Best Small Business Loans
Based on In-Depth Reviews

COVID-19 Update

The Small Business Administration has a number of programs meant to help struggling small businesses, four of which are part of their COVID-19 response. We'll cover them briefly here.

The Paycheck Protection Program

In late March, Congress passed the $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, with the aim of helping offset the economic downturn that has resulted from the COVID-19 pandemic. The largest economic stimulus package in history, the program originally allocated $349 billion in funds to the newly created Paycheck Protection Program (signed into law in late April). Since the program—which provides forgivable loans to small businesses for the purpose of payroll and overhead costs—had fully allocated its original budget within 13 days, an additional $320 billion was added with April's Paycheck Protection Program and Healthcare Enhancement Act. 

Currently, approximately $130 billion of PPP funding remains available, and the program is accepting new applications until August 8, 2020. Since its beginning, the PPP has been fraught with confusion, and many small business owners haven't taken advantage of the program (or have returned their disbursed funds). Guidelines for how and when to use the loans, application deadlines, and an overall lack of transparency has made the PPP somewhat controversial—particularly since subsequent disclosures revealed that many small business owners were denied, while large enterprises such as Shake Shack, Ruth's Chris Steak House, and the Los Angeles Lakers obtained millions. Below, we answer some of the most commonly asked questions.

How do I apply for a PPP loan?

The SBA website states that "You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating." Other lenders may also enroll in the program, so long as they meet the approval requirements. To see whether a lending institution is enrolled, you can download this nation-wide list.

Who can apply for a PPP loan?

Any small business that meets SBA size standards (either industry-based or alternative) is eligible to apply for a PPP loan, as well as sole proprietors, independent contractors, or self-employed individuals. The same goes for any business with a NAICS code that begins with 72, with more than one physical location and less than 500 employees per location. And finally, any 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) is also eligible.

What are the terms and conditions of a PPP loan?

PPP loans have a 1% interest rate, and zero fees from either the government or individual lenders. Loans issued after June 5, 2020,  must be repaid within 5 years, though payments may be deferred for six months, initially. Loans require no collateral or personal guarantees. 

How are PPP loans forgiven?

If the funds are used for payroll costs, utilities, rent or interest on mortgages, PPP loans—and 60% is used on payroll—the loans will be fully forgiven. If full-time headcount declines, or should salaries and wages decrease, then forgiveness will be reduced accordingly. 

Economic Injury Disaster Loans

Unlike the PPP, the Economic Injury Disaster Loan (EIDL) program has been a longtime part of the SBA’s available resources to aid small businesses during times of disaster, providing low-interest loans to cover a variety of expenses (from payroll to inventory or debt). However, in response to the current COVID-19 crisis, requirement guidelines have been relaxed to include a larger swath of businesses—including sole proprietors, freelancers, and independent contractors. Interest rates are 3.75% for small businesses and 2.75% for non-profits, with loan terms of up to 30 years, and first payment deferrals of one year. 

EIDL also includes a grant program called EIDL Advance, but it’s not currently accepting applications. 

SBA Express Bridge Loans

This Pilot Program awards loans of up to $25,000 to businesses that have an existing relationship with an SBA Express Lender. They can be used both as term loans or as a bridge to the SBA’s EIDL program, from which funds can be used for partial or full repayment.

SBA Debt Relief

As per the SBA website, this program pays 6 months of principal, interest, and any associated fees “on any current 7(a), 504, and Microloans in regular servicing status—as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020,” and will be disbursed automatically. This relief does not apply to loans under the Paycheck Protection Program or Economic Injury Disaster program. However, if you had an SBA Serviced Disaster (Home and Business) loan in “regular servicing status” before March 1, 2020, the SBA will provide automatic deferments through December 31, 2020.

Alternative Ways to Fund Your Small Business

Tap into Savings or Borrow from Your 401k

This might be easier said than done, but we've heard directly from other business owners that the best way to go into business is to do so without debt. While that's not an option for many, there are small business owners out there who have incurred debt needlessly because they've opted to keep their savings separate. That can be a sensible decision, but if you've done your market research and feel confident in your business idea, there's no reason why you shouldn't invest in your own business. If you have some seed money put away or a 401k account, these could be great sources to help you get started without digging yourself into a hole.

Taking funds from your 401k account is perhaps the best and safest option of the two. If you have this type of retirement savings account, know you can borrow against it, cash out your funds, or roll them over as a business start-up (ROBS). There are pros and cons to using your retirement savings to fund your business, the main ones being that you can roll those funds over tax-free, but could easily lose your hard-earned investment. Consider your options carefully and learn more about what ROBS entail to make sure you're making a sound financial decision.

Apply for an Unsecured Business Credit Card

Many lenders recommend this option for startups or small business owners without established credit. Business credit cards tend to have more flexible qualification requirements and because they're a revolving line of credit, small business owners can get a high limit and only pay back what they use. Many business credit cards require a personal guarantee, and the applicant needs to have a good credit score as well as a low debt-to-income ratio.

If you don't want to be personally responsible for your business expenses, you can always look for a business credit card that doesn't require a personal guarantee. However, as with any other credit card, you have to pay your outstanding balance in full each month, or else it accrues interest and you can get into debt quickly. If you opt for a business credit card, use it responsibly and solely for business purposes as opposed to personal ones.

Crowdfund Your Loan

One great highlight stemming from the shift to online lending is the host of alternative funding options now available to small business owners. One such option is crowdlending, a funding solution based on the crowdfunding model. A standout platform in this new arena is Kiva, a non-profit micro-loan crowdfunder that uses “the power of the crowd to get your business funded.” This is a pretty sweet deal for businesses who don't have enough capital to get started and are unlikely to qualify for other types of financing. The benefit of using a platform like Kiva is that you can build a community around your cause while funding your loan, all interest free. This lending model works through what they call "social underwriting," meaning that instead of focusing on credit score and cash flow the company prioritizes your personal character and community standing. How? Well, by asking you to network and get your circle of friends and family to pledge on your behalf by contributing whatever they can to your loan.

The community-building aspect and the raised awareness about your business, in addition to the interest-free loan, are definitely strong selling points. The potential downside? Funding times are over 2 months and the loan amount caps at 10 grand. Otherwise, this is a great, cost-effective loan option that will create and foster a community around your up-and-coming business.

Another player in the crowdfunding lending arena is Kickstarter. This platform is a great alternative for creative ventures offering a tangible product, such as a gadget or a clothing garment. If you've never used the platform, it works by advertising a finished product and asking people to back the project to get rewarded with said product once it's been mass-produced. Once a project has been funded, the "creator" is responsible for completing the project and issuing the rewards promised to their backers. Following this model, backers run the risk of funding a project that might not reach completion. The risk for creators, however, is very small. If the campaign doesn't reach its funding goal, the backers get refunded whatever they contributed.

Ultimately, you should look into crowdfunding if you’re looking to bypass traditional lending models as a way of saving on fees and interest or want to build a supportive community around your venture. If this is the route you want to take, we recommend that you carefully consider the type of platform that best suits and is compatible with your business needs. After you’ve decided, flesh out a compelling story about why you need funding. If you're looking to start a bakery, for example, let your backers know how your passion for baking cakes motivated you to leave your corporate 9-5 job so you could start baking full-time. Generally speaking, people want to help you! All you need to do is ask for it. Your lenders will relate to your story, your passion, and your drive. And lastly, spread the word within your closest circles. Having your friends and family back your venture from the start can significantly help your project get the funding it deserves. 

Consider Peer-to-Peer Lending

Similar to crowdfunding, P2P lending connects you to individuals that will fund your loan, but in this case, with a return on the investment for the lender. The upsides of using peer to peer lenders are significantly lower interest rates, streamlined applications, and quicker funding times when compared to traditional lending institutions. Most P2P loans are personal loans, but some lenders offer business loans as well. Some examples of these are Lending Club and Funding Circle. The pros of using P2P loans are a simple and automated online application and fast funding times. It's also worth mentioning that having good credit is crucial for this type of loan.

Tips for Small Business Owners

Research the Market & Take Your Own Wages Into Account

A common mistake small business owners make is not factoring in their own wages into the cost of running their enterprise. Remember that your business is your income and you should always factor yourself in. And just as importantly, carry out market research before going into business to understand how much it will cost to fund your business and how soon you can expect a return on your investment.

Don't take these numbers as a death sentence, as market conditions vary from one region to another, and most of these statistics fail to include large business segments such as online retail and one-person enterprises. Furthermore, according to the Bureau of Labor Statistics, about two-thirds of businesses survive at least 2 years and about half survive at least 5 years. The most recent data reveals that 79.4% of businesses that opened in March of 2017 made it to 2018. Heed the expert advise of the SBA and do your homework before even considering a loan. Click here to go to SBA.gov and learn more about market research.

Apply for Several Kinds of Funding

Don't limit yourself to one kind of loan, apply for different kinds of funding to ensure you'll have the resources you'll need to start or grow your business. As we mentioned above, many small business owners underestimate the amount of money they'll need to purchase equipment, process payroll, invest in smart technologies, and ultimately keep their businesses afloat.

A good way to counteract that is to aim higher in terms of loan amounts and to supplement their main funding strategy with a different loan product. For example, if you've applied for a short-term loan for your startup, consider applying for a business credit card simultaneously. Unsecured credit, like a business credit card, can be an excellent solution to cover unforeseen expenses. They also have very flexible qualification requirements and you only have to pay back what you use.

Mentorship is Key

A trend that consistently popped up in our research was the importance of finding mentors in your field of business. Acai Express owner Hector Westerband credits the success of his franchise to being mentored by industry veterans and educating himself as much as possible about funding solutions and how to keep his business ahead of the curve.

When we asked him to provide general advice to other small business owners, he told us the best thing an entrepreneur can do is to “... stay educated, educate yourself, read on topic literature and go to conferences, network endlessly; if you’re passionate about it, you will find a way to make it happen. Don’t be afraid. Just do it.” Normarie Piñeiro adds: “Try to learn from their (your mentors’) mistakes so you don’t repeat them yourself. Don’t be afraid. It will be hard but in the end, you get a big reward. I don’t regret this at all.” 

Be Aware of High-Interest Rates by Reading the Fine Print

When taking out a short-term business loan, be aware that interest rates will probably be higher than for other types of financing. Online lenders may also charge higher interest rates for both short and long-term lending solutions. To counteract that, the general advice from experts is to do your homework and weigh your options carefully. Choose a loan amount and terms that make sense for your business, always read the fine print, and be diligent with your payments. 

A small business loan, whether or not it's SBA-backed and funded via a traditional lender or an online one, should be an instrument that facilitates your business’ growth and development. Choose wisely and stay informed. In any case, always err on the side of caution when it comes to rates and terms. Your pocket will thank you in the long run. 

Traditional vs Alternative Lenders

As Matt Harris from Bain Capital Ventures so eloquently put: “No one can fund cheaper than a bank.” While that might be true, traditional banks often fail to deliver the convenience and flexibility that online lenders offer. One thing is for certain, the small business lending market has been disrupted by the online players and they are here to stay. 

Online Lending: An Unregulated Market

Online lenders make a profit by charging interest and fixed rates varying on the loan offered. Online lending is not regulated like traditional banking institutions and that has not escaped our notice. Full disclosure compels us to add that, according to Harvard Business School, there is no regulation or government oversight that applies to online lenders, especially when it comes to protections for borrowers.

Screenshot HBS The State of Small Business Lending: Innovation and Technology and the Implications for Regulation, August 2019.

There’s more: “No single federal regulator has the authority to oversee business lending. Instead, there is a spaghetti soup of at least seven agencies with overlapping jurisdictions and purviews. This leaves online small business lenders to be governed by an expensive and time-consuming patchwork of state oversight, often with inconsistent rules that can confine online lending to state-by-state silos, undermining what is an otherwise national market for credit.” As stated by Karen Gordon Mills and Brayden McCarthy on this HBS working paper, with the emergence of online lenders and marketplaces the need has emerged for centralized regulation to protect borrowers and lenders alike.