The Best Business Loan and Financing Options of 2023

Access to capital is essential to running a small business, whether for funding operations, filling gaps in cash flow or taking advantage of an opportunity to grow and expand. There are many sources of funding for small businesses, including traditional banks, but their eligibility requirements and restrictions frequently exclude applicants. To help you choose from among seemingly endless fintechs, alternative lenders and funding marketplaces, we narrowed down the list to the best options. When examining different lenders to determine our best picks for small businesses, we considered the cost to borrow, whether the lender requires collateral, loan terms and more.

What is a Small Business Loan

A small business loan provides business owners with additional capital when needed. There are a variety of types of loans, including term loans, lines of credit, equipment loans, working capital loans and merchant cash advances (MCAs). Each type of loan can fill a different capital need. For example, you might take out a line of credit to help fill a cash flow gap. A working capital loan is good to help cover day-to-day expenses, and an equipment loan is good to help cover the costs of new equipment, such as machinery or computers.

Rates

Accessing capital is an important part of running a small business, but it isn’t free. Banks and alternative lenders charge you interest and fees for the privilege of borrowing. These are some of the funding costs that you will likely encounter:

• Interest rate: This is the cost to access a lender’s capital, charged as a percentage of the loan principal. The interest rate depends on several factors, including your personal and business credit score, time in business, sales and loan size. Pay close attention to the annual percentage rate. This number allows you to compare borrowing costs between different lenders.
• Loan application fee: Some lenders charge a fee to apply for a loan. This fee doesn’t guarantee you’ll be approved. We prefer lenders that don’t charge fees simply for applying.
• Origination fee: This fee covers the costs of processing the loan. The origination fee is assessed after you agree to the financing. It is charged as a percentage of the loan or as a flat fee,
• Monthly and annual maintenance: Some lenders charge fees to administer your loan. This is common if you maintain a business line of credit with a lender. We prefer lenders that don’t charge fees for longer-term loans.
• Late payment fee: Most lenders will assess a fee for past-due payments if you are late on your loan payments. This will be spelled out in your loan contract.
• Prepayment penalties: Some lenders charge a fee if you finish paying back your loan before the term ends.

Terms

The term refers to the repayment period of the loan. The loan term can range from several months for a short-term loan to 30 years for real estate financing. Many small business term loans fall within the 1-5 year range. Payments usually are made weekly or monthly, depending on your loan contract. Additional conditions for financing can include putting up collateral or making a personal guarantee.

Small business funding comes in many different forms. From SBA loans to lines of credit, small business owners can access cash in several ways.

SBA Loans

The SBA provides startups and small business owners access to capital through its lending program. The SBA backs up to 85% of these loans, which enables banks to extend funding to borrowers they may not have lent money otherwise. Some of the lending programs even provide ongoing support for the entrepreneur. Expect to pay comparable interest rates to a bank’s on SBA loans:

• Standard 7(a) loan: With the SBA 7(a) loan, small business owners are eligible to borrow up to $5 million. The interest rate on this loan ranges from the base rate plus 2.25% to base rate plus 4.75%, depending on the loan size and term. The turnaround time from application to funding tends to be five to 10 business days. There’s no collateral required for loans up to $25,000.
• SBA Express loan: The SBA Express loan is similar to the 7(a) loan, but funding may come in as little as 36 hours. You can borrow up to $500,000 and use it as a revolving line of credit or a term loan.
• 504 loan: This is a long-term, fixed-rate loan in which the SBA provides 40% of the funding, a bank covers 50% and the borrower is responsible for 10%. Business owners can use 504 loans to purchase or fix equipment or property to help the business grow.

Traditional Bank Loans

Banks and credit unions offer small business loans. It may be easy to apply if you have a relationship with the bank, but that doesn’t guarantee you’ll get a loan. Banks and credit unions have gotten more stringent in approving borrowers. A bank loan tends to have a lower interest rate than you’d pay with an alternative lender, but only those with a strong credit profile need apply.

Business Lines of Credit

With a business line of credit, you draw money from the loan as needed. You pay interest only on the amount you use. Small business lines of credit range from $1,000 to $250,000, going even larger in some instances. They tend to have variable interest rates, which means your interest payment amounts will fluctuate with the market.

You don’t have to provide collateral with an unsecured line of credit, but the lender may require a personal guarantee. With a secured line of credit, you must offer something of value that the lender can seize if you can’t repay the loan. Common types of collateral include property and business equipment.

Microloans

Ideal for small business owners starting out or in need of a small amount of cash, microloans range from $500 to $500,000. Typically, they feature short terms and are offered by nonprofits. Many microlenders aim to help small business owners from underserved groups, such as women, minorities and veterans. The SBA is a big player in the microloans market, providing the funding to nonprofits that it designates as intermediary lenders.

Business Credit Cards

You can use a business credit card to make purchases while paying annual interest and fees, but this can get expensive if you carry a balance. Lenders look at your personal and business credit scores when determining your creditworthiness. A higher credit score generally translates into a lower interest rate.

Alternative Loans

Only some small business owners are eligible for a traditional bank or SBA loan, which is where alternative lenders come in. These are nonbank lenders that provide an array of loans. Alternative lenders typically are more flexible than banks, with faster application processes and funding turnarounds. They may cost you more in fees and interest, but it means you get your funding more quickly and easily. Here’s a look at three popular alternative loan types for small business owners:

• MCA: A lender can offer you an MCA in exchange for a portion of your future credit card sales. You get access to cash quickly, sometimes within one day and then pay it back as a percentage of your daily credit card sales.
• Equipment financing: This is a loan you take out to pay for business equipment. The collateral, in this case, is the equipment being financed. Most business owners can get approved for this, given the collateral component.
• Invoice financing: Similar to an MCA, invoice financing gives you an advance on your clients’ unpaid invoices. It’s often referred to as accounts receivable financing. With this type of funding, the invoicing company advances you up to 85% of the value of your unpaid invoices. You receive the final 15%, minus the financing company’s fees, when your customers pay their invoices.

When you’re researching your financing options, you have several factors to consider that will help you narrow down your selection.

Loan Process

When small business owners need cash, they often need it quickly. The last thing you want to do is get stuck with a lender that requires reams of paperwork or takes too much time getting the funding into your bank account. With many alternative lenders, it takes minutes to apply for a loan and some offer same-day funding once you’re approved.

Term

The term refers to the loan repayment period and the schedule for when you need to make payments. You may have six months to pay off a short-term loan, for example, or five years for a long-term loan.

Qualifications

Qualifications vary by lender but, in general, they look at your credit score, the financial health of the business and how long you’ve been in operation. Some lenders work only with borrowers who have a very good credit score while others are open to higher-risk borrowers. You should understand a specific lender’s qualifications and know that you’re eligible before you apply for financing from that lender.

Collateral

Depending on the loan, you may need to offer up personal or business collateral, such as paper assets like stocks or corporate bonds or property, such as buildings, equipment or vehicles. If you default on the loan, the lender can come after that collateral. It’s important to understand the lender’s collateral requirements and the inherent risk before agreeing to the terms.

Fees/Repayment

The interest isn’t the only fee you’ll pay back to the business lender. Lenders can charge various fees that impact the cost of the loan, such as application fees, origination fees, late-payment fees, prepayment penalties and monthly and annual maintenance fees.

Time to Deposit

This is the time it takes to get money in your bank account once you are approved for the loan. Before you choose a lender, you should obtain an estimate for time to deposit. Some alternative lenders can get the funding into your bank account within several business days.

Special Documentation

Some lenders require you to provide documentation before they will move forward with your application. These include your business financial statements, such as a balance sheet, income or profit and loss statement and your statement of shareholder equity.

Lenders may require three months of your checking account statements. You’ll also need to provide your income taxes for the last three years, paperwork pertaining to any businesses you have a financial stake in and your business license or certification. If you’re renting office space or equipment as part of your operations, you’ll want to have those leases easily accessible as well. Knowing ahead of time what paperwork your chosen lender requires ― ideally gathering and preparing it before you start the application ― will ensure a smooth and quick process.

For more information about business loan terminology, check out our glossary of business terms.

Whether you work with a bank or an alternative lender, the funding provider wants to ensure that you will repay them. That is why you must provide financial documentation and information about your business before they will approve your loan. The lender considers how long your company has been in business, your business credit score and your annual sales. Lenders also look at your personal credit score when issuing capital.

If you have a strong credit profile and your business is growing, you will find it easier to get a bank or SBA loan at favorable rates. If your credit has taken a hit, you don’t have strong revenue growth or your business is in the early startup phase, then an alternative lender may be a better option for you than a bank. That’s why it’s important to understand the type of financing you need before you begin applying for a loan.

What documentation and financial statements do you need to prepare for a loan application?

The paperwork required for small business financing varies from one lender to the next. But there is some documentation that most lenders require:

• Bank statements: Lenders want to see the last six months of your bank statements.
• Tax returns: Some lenders require copies of your tax returns going back several years.
• Business plan: Many lenders will want to see your business plan for achieving profitable growth.

The number of documents required varies widely, so it’s a good idea to ask your loan specialist about it upfront. That is especially true if you’re looking for quick funding. The lender can tell you exactly what they require in your situation. The more prepared you are with documentation, the quicker the process will go and the sooner the money will land in your bank account.

Amid a deteriorating economic backdrop, tightening credit availability and higher interest rates are potential issues for business owners in 2023. Several major United States banks have failed, resulting in tighter credit conditions. In times of economic uncertainty, lenders tend to approve fewer loan applicants and those receiving financing often must abide by stricter terms. A recent report from the Kansas City Fed shows that more banks are citing deteriorating small business financials and credit as a reason for declining loan approval rates. Given the chance that credit could tighten even further, business owners who are considering seeking financing should make a decision sooner rather than later.

Over the last year, the U.S. Federal Reserve has embarked on a program of tighter monetary policy. In response to rising inflation, policymakers have hiked interest rates to the highest level in over 15 years. As of September 2023, the WSJ Prime Rate, an index of prime rates from 30 major banks, sits at 8.5 percent, versus 6.25 percent a year ago. The Federal Reserve recently paused rate hikes to assess the economic impact. However, the central bank has not ruled out further interest rate increases in the future.

Due to the unpredictable nature of future interest rates, business owners should carefully consider the risks of variable interest rates that often accompany short-term loans. Higher interest rates increase financing costs and businesses with floating interest rate debt may be on the hook for much higher monthly payments.

Business owners who use online and alternative lenders in 2023 may be able to access lower interest rates. Technological advances may improve the lending process, with artificial intelligence and machine learning reducing loan approval wait times. Credit scores still matter, but lenders are increasingly scrutinizing other aspects of business owners’ finances to ascertain their creditworthiness. These changes could make it easier and faster for some businesses to receive financing.

In 2022, an SBA ruling adjusted its size standards in 16 of its sectors in response to changes in the North American Industry Classification System. The ruling, which took effect in October 2022, determines which businesses are eligible to apply for SBA loans and federal contracts. Overall, 59,000 more businesses are now classified as small businesses and eligible for SBA financing. More information is available on the SBA table of size standards.