Small Business Loan Guide: Types, Qualification and Best Options

Match the loan type to the need

• SBA 7(a): large amounts, long terms, the best rates — but the slowest and most paperwork-heavy.
• SBA microloans: small amounts for startups and newer businesses that banks decline.
• Term loan: fixed amount and schedule, best for a defined one-time purchase.
• Line of credit: draw and repay as needed, interest only on what you use — ideal for seasonal gaps.
• Equipment financing: the equipment is the collateral, so approval is easier.
• Invoice factoring and merchant cash advances: fast but expensive; treat as a last resort.

What lenders actually check

• Personal credit score — many bank programs want 680 or higher.
• Time in business — two years is the common threshold for conventional terms.
• Annual revenue and its consistency, not just the total.
• Debt service coverage: does cash flow comfortably cover the new payment?
• Collateral and a personal guarantee, which most small business lending requires.

Assemble the application package

1. 1

   Two years of business and personal tax returns.

2. 2

   Year-to-date profit and loss statement and balance sheet.

3. 3

   Recent business bank statements, usually three to six months.

4. 4

   A written use-of-funds statement tying the loan to specific revenue or savings.

5. 5

   Business formation documents, licenses, and any commercial leases.

6. 6

   Apply to multiple lenders within a short window to limit credit inquiry impact.

Before you borrow at all

• Model the payment against your worst month in the last two years, not your average.
• Keep business and personal finances fully separated — see budgeting with side income.
• Reserve for quarterly taxes separately; the loan payment does not reduce your tax bill, only the interest is deductible.
• Understand how business income flows onto your return via federal tax brackets.