Running a small business takes more than hustle and good ideas — it often takes capital. Whether you’re launching a new venture, buying equipment, or covering a seasonal cash crunch, small business loans can provide the funding to keep things moving.
But loans are not free money. The terms, interest rates, and requirements can vary widely depending on the lender, your business history, and even broader economic conditions. In 2025, with interest rates still elevated but starting to cool after the Fed’s September rate cut, small business borrowing remains a balancing act between opportunity and cost.
This guide explains how small business loans work, the types available, what lenders look for, and how to improve your chances of qualifying.
What Is a Small Business Loan?
A small business loan is financing provided to help business owners cover expenses, invest in growth, or manage cash flow. You borrow a lump sum or gain access to a line of credit, then repay it over time with interest.
Lenders include:
- Traditional banks
- Credit unions
- Online lenders/fintechs
- The U.S. Small Business Administration (SBA)
Loan amounts range from a few thousand dollars to several million, depending on the business and purpose.
Types of Small Business Loans
1. Term Loans
- Lump sum paid back over a set period.
- Fixed or variable interest rates.
- Best for equipment, expansion, or large purchases.
2. SBA Loans
- Backed by the U.S. Small Business Administration.
- Lower rates and longer terms than many private loans.
- Popular programs: 7(a) loans, CDC/504 loans, microloans.
3. Business Lines of Credit
- Access funds up to a set limit.
- Pay interest only on what you use.
- Good for managing cash flow and seasonal needs.
4. Equipment Financing
- Loan secured by the equipment being purchased.
- Lower risk for lenders, often easier to qualify.
5. Merchant Cash Advances
- Advance based on future sales.
- High cost, should be last resort.
6. Invoice Financing
- Advance against unpaid invoices.
- Helps businesses with long payment cycles.
What Lenders Look For
When evaluating your loan application, lenders assess risk. Key factors include:
- Credit Score
- Personal credit often matters, especially for new businesses.
- Scores above 680 generally qualify for better terms.
- Business History
- Established businesses (2+ years) have more options.
- Startups may need personal guarantees or collateral.
- Revenue and Cash Flow
- Lenders want to see consistent income and ability to repay.
- Debt-to-Income (DTI) Ratio
- High existing debt reduces your chances of approval.
- Collateral
- Assets (property, equipment) can back the loan and reduce lender risk.
- Business Plan
- Startups may need a solid business plan to demonstrate viability.
How Interest Rates Work
Business loan rates vary widely:
- SBA loans: ~6–9% APR
- Bank loans: ~7–12% APR
- Online lenders: ~10–40% APR
Rates depend on creditworthiness, loan type, and economic conditions. The Fed’s September 2025 cut may ease some rates, but small businesses remain sensitive to credit market shifts.
Pros and Cons of Small Business Loans
Pros
- Access to capital for growth or emergencies.
- Builds business credit.
- SBA loans offer long repayment terms and favorable rates.
Cons
- Debt adds risk if the business struggles.
- Approval can be difficult for new or low-revenue businesses.
- High-cost options (merchant cash advances, some online loans) can trap owners in debt cycles.
How to Improve Your Chances of Qualifying
- Build Personal and Business Credit
Pay bills on time, reduce debt, and establish trade lines. - Keep Clean Financial Records
Accurate bookkeeping and tax returns show lenders you’re credible. - Demonstrate Revenue Stability
Show consistent sales or contracts to prove repayment ability. - Offer Collateral
Pledging assets reduces lender risk. - Start with Smaller Loans
Successfully repaying small loans builds a track record for bigger ones later. - Explore SBA Options
These can be easier to qualify for than private loans if you meet requirements.
Real-World Example
Marcus runs a landscaping business with $150,000 in annual revenue. He needs $25,000 for new equipment.
- Bank loan: 5-year term at 8% APR → ~$507/month.
- SBA microloan: 7-year term at 7% APR → ~$377/month.
- Online loan: 3-year term at 18% APR → ~$904/month.
Choosing the SBA loan saves Marcus over $18,000 compared to the online option, though approval takes longer.
Alternatives to Traditional Loans
- Grants: Non-repayable, though highly competitive.
- Crowdfunding: Raise funds from supporters, often in exchange for products or perks.
- Angel Investors/Venture Capital: Equity funding for high-growth startups.
- Personal Loans or Credit Cards: Riskier and often more expensive.
FAQs
Can I get a small business loan with bad credit?
Yes, but expect higher rates. Consider building credit or exploring SBA options.
How long does it take to get approved?
Traditional banks: weeks to months. Online lenders: a few days.
Do SBA loans require collateral?
Often yes, but requirements vary by program.
Can startups get loans?
Yes, but it’s harder. A strong business plan, collateral, or cosigner helps.
Are online lenders trustworthy?
Many are, but terms vary. Always compare APR, fees, and reviews.
Conclusion
Small business loans can be a lifeline or a liability depending on how they’re used. The key is understanding your options, preparing your financials, and borrowing only what you can realistically repay.
In 2025, with rates still relatively high, smart borrowers shop around — comparing banks, credit unions, SBA programs, and online lenders. For entrepreneurs, access to capital can unlock growth, but the terms you accept will determine whether that growth is sustainable.
