How to choose the best small business lender

10’000 Hours/GettyImages; Illustration by Hunter Newton/Bankrate

Small business loans are accessible through banks, credit unions and online lenders. But with so many options, choosing a lender for your small business can take time.

To narrow down your list of options and find the right fit for your business, consider each lender’s eligibility criteria and reputation. Also, if it’s an option, get prequalified with the best small business lenders you’re considering and compare loan quotes to make a wise financial decision and find the best small business loan for your business.

Factors to consider when choosing a small business lender

It’s always responsible to compare lenders and terms before you sign on the dotted line for financing. You’ll want to educate yourself on what you qualify for and how quickly you need the money, among other factors.

1. Consider your needs

How much are you looking to borrow? If you haven’t yet decided on a loan amount, you’ll need to assess your cash flow and unmet needs to determine a figure. Once you have a number in mind, use a business loan calculator to determine how much you can actually afford to borrow.

It’s equally important to choose from the types of small business loans available to you. Depending on your revenue and desired loan amount, you’ll find that some loan options are more ideal than others.

2. Consider your qualifications

Each lender has its own eligibility criteria that vary by loan product. That said, you should keep these general guidelines in mind:

• Credit score. Most lenders have a minimum credit score requirement for small business loans, often considering a FICO score of 670 or higher a good score. Some will also check your business credit score, particularly if you’re pursuing a large amount.
• Debt-to-income ratio. Lenders also assess your debt-to-income ratio to determine if your company is in a financial position to handle more debt or if it’s overextended. A good rule of thumb is to keep your DTI to around 36 percent, though lenders may accept higher.
• Time in business. You’ll generally need two or more years in business to qualify for a business loan from a bank. However, some lenders will consider you for funding if you’ve been established for at least six months.
• Annual revenue. Lenders also typically have yearly minimum revenue requirements you must meet to be considered for a small business loan. These typically fall between $100,000 and $250,000.

When evaluating lenders, ask about their specific requirements for the loan products you’re considering. You may find that some are more stringent than others and may or may not be a good fit for your company.

3. Consider lender type

Now that you’ve calculated how much funding you need and understand eligibility guidelines, it’s time to learn where to get small business loans. You can choose from several different types of small business lenders. You can secure financing from a traditional bank, credit union, nonprofit or online lender.

Here’s a rundown of the different lenders and the features and loans to expect from each:

4. Consider lender reputation and customer service

You can learn a lot about a lender based on the experiences of past and current customers.

Check online reviews from Trustpilot and complaints on the Better Business Bureau (BBB) platform to determine if most of the feedback is positive or if there is cause for concern. For example, a government action against a company listed on the BBB profile may be a red flag.

Consider positive and negative reviews that provide specific feedback. Some lenders promote their online profiles to encourage customers to leave a review, which can lead to generic statements about their experience.

You can also ask other small business owners which lender they used and what their experience has been.

5. Consider the application process

Many lenders offer online preapproval or prequalification that only requires a soft credit check and won’t hurt your credit score. If there’s a match, you can view potential loan offers, including terms, interest rates and monthly payments.

A hard credit inquiry will be generated if you decide to move forward or if getting prequalified isn’t an option and you apply to view loan offers. It can dip your score by a few points, but your credit score should rebound relatively quickly.

Questions to ask when choosing a small business lender

Review the loan quotes you receive and compare them to choose the best small business loan for you. When evaluating each option, consider the following:

• Which lender offers the lowest interest rate?
• Is the interest rate fixed or variable?
• Does the lender charge an origination fee?
• Is there a prepayment penalty if you decide to repay the loan early?
• Are interest rate discounts available if you enroll in automatic payments?
• Can you apply online, or do you have to visit a physical branch?
• How fast can you receive funding?
• Can you manage the loan online?
• Is collateral required?
• Does the loan term and monthly payment work for your company’s budget?
• Is in-person support available, or are you limited to online or phone support?

Ultimately, the lender you select should be reputable and offer the lowest borrowing costs available to you. Their application process and funding timelines should also meet your needs.

Applying for a small business loan

The final step is to formally apply for a loan. Be sure to gather any documents they’ll need before applying to expedite the processing of your application.

You can apply online with many lenders, but some — particularly banks — require you to visit a branch or schedule a phone call to move forward. Either way, after submitting your application, you’ll hear back from the lender with a decision or request for additional information or documentation needed to process your application.

Online lenders generally provide a decision in minutes or within the same business day. Expect to wait a few days with most traditional lenders.

Once the lender issues the final approval, you’ll review and sign the loan documents. The lender will then close the loan and disburse the loan proceeds to you.

Bottom line

Not all business lenders are the same. So, before applying, it’s worth exploring your options. Start by understanding your unique needs and general funding guidelines.

Also, familiarize yourself with what to expect from each lender and get prequalified with at least three lenders that meet your needs to ensure you get the best deal on financing.

Frequently asked questions about choosing a small business lender

• What lenders offer the best small business loans?

  When evaluating small business lenders, consider their offerings, eligibility guidelines and funding times. Large banks tend to offer the best interest rates on loans, but they may have strict eligibility for small business lending. Online lenders can be more lenient with approval requirements and fund quickly but watch out for fees and high interest rates.

• How do I know which business loan is right for me?

  Identify your unique funding needs to decide which business loan is best for your company. You should be clear on how much you need to borrow, how you’ll use the funds and how much time you’ll need to repay the loan.

• What is a good APR for a business loan?

  It depends on the type of business loan you select. However, the best rates are generally reserved for borrowers with good or excellent credit. So, it’s worth improving your credit score if it’s on the lower end to qualify for attractive loan offers.

• How do I choose an SBA lender?

  Use the SBA’s Lender Match tool to find SBA-approved lenders in your area. The lenders you’re matched with will depend on your industry, the age of your business and the amount of funding you need. Interested lenders will reach out within two days to discuss your funding needs, and you can compare your options based on what each offers.