Whether you plan to expand your business, acquire more inventory, or purchase new equipment, a small business loan can provide access to the funds you need to meet your goals.

From SBA loans to lines of credit, small businesses can choose from a wide range of loan types. In this article, we'll cover everything you need to know about how small business loans work in 2024, including loan types, eligibility requirements, and repayment terms.

What Is a Small Business Loan?

A small business loan is a kind of financing companies can get from traditional lenders like banks and credit unions, as well as alternative institutions like online lenders and peer-to-peer lenders.

Nearly half of small businesses take out loans, typically to obtain working capital or fund business growth. Unlike grants and crowdfunding, businesses must pay back loans based on the terms of the agreement.

Types of Small Business Loans Available in 2024

Qualified small businesses may be eligible for one or more loan options. The most common types of small business loans include the following.

Term Loans

One of the most common financing methods for small businesses, term loans are ideal for established businesses that need upfront financing for a specific expense. Borrowers pay back the loan amount plus interest over a set period.

SBA Loans

SBA loans are designed for businesses that need funding for working capital, real estate purchases, expansions, and more. Partially guaranteed by the Small Business Administration (SBA), these loans are known for their low interest rates.

In recent years, the SBA has significantly increased small-dollar lending and financing opportunities for underserved entrepreneurs.

“Over the past four years more entrepreneurs than ever before have pursued the American dream of business ownership, and the SBA has been committed to matching this incredible wave of enthusiasm with the capital, market access, and resources small businesses need to start, grow, and thrive,” SBA Administrator Isabel Casillas Guzman states.

Business Lines of Credit

Lines of credit provide ongoing funding for businesses that have consistent expenses. Borrowers can draw on the line of credit multiple times as long as they continue to repay the amount.

Invoice Financing

Invoice financing uses unpaid invoices as collateral for cash advances. Also known as accounts receivable financing, it works best for businesses that need to address short-term cash flow issues.

Eligibility Requirements for Small Business Loans

When reviewing small business loans, lenders typically consider a few standard factors. Before applying, make sure your business meets the following eligibility requirements.

• Credit Score: When you apply for a small business loan, you can expect the lender to check both your business credit score and the personal credit scores of the business owner or officers. Traditional lenders generally require a good credit score of 650+. However, alternative lenders may approve borrowers with lower credit scores.

• Time in Business: As a general rule, the longer a borrower has been in business, the more likely they are to be approved for financing. At minimum, lenders generally require borrowers to be in business for at least six months. With some types of business loans, lenders require borrowers to be operational for at least two years.

• Revenue: Lenders often want confirmation that borrowers bring in sufficient revenue consistently. This way, lenders know that the business can afford the loan repayment. Some lenders and loan types require a minimum annual revenue amount.

• Collateral: Borrowers who take out secured loans need to offer collateral in exchange. Collateral refers to real estate, equipment, accounts receivable, or something else of value that the lender can seize if the borrower doesn't repay the loan. It gives lenders a way to limit the risk they take on.

• Debt-to-Income Ratio: This ratio compares the business's monthly debt obligations to its gross monthly income. By calculating this ratio, lenders can better understand if the business can afford to take on new debt or if its existing liabilities are already too large.

Interest Rates and Repayment Terms

Interest rates and repayment terms can vary significantly between loan types and lenders. Here's what you should know about both.

Interest Rates

The loan type and the lender are just two factors that affect the interest rate borrowers have to pay. Market conditions and the borrower's credit score also impact the interest rate.

Here are average interest rates for small business loans in 2024:

• SBA loans: 13.5% to 16.5% APR for fixed rate loans and 11.5% to 15% for variable rate loans

• Term loans: 7.85% to 8.79% APR

• Online loans: 9.0% to 75.0% APR

Loans with a fixed interest rate keep the same rate throughout the term of the loan. However, the rate on variable interest rate loans change depending on market conditions.

Repayment Terms

Small business term loans typically have repayment terms between three and 10 years. SBA loans can have repayment terms up to 25 years.

Out of all small business loans, lines of credit usually have the shortest repayment terms. Borrowers generally have to repay lines of credit within six months to five years.

How to Apply for a Small Business Loan in 2024

To apply for a small business loan, use the steps below as a guide.

1. Determine Your Financing Needs

First, confirm the purpose of the business loan you want. For example, do you plan to use the funds for equipment, inventory, real estate, or another purpose?

Then, assess how much financing you need, how frequently you need funds, and when you need them. If you need a one-time lump sum in the next six months, an SBA loan could be a good choice. But if you need financing every month, a line of credit could be a better choice.

2. Research Lenders

Next, research different types of lenders. Each lender offers a different set of loan options, interest rates, and repayment schedules.

If you've been in business for several years, a traditional lender like a bank or a credit union could be a good choice. If your business is newer or if your credit score is lower than 650, consider an alternative lender instead. Online lenders and peer-to-peer lenders may be better partners for your business.

3. Gather Required Documentation

Before you begin filling out the application materials, gather all the information and documentation you'll need. Most small business loan applications require the following items:

• Business plan that details how your business runs, including your products and services, management team, and marketing and sales strategy

• Financial statements including your business's balance sheet, cash flow statement, and income statement

• Tax returns that show your revenue for the most recent tax year

In some cases, you'll also need to provide collateral, such as accounts receivable, equipment, or real estate.

4. Submit an Application

Now you're ready to submit your small business loan application. While traditional lenders generally require an in-person application, alternative lenders typically require online applications. Check with your preferred lender to confirm their requirements.

5. Await Approval and Funding

The type of loan you apply for determines how long you'll have to wait for approval. Some take just a few days. However, SBA loans can take up to 90 days before approval.

Once your loan is approved, you can expect to receive the funds relatively quickly. Most lenders disburse loan funds within seven to 14 days.

Alternatives to Traditional Small Business Loans

If your business doesn't qualify for a traditional small business loan, consider an alternative financing option. Some of the most common alternatives include:

• Crowdfunding: Platforms like Kickstarter and GoFundMe allow businesses and entrepreneurs to raise capital from the public. Instead of getting a lump sum from one lender, businesses receive numerous smaller amounts from several people.

• Peer-to-Peer Lending: Peer-to-peer lending platforms connect small businesses and entrepreneurs with individual people who provide loans. This way, SMBs can avoid going through traditional lenders.

• Merchant Cash Advances: Borrowers get a lump sum based on projected credit or debit card sales. Instead of an interest rate, merchant cash advances have a factor rate, which means borrowers repay a factor of the original amount.

• Grants: Small business grants can come from government agencies, non-profit organizations, or individuals. Unlike loans, grants don't require repayment. As a result, they can be more competitive.

Conclusion: Finding the Best Small Business Loan in 2024

Small business owners have many options to get financing for working capital, expansion, and other purposes. By considering lenders, financing options, and your financial situation carefully, you can find the right small business loan for your purposes.

No matter which financing option you choose, set your business up for success. Create a repayment strategy that aligns with your long-term business goals.