With so many options on the market for small business lenders, it can be hard to decide which lender is the right option for your business. You’ll want to do your research and compare lenders to make sure you’re making the best decision. Consider the lender’s eligibility criteria and reputation to narrow down your list of lenders to choose from. 

Then, consider the loan terms, interest rate and fees the lender will offer to you, and compare those features with other business lenders. You can also prequalify if it’s available to help you see what loan terms you’re offered without a hard credit check. Learn more about what to look for when choosing the best small business loan for your business.

Factors to consider when choosing a small business lender

To choose the right small business lender, keep in mind what type of funding and loan amount you need, while researching features about each lender. Factors to look for include:

1. Consider your funding needs

The first step to choosing a small business loan and lender is to determine your funding needs. First, decide how much you need to borrow by assessing the cost of the purchases you need to make. Once you have a number in mind, use a business loan calculator to determine how much you can actually afford to borrow. You can add the estimated repayment to your budget to see if you can comfortably cover the repayment amount.

Then, you need to decide on a type of small business loan. Knowing the type of business loan you need will help you look for lenders that offer that loan. Common types of business loans to consider:

Bankrate insight

Small loan amounts might be more attainable for startups or business owners with bad credit. If you need a small loan, consider these:

2. Consider the type of lender

Now that you know the type of funding and how much you need, it’s time to explore your options. You can choose from several different types of small business lenders: traditional banks, credit unions, nonprofits or online lenders. Consider what each type of lender offers and the advantages and disadvantages of working with them.

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• 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. A higher credit score can lead to a lower interest rate.
• 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. You can reduce your DTI ratio by paying off debt or boosting revenue.
• 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.

Consider the lender’s eligibility requirements

Next, you will want to research lenders that accept your business’s credentials so that you have a higher chance of approval. Many lenders post their criteria online for minimum credit score, time in business and annual revenue required to be eligible for their loans. To get an idea of what lenders require, 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. A higher credit score can lead to a lower interest rate. However, you can find online lenders with credit requirements as low as 600.
• 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. You can reduce your DTI ratio by paying off debt or boosting revenue.
• 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.

Bankrate insight

Some lenders offer small business loans to startups, though many require six months in business to get approved. It’s also possible to get a business loan with bad credit, but the lower your credit score, the fewer lender options are available. Online lenders may accept a FICO score as low as 500, but minimum credit guidelines vary from lender to lender.

4. Consider lender reputation and customer service

Next, you want to ensure that customers have a mostly positive experience when working with the lender. 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. While some negative feedback is normal, consider moving on if you find a lender that has many negative comments, especially if they mention problems with receiving funding or trouble working with the lender if you run into financial hardship.

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

5. Consider the application process

Finally, you’ll want to compare multiple lenders and their loan offerings before making the final decision on which small business loan to choose. 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 decrease 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? Is the interest rate fixed or variable? Fixed rates provide predictable repayments, while variable rates can go up at any time.
• Does the lender charge an origination fee? Does the lender charge an origination fee? If so, compare this fee with how much other lenders charge, usually between 2 percent and 5 percent of the loan amount.
• Is there a prepayment penalty if you decide to repay the loan early?
• Can you apply online, or do you have to visit a physical branch?
• How fast can you receive funding? Consider how quickly you need funding to cover your purchase.
• Can you manage the loan online?
• Is collateral required? You may need to consider if you have enough assets to back the loan.
• 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? Consider if you’re comfortable with just phone support and if the company is easily reached.

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 small business 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. After submitting your application, you’ll hear back from the lender with a decision or request for additional information 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

Business lenders vary widely in the types of business loans, terms, interest rates and features they offer. To determine which lender is right for your business, you’ll start by understanding your unique needs and the type of business loan you’re looking for so that you can choose the right lender.

Also, familiarize yourself with what requirements to expect from each lender. Then, get prequalified if possible with multiple lenders to choose the offer with the lowest rates and most favorable terms offered to your business.

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, the type of loan you’re looking for and how much time you’ll need to repay the loan. Then, narrow down your options with these criteria to find the right business loan for your business.

   

• What is a good APR for a business loan?
  

  The lowest APRs for a business loan often start at 7 percent to 8 percent interest, but these rates are reserved for strong credit borrowers. Borrowers with fair or poor credit may see rates of 30 percent or higher, depending on your business’s finances and exact credit score. Ultimately, the best APR is the lowest interest rate you can find for your credit level.

   

• 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.