Borrowing can be a smart move for your business, especially when you're in the early stages of growth. Lending partners can support you by providing fast access to capital, and in most cases, you won't have to give up any equity in your company.
But borrowing can also be a challenge! There are thousands of commercial lenders in the United States and many of them offer a diverse suite of financing options. In this guide, you'll find out how to navigate this crowded market and find the best small business loans for your growth strategy.
Before you start assessing business loan options, you need to assess your needs and capabilities. Why do you need a loan? And how do you intend to repay it?
“Match the timing of your need to the time frame of the loan,” advises Will Howard, VP of Relationship Management at Foro. “If you have a long-term need, you’ll need long-term financing. For example, you don’t want to be looking for a line of credit to complete an acquisition or buy a building. Similarly, a term loan would be entirely unsuitable for financing your inventory or your accounts receivable.”
Here are some factors to consider or discuss with your leadership team:
Remember: business loans are there to help your business grow. With the right loan at the right time, you may see a return on investment that more than justifies the costs of the loan. That's why it's helpful to think about how each loan fits into your broader strategy.
The commercial lending market is sophisticated and competitive. Lenders offer a multitude of products, with great variation in:
Traditional business loan options include:
Let's look at each of these in turn.
Term loans provide you with a lump sum of capital, which you agree to repay over a specified term. Interest rates usually depend on the loan term, with lower rates for longer terms. This type of loan is often secured against a specific asset. For instance, a commercial property loan will give you the capital you need to purchase a new building. That building will then act as your collateral for your loan.
Bridge loans offer fast access to capital when you need it — they "bridge" the gap when you have a temporary shortfall. You can use commercial property as collateral for a bridge loan. A good example would be a business owner using a bridge loan to purchase a new commercial property prior to selling their current property. The loan bridges the gap between the purchase of the new property and the sale of the old one.
Small businesses often have a hard time finding loans. Lenders want to see a good credit record and tangible assets; small businesses often have neither. The federal Small Business Administration (SBA) aims to help people in this situation by acting as a guarantor on loans. The maximum amount depends on the type of loan you are applying for — for a Standard 7(a) loan, it’s $5 million.
Banks often provide business customers with an overdraft, allowing them to borrow and repay on their own schedule. A commercial line of credit works in much the same way, except at a much larger scale — sometimes up to $100 million. Commercial lines of credit are short-term (1-2 years) but are frequently renewed at each maturity.
Growing businesses often need to invest in expensive equipment, such as IT systems, machinery and vehicles. You may be able to lease the equipment, but an equipment loan allows you to purchase it outright.
The loans listed above are suitable for most scenarios in which you might wish to borrow. Lenders also offer more specialized products that can be useful in specific circumstances. You might consider some of these options if you're looking for a more complex financing arrangement.
Mezzanine debt is a type of financing that is typically used by businesses to fund expansion, acquisitions or other growth opportunities. It’s a hybrid form of financing that combines elements of both debt and equity financing, hence the name.
Mezzanine financing is typically provided by a junior lender, which means that it is positioned lower in the capital structure of a company compared to senior debt (banks). In the event of bankruptcy or some other financial crisis, mezzanine debt holders will only be able to recoup their investment after the claims of senior debt holders have been satisfied.
“Mezzanine financing is fantastic as a filler,” says Will Howard. “It can bridge the gap between what a bank will offer you in traditional debt and the total that you need to raise. Mezzanine financing is most effective when used in conjunction with senior lending.”
Purchase order financing is a common option when there is a long lead time on goods. For example, if you order stock from overseas, you may have to wait weeks or even months for your cargo to arrive. In PO financing, the lender settles the cost of goods on your behalf, usually making payments directly to the supplier. You then repay the lender when you've settled with your clients.
Invoice financing uses your accounts receivable as collateral. It’s a popular option among companies with a long working capital cycle. Consider invoice financing if you need to improve timing of cash flows or have customers that pay on longer terms.
Before you apply for a business loan, make sure you're prepared to have a conversation with lenders about your financing requirements. Here are some steps to consider if you're wondering how to get a business loan:
Try to have clarity about:
Work with your financial team to assemble hard data that makes a case for your loan.
Some lenders may ask to see a business plan so they can learn more about how you plan to invest the capital. Even if that's not a loan requirement, it's important to have a detailed business plan before you borrow. Look at details like:
Making a business case helps you see if debt financing is the best option available to you, and if a loan suits your long-term goals.
Lenders need to know that you're a reliable client. They will ask for all relevant paperwork, and they will research your credit history. It's a good idea to get ahead of this and gather up all relevant information, such as:
For arrangements such as factoring loans, you will also need to prepare any relevant invoices or purchase orders.
Finding the right finance partner can be a challenge, especially in such a competitive market. That's why it makes sense to seek advice and support from experts who can help you find the best small business loans.
A digital platform like Foro can help you find the right loan in minutes. Foro uses artificial intelligence technology to match your lending needs with suitable lenders and financing products. You will quickly receive loan recommendations, and our experts will guide you through the process so that you can compare offers and choose with confidence.
“Business owners don’t have time to engage in endless conversations with potential lenders who will never be a good fit for them,” says Will Howard. “They just want to run their company. What Foro does is eliminate all those frustrating hours you would otherwise spend finding the right partner. Our platform cuts out the noise and gets straight to the signal — a potential lender that is genuinely interested in supporting you. Right away, you’re having direct and meaningful conversations with a bank that wants to talk to you. We’re focused on driving and building those relationships.”
Every lender has its own application process. Most loan providers will try to make the experience as user-friendly as possible, and some may offer an instant decision.
You'll often apply through the lender's online portal, where you can also submit documents and track your application's progress. The lender might assign a loan consultant to your case for large loans or complex applications.
Securing a business loan is often a matter of preparation. Before approaching a lender, it's important to know:
Having a clear understanding of your needs will help you narrow down the options to find the right loan partner. Try using a platform like Foro to match with the best small business loans instantly.
Several factors affect your chances of accessing the best small business loans. Lenders will consider things like:
Ultimately, lenders want to provide financing to you — so long as you can repay them in full. If you have a solid business strategy, you have a much better chance of securing a business loan.
A growing business can borrow as much as the lender is willing to offer. However, some business loan products are capped, including:
Otherwise, a lender will assess your ability to repay the loan and set lending limits accordingly.
Ber Leary worked in investment management for over ten years. He's now a full-time content marketing consultant specializing in finance technology and management strategy. Connect with Ber on LinkedIn.