- Potential prepayment penalties
- Risk collateral (for secured loans)
- Rates are higher if you have poor/no credit
Did you know?
You can apply for business financing—including the Bluevine Line of Credit and term loans through our partners—with one simple application.
Pros and cons of SBA loan
An SBA loan can be the best type of funding available to a small business. With longer repayment periods, high loan amounts, and lowest interest rates, they offer the most favorable lending terms. They’re also highly competitive and it can often take months to hear back about a lending decision, making them less flexible in moments when you need faster access to capital.
Some advantages and disadvantages of SBA loans are:
Advantages:
- Low interest rates
- Accessible to younger businesses
- Favorable repayment terms
- Predictable repayment schedule
Disadvantages:
- May take months to process
Best funding option for businesses
Not every funding option is suitable for every business situation. If you need access to fast capital, the SBA loan will likely take too long to process, even if you do qualify. Conversely, if your business is newer or if you’re looking for the best financing for startups, some term loans may not be the best fit either, and a line of credit may offer the flexibility and access to ongoing capital you need to grow.
Below we cover three situations and which loan may be the best option in each one.
1. Small business financing for growth
If you’re an established business looking to expand, finding the best financing for growth can be your ticket to opening a new location, hiring more people, buying new equipment, or increasing your service offerings.
For big projects, a term loan can provide the capital you need to get your new venture off the ground. If you have a long runway and feel comfortable taking the time to plan your expansion, the SBA loan is the most ideal financing for these major expenses.
Alternatively, a business line of credit is another good option for small businesses looking to grow. If your growth plans are more focused on scaling versus completing a big project, a line of credit might be a better fit. Business lines of credit are a great alternative to small business term loans if you’ll need ongoing access to financing instead of one-time access to a lump sum. It will also give you access to capital over time, and you’ll only have to pay for what you use.
2. Small business financing in emergencies
Running a business is difficult, and not everything is always smooth sailing. Emergencies happen, and when they do, it’s important for small businesses to have access to funds that can see them through a rough patch.
In cases of an emergency, SBA loans won’t be fast enough to cover immediate expenses. Term loans from other lenders can be approved faster. If the emergency involves an upfront cost in order to recover, then a term loan may be able to see you through.
Alternatively, if you anticipate a longer term recovery with ongoing expenses, a line of credit may be a better fit. A business line of credit gives you access to funds that you can draw from over time. With careful planning and close attention to cash flow, the funds from a line of credit can provide flexible access to capital to help you through key moments of recovery.
3. Small business financing for new businesses
Raising capital to launch a new business is challenging. Banks and other major lenders typically don’t offer startup financing, so your choices may be more limited.
If you’re just getting started but have a solid business idea, you may consider grants as an alternative to the SBA loan. Particularly if you’re a first-time business owner, there are many grants available, and an excellent resource is the U.S. Small Business Administration, the same agency that provides SBA loans. The U.S. SBA runs Small Business Development Centers throughout the country. SBDCs offer free business consulting and low-cost services for different business needs, including crafting and developing business plans and securing financing.
Opening a business checking account designed to scale with you is also a good idea. Having a business account from the get go will help keep you organized and set you up for success down the line.
What are the steps to get a small business loan?
Now that you have a better idea of the best type of financing for your business, it’s time to apply. The five steps to get a loan for your small business are listed below.
1. Understand why you need a small business loan
Do you need to improve your cash flow to stay ahead of expenses? Are you covering for an emergency? Or will this loan serve as a way to upgrade your equipment and/or grow your business?
2. Determine if you’re qualified for funding
Know your business and personal credit history, as well as your cash flow situation. Lenders will want to know that you’re able to pay back the money you borrow before they approve your business for a loan. Also, be prepared to provide collateral if your credit isn’t up to par.
3. Compare small business loan options
Be sure to research and discuss whether your business needs would be better suited for a term loan, SBA loan, or business line of credit.
4. Evaluate different lenders
Once you’ve figured out what type of small business financing best fits your needs, you can compare lenders to make sure you choose the one with the most favorable terms and benefits. Options can include traditional banks, online lenders, the SBA, and non-profit lenders.
5. Prepare your documents and apply
Finally, you can get your documents together and submit a loan application. Here’s a quick list of what you need to apply for a small business loan in most cases:
- Incorporation papers – make sure you’re properly registered with your Secretary of State
- Bank statements for last 3–12 months
- Tax filings for last 1–3 years
- Updated balance sheet
- Profit and loss report
