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What Is a
Small Business Loan?

A small business loan is money you borrow from a lender to be used exclusively for funding your business — it’s a debt that you’ll repay over time with interest. To be eligible to receive a loan, you’ll need to meet certain qualifications that vary widely by lender and loan type.

When should you seek a small business loan

Many business owners would benefit from having more cash. And, thankfully, there are several funding options available to small businesses. But how do you know if taking out a loan is the best option to get the funding you need?

Here are some examples of business needs and situations that are good reasons to get a small business loan:

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Purchasing new equipment


Expanding to a new location


Hiring more talent

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Refinancing expensive loans


Building credit


Pursuing a new business opportunity


Stocking up on inventory

It’s always recommended to start by identifying what your business needs are and connecting them to real business outcomes. For example, if you have a piece of machinery that’s broken or not running efficiently, you know that replacing it will increase productivity and therefore revenue.

You can then pursue getting a loan with confidence knowing that you’re in a position to use the funds effectively — and to pay it back.

Once you’ve determined that it makes sense to get a small business loan, you’ll want to identify the best type of loan for your business.

Types of small business loans

Taking out the wrong type of loan for what you need can do more harm than good. That’s why it’s critical to understand the different types of small business loans available to you and what works best for your situation.

Here’s a look at seven types of small business loans that may make sense for you.


SBA Loans

SBA Loans are loans that are backed by the U.S. Small Business Administration (SBA). These are not funds that are secured directly from the SBA or come in the form of an SBA grant. Banks actually issue these loans, but the SBA guarantees to pay a certain portion of the money back to the bank if you default. This guarantee lowers the risk for banks and incentivizes them to provide these loans to qualified borrowers.

SBA loans are often borrower-friendly. Their low rates and long terms often make them an ideal choice for many small businesses. To learn more about SBA loans and which one makes the most sense for you, you can read our overview of the six most prevalent types of SBA loans.

If you’re considering an SBA Loan, you’ll want to ensure you’re prepared to qualify. You can learn more about the process in our step-by-step guide to getting an SBA Loan


Bank Term Loans

Bank term loans function similarly to standard loans. You receive a borrowed amount of money upfront from the bank and pay it back with interest on a fixed repayment schedule.

While the rates typically typically higher than  SBA loans, bank term loans are great for businesses that need relatively quick funding for a specific purpose — such as inventory or equipment purchases.

Check out this guide to small business term loans to learn more about bank terms, what the funds can be used for, the different options available, and if it’s a good fit for your business.

Alternative Loans and Financing Options

If you’re still working on building your credit score, or your business doesn’t have any revenue yet, you may want to consider some alternative loan and financing options.

These alternative options include:

  • Business lines of credit: A flexible option for business owners with good credit scores and looking to cover expenses from emergencies or seasonal shortages
  • Equipment financing: Easy-to-qualify-for loans that use the equipment you purchase as collateral
  • Merchant cash advances (MCAs): A convenient but costly funding option where the lender recoups the money by taking a portion out of credit card transactions to cover your repayment
  • Invoice factoring: Businesses with unpaid invoices can receive the money due upfront from a lender and then pay it back with a fee upon collection from their customers

While these alternative funding options are easier to qualify for and can seem more convenient than SBA or bank term loans, they are usually more expensive and should be pursued with caution.

Benefits of a small business loan

The main benefit of taking out a loan is getting access to cash at a favorable rate. 

You can use these funds to accomplish things for your business that you otherwise wouldn’t be able to. Some common examples include acquiring the resources (such as equipment or additional talent) you need to grow your business, stabilizing cash flow during slow times for seasonal businesses, or funding a business expansion opportunity.

Small business loans also help you build your business credit and establish a good relationship with a lender, potentially making the process of securing another loan down the road a little bit easier.

Generally, for many small businesses, loans are the most cost-effective way to get the funding you need while giving you the control and flexibility you want.


How to qualify for a small business loan

In general, getting a loan for your business will require a good credit score. 

Beyond that, qualification requirements will vary by loan type and by lender. For example, the same type of loan from two different lenders may have different qualification criteria. Taking the time to gather documentation, research lender expectations, build your credit report, develop a business plan, and put up collateral can help make the qualification process as smooth as possible. 

Qualifying for SBA loans is typically a lengthier process than a bank loan. And funding is usually slower to get to you. However, SBA loans generally have the lowest rates and longest terms, and they’re widely considered to be the gold standard in small business lending.

If you’re considering a loan for the first time, here are seven tips for getting a first-time business loan to help make the process a little bit easier for you.


Common reasons why lenders reject loan applications

Before getting a loan, you should know some of the most common reasons banks and lenders reject loan applications. Some common disqualifiers include excessive debt, a bad credit score, and unequal collateral. Knowing these before you apply will help you identify anything you may need to fix or improve to increase your likelihood of approval.

If you’ve already been rejected, it’s important to find out why so that you can take the appropriate next steps — whether that’s fixing the reason you were rejected and applying again or looking for alternative sources of funding.

Ten common reasons for business loan rejection

The process of getting a small business loan

The steps you’ll take to get a small business loan will vary depending on what type of loan you’re getting. But, in general, there are four steps to getting a loan.

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Identify why you
need a loan

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Gather the documents required by the lender

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Choose your lender and the type of loan you want


Submit your application according to the lender’s instructions

Some other best practices within this process include checking your eligibility, having a financial professional review your application, writing a business plan if required, and researching and comparing types of loans and lenders.

Choosing the right type of loan for your business

Choosing the right type of business loan is key to achieving the desired outcome for your business. Don’t make the mistake of believing that the fastest option is the best option. The fastest funding options are typically more expensive, and going down that path can sometimes leave you in a worse financial position.



So how do you choose the right small business loan? Should you apply for an SBA loan or a bank term loan? Is there an alternative option that’s best for your situation?

It can feel overwhelming, but following these eight simple steps will help you navigate the process and come to a decision in which you feel confident.

  1. Know why you need a loan

  2. Determine how much money you need

  3. Review qualification requirements to check your eligibility

  4. Consider how much you can pay per month

  5. Decide if you’ll put collateral

  6. Explore your different loan options

  7. Gather the necessary documentation

  8. Choose your loan and apply

Learn more about each of these eight steps to help you choose the right small business loan.

Getting a small business loan online

Getting a business loan used to mean driving to a bank and sitting down with a loan officer. They’d give you brochures and other materials that explained their different loan options. But if you wanted to compare them to another lender, you had to do the whole process again at another bank.

That’s now changed thanks to online lending.

Online lending enables you to apply for a loan on your own time and at your convenience. Thanks to online search engines like Google, you can easily do your own research to compare your options. There’s a wealth of information available to learn what options you have and what makes sense for your business.

Plus, applying online for a small business loan is typically simpler and faster than going to a traditional bank branch. And you often get your funds sooner, too.

Using an online lender takes the pressure off of you to quickly make a decision while sitting in a loan officer’s office and instead allows you to do your own thorough research to find the right loan.

How to choose an online lender

If you start researching how to get a loan online, you’ll quickly find several lenders and various options. While this can feel overwhelming, you don’t have to spend hours and hours researching every option.

You can follow this simple 5-step process that will narrow your options and help you choose an online lender that’s right for you.

  1. Decide how much money you need

  2. Check your business and personal credit scores

  3. Decide which type of loan is best for your needs

  4. Research and compare lenders

  5. Apply for a loan

When researching online lenders, you should remember to always read the terms and conditions. While one lender might be able to get your funds to you tomorrow, you might see that you’d be paying a much higher interest rate than another lender that can get you funds in 7-10 days.

Thorough research will help you choose an online lender that makes the most sense for you.


Make smarter financial decisions with SmartBiz

SmartBiz is transforming small business banking by leveraging technology, data, and excellent customer service to help business owners access the right capital at the right time.

With SmartBiz, you don’t have to spend hours researching and comparing all the different lending options and trying to make sense of it all. Based on your business needs, our technology and team of experts will find and recommend the best financing options for you and connect you directly with the lender you choose. SmartBiz’s fast, reliable, and secure process helps you find the right loan, from the right lender, at the right time.

How to get a small business loan with SmartBiz

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Todd Miller, founder of Doo Doo Squad, decided extra funding could help fuel the growth of his pet poop cleanup business. Learn why he chose SmartBiz to get the right loan to achieve his growth goals.

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Learn more about the small business financing options available through SmartBiz

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SBA Loans

Lower interest, lower monthly payments

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Term Loans

Shorter terms, faster delivery of funds

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Custom Financing Solutions

Flexible solutions for any situation

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1. We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan

2. Numbers based on internal reporting and metrics

3. Based on FY2020 SBA loans data released by the SBA for SBA 7(a) loans under $350,000

4. This calculator is a tool meant to help you estimate monthly payment amounts based on the information you enter. The monthly payment provided is an estimate meant for illustrative purposes only, loan sizes, interest rates, and loan terms vary and are determined by the applicant's credit profile.