What a small business loan actually is, and where it comes from

A small business loan is money a bank or lender gives you for your business, which you repay with interest over a set period — usually two to ten years. The lender is not giving you a grant; they expect the full amount back plus a percentage fee. The money comes from a bank, credit union, online lender, or a government-backed program like the Small Business Administration (SBA).

The key difference between these sources is how much paperwork they require and how much they charge. A traditional bank loan takes longer to process but usually has lower interest rates. An online lender moves faster but charges more. An SBA loan is slower still but offers better terms if you meet their rules. Which one makes sense depends on how much money you need, how quickly you need it, and what your business looks like on paper.

Key Takeaways

  • Banks, credit unions, online lenders, and the SBA all offer small business loans, and each has different speed, cost, and paperwork requirements.
  • Lenders will ask for a business plan, tax returns, personal credit score, and proof of how you will repay the loan before they say yes.
  • SBA loans take longer to process but charge less interest; bank loans are faster but more expensive; online lenders are fastest but most expensive.
  • You will need to show the lender exactly what you are borrowing the money for and how the business will generate enough income to pay it back.
  • The interest rate you receive depends on your credit score, how much you are borrowing, and how long you take to repay it.

What lenders actually look at before they say yes

A lender's job is to predict whether you will pay them back. They do this by looking at five things: your personal credit score, your business plan, your tax returns, your collateral (something they can take if you do not pay), and your personal may provide (your promise that you will pay even if the business fails).

Your personal credit score matters because it shows how you have handled debt in the past. Most lenders want a score of at least 620, though banks often want 680 or higher. If your score is lower, you will either be turned down or offered a much higher interest rate. You can check your own score free at annualcreditreport.com.

Your business plan does not need to be fancy. Lenders want to see what you are borrowing the money for (equipment, inventory, payroll, expansion), how much revenue you expect to make, and how you will use the loan money to increase that revenue. If you cannot explain why the loan will help the business make more money, the lender will not believe you can repay it.

Your tax returns prove what your business actually made in the past. If you are a new business with no returns yet, lenders will ask for a personal financial statement instead. Collateral is something of value the lender can seize if you stop paying — usually business equipment, inventory, or real estate. A personal may provide means you are signing a document saying you will pay the loan back personally if the business cannot.

The difference between bank loans, credit union loans, and online lenders

A traditional bank loan takes six to eight weeks to process. The bank will ask for detailed financial statements, a formal business plan, and proof of your business history. Interest rates are usually between 5 and 10 percent, depending on your credit and the loan size. Banks are the cheapest option if you have good credit and can wait.

A credit union loan works similarly to a bank loan but is usually faster (four to six weeks) and slightly cheaper because credit unions are nonprofit. You have to be a member of the credit union first, which usually means living or working in a certain area or belonging to a certain profession. Interest rates are often one to two percent lower than banks.

An online lender can give you an answer in days and fund the loan in one to two weeks. The tradeoff is much higher interest rates — often 10 to 30 percent or more — and smaller loan amounts (usually under $500,000). Online lenders also ask for less paperwork and have looser credit requirements. They are useful if you need money fast and have weaker credit, but they are expensive.

How SBA loans work and why they take longer

The Small Business Administration does not lend money directly. Instead, they may provide a portion of the loan (usually 75 to 90 percent) to a bank or lender. This may provide means the bank takes less risk, so they offer lower interest rates and longer repayment terms — often up to ten years. Interest rates on SBA loans are typically 6 to 9 percent.

The catch is that SBA loans take longer to process — usually eight to twelve weeks — because the SBA has to review the process and approve the may provide before the bank will fund it. You will need a detailed business plan, three years of personal and business tax returns, a personal financial statement, and a resume. The SBA also has rules about what the money can be used for: you can borrow for equipment, real estate, or working capital, but not to pay off existing debt or pay yourself a salary.

The most common SBA loan is the 7(a) loan, which goes up to $5 million. There is also the Microloan program for businesses that need less than $50,000. You explore through a bank or SBA-approved lender, not directly to the SBA. Your local Small Business Development Center (SBDC) can help you find a lender and prepare your process for free.

Step-by-step: what to do before you walk into a bank

Before you contact any lender, gather your documents. You will need your personal tax returns for the last two years, your business tax returns for the last two years (or a personal financial statement if you are brand new), a business plan that explains what you are borrowing for and how you will repay it, and a list of any collateral you own. You should also know your personal credit score.

Write a one-page summary of what you need the money for and how much. Be specific: "I need $50,000 to buy a used commercial oven and install it in my bakery, which will let me increase production by 40 percent and add $200,000 in annual revenue." Not: "I need money to grow my business."

Check your credit report at annualcreditreport.com and dispute any errors before you explore. Fixing errors can take 30 to 60 days, so do this early. If your score is below 620, you may want to wait and improve it first, or plan to use an online lender and pay higher interest.

Research which lender makes sense for your timeline and credit. If you have good credit and can wait two months, a bank or credit union is cheapest. If you need money in two weeks and have weaker credit, an online lender is faster. If you want the lowest rate and can wait three months, look into SBA loans through your local SBDC.

What happens after you submit your process

The lender will verify your information — calling your bank, checking your credit, and confirming your tax returns with the IRS. This takes one to two weeks. During this time, do not explore for other loans or credit cards, because each process creates a hard inquiry on your credit report and can lower your score.

If the lender approves you, they will send you a loan agreement that spells out the interest rate, monthly payment, repayment term, and any conditions. Read this carefully. If anything is different from what you were told, ask before you sign. Once you sign, you are legally obligated to repay the loan.

The lender will then fund the loan, usually by depositing money directly into your business bank account. Some lenders require you to use the money for the specific purpose you stated in your process — they may send payment directly to a vendor instead of giving you the cash. This protects them from you using the money for something else.

Your first payment is usually due 30 to 60 days after funding. Set up automatic payments so you do not miss one; missing a payment damages your credit and can trigger the lender to demand the full remaining balance when ready.

What to do if you are turned down

If a bank turns you down, ask why. The answer is usually one of five things: your credit score is too low, your business plan is weak, your income does not support the loan amount, you do not have enough collateral, or the lender does not lend in your industry. Knowing which one matters because it tells you what to fix.

If it is your credit score, you can wait and rebuild it, or explore to a credit union or online lender with lower credit requirements. If it is your business plan, rewrite it with more detail and explore again. If it is income, you may need to borrow less or wait until your business has more revenue. If it is collateral, you may need a co-signer or a personal may provide.

Do not explore to five banks in one week. Each process creates a hard inquiry that lowers your score. Instead, explore to one lender, get feedback, fix what you can, and try again in 30 days. If traditional lenders keep saying no, an online lender or microloan program may be your next step.

Frequently Asked Questions

How much can I borrow?

It depends on the lender and your business. Banks typically lend $25,000 to $5 million. Online lenders usually max out at $500,000. SBA 7(a) loans go up to $5 million. Microloans go up to $50,000. The lender will offer you an amount based on your credit, income, and collateral — you do not get to choose.

What if I do not have collateral?

You can still borrow, but you will pay a higher interest rate because the lender has more risk. You can also ask a family member or business partner to co-sign the loan, meaning they promise to repay it if you do not. A personal may provide (your promise to repay personally) is usually required anyway, even if you have collateral.

How long does it take to get the money?

Online lenders: one to two weeks. Banks and credit unions: four to eight weeks. SBA loans: eight to twelve weeks. The timeline starts when you submit a complete process, not when you first call. Incomplete applications add two to four weeks because the lender has to ask you for missing documents.

Can I use a small business loan to pay off credit card debt?

Banks and credit unions will usually let you, though the interest rate may not be much lower than your credit cards. SBA loans do not allow it. Online lenders will let you, but their interest rates are often higher than credit cards, so it does not help. If debt payoff is your goal, a balance transfer credit card or debt consolidation loan may be cheaper.

What if my business is brand new?

Most banks want at least two years of tax returns. If you are brand new, you can use a personal financial statement instead, but you will face higher interest rates and may need collateral or a co-signer. Online lenders and microloans are more willing to lend to new businesses. The SBA has a Microloan program specifically for startups.