At some point in your business journey, you will likely find yourself needing more capital. Whether it’s to accelerate growth or to cover a seasonal cash flow shortage, adequate funding can be make-or-break for small business owners.
Luckily, there are plenty of small business lending solutions available to you. Banks, online lenders, and even family and friends can all help you secure the money you need to grow your business.
To help you navigate small business lending, we outline the various types of loans and share statistics on approval rates and average loan amounts to help you choose the right option for your business.
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Types of small business loans
There's no shortage of small business lending options available to you—but they each come with their own advantages and disadvantages, and varying repayment terms. Repayment terms are extremely important to pay attention to. For example, if your business has a long cash flow cycle, short-term business loans with frequent payments could leave you in a cycle of debt payments.
Below is a quick overview of each type of small business loan and their pros and cons.
Business term loan
A business term loan is a lump sum of cash that small business owners can get from banks, online lenders, or other financial institutions. Companies have a fixed term to repay the lender. (95% of business term loans have fixed interest rates.)
These can be short-, medium-, or long-term loans and depending on the lender, the time to receive funding can vary greatly. For example, medium-term business loans take longer to approve through a bank versus an online lender.
Short-term business loans have a short repayment period (usually between 18 months and 3 years) whereas medium- and long-term business loans have longer repayment periods (up to 10 years).
- Fixed interest rates.
- You can build business credit.
- Small businesses can borrow large amounts of money.
- Long term payback period available for long-term loans (up to ten years, depending on the lender).
- Low eligibility requirements for short-term loans.
- It can take a while to be approved.
- The shorter the term, the higher the interest rate.
- The shorter the term, the more frequent the payments.
- There may be early repayment fees if you pay off the loan earlier than agreed.
The US Small Business Administration (SBA) is a government-backed loan available through various lenders including banks and credit unions. SBA loans are beloved for their enviable rates and loan terms.
There’s a lot of variation and options when it comes to SBA loans, and amounts can vary from $75,000 to $5 million, so be sure to check the SBA’s website for the right type of loan for your business.
- Low interest rates.
- Small and large sums of money available to borrow.
- Broad eligibility requirements: you must be a registered business, operate in the US, have invested your own time/money into the business, and have been unsuccessful at applying for funding elsewhere.
- Long approval process (around 60 to 90 days).
- Good credit scores required.
- Down payment needed.
- Personal guarantee required for SBA lending; you’re liable for the loan if the company is unable to pay.
There are lots of avenues to investigate if you’re looking for money to start a business. One popular route is a small business loan, such as an SBA microloan, which is a loan of up to $50,000; it's administered by nonprofit community lenders and can come with favorable interest rates and terms.
Business line of credit
Line of credit is a lump sum payment that small business owners can use for expenses—such as inventory, rent, or new machinery. Unlike business term loans, large banks give companies a line of credit without fixed repayment terms. It’s a short-term loan that can range anywhere from $1,000 to $250,000.
According to the Small Business Credit Survey from the Federal Reserve Bank, 54% of US small businesses applied for a business loan or line of credit in 2018.
- No early repayment fees.
- It’s flexible; access money as and when you need it.
- Only pay interest on the amount you use.
- Build business credit.
- Strict eligibility requirements.
- Fees can be high if you borrow more than the agreed amount.
- Failing to make repayments can impact your business credit score.
Specifically designed to finance equipment, this type of business loan can help you purchase the commercial fridge, tractor, or computer equipment you need. Lenders will rent equipment to you while you pay for it in monthly instalments. Once the amount is paid, your business will own the equipment.
According to the Equipment Leasing and Finance Association, almost 8 in 10 US companies use some form of financing when acquiring new equipment. Banks were the primary lender for 43% of equipment financing deals.
- Spread the cost of expensive equipment.
- Flexible terms are available from the majority of lenders.
- Build business credit.
- Money can only be spent on equipment the lender agrees to.
- Lenders may require a down payment or minimum credit score to be approved.
- You may still be paying monthly repayments on equipment that is no longer used.
A personal loan is a type of financing based on personal credit to help accelerate business growth in a pinch. It’s available from credit unions and banks and typically ranges from $1,000 to $50,000.
- They’re easy to apply for online.
- Most lenders offer lower interest rates for personal loans.
- You don’t always need large down payments for a personal loan.
- You can be approved for most personal loans within two weeks.
- You, personally, need a good credit score to qualify.
- It’s tough to secure large amounts of money.
- You can’t build your business’ credit score.
- Might not be eligible for tax benefits.
- Personal assets—such as your home and car—could be at risk if monthly repayments can’t be made.
Merchant cash advance
A merchant cash advance (MCA) is a type of funding that allows small businesses to borrow against future earnings. Lenders give companies rapid access to capital. The money is repaid based on a percentage of future daily sales.
- Extremely fast access to capital (less than 48 hours).
- No fixed weekly or monthly installments for repaying the loan.
- Most lenders don’t need collateral to secure the funding.
- It doesn’t build business credit.
- Most lenders have short repayment terms.
- An MCA can impact cash flow because lenders take money from revenue.
- Interest rates for an MCA are higher than other types of small business loans.
Business credit card
A business credit card is a simple way to make your everyday expenditures work for you. Once approved by a bank, you’ll have a revolving credit limit to use for business purchases. Small businesses can use credit cards for short-term cash flow fluctuations.
- Quick upfront approval process.
- Get rewards (cash back, travel points, etc) for your business purchases.
- Create individual credit cards for your senior leadership teams to use.
- They’re flexible—once approved, you can choose to take the funding when you need it, and leave it when you don’t.
- Interest rates can fluctuate.
- Most lenders have annual fees.
- Smaller credit limit than other types of funding.
- There are security issues if your credit card is skimmed or stolen.
- Many lenders require a personal liability agreement; any late repayments could impact your personal credit score.
Accounts receivable financing
Accounts receivable financing allows small businesses to borrow against unpaid invoices for working capital. You repay the initial amount to a lender when the invoices are paid, alongside weekly fees that act as interest.
- Get quick cash for the work you’ve done.
- Retain control over the business.
- No collateral needed.
- Not available on older invoices.
- Most lenders only give a percentage of the total unpaid invoice sum (approximately 75-80%).
- You can end up paying much more than the invoice amount if the invoices are unpaid or overdue.
For Shopify store owners, Shopify Capital is a funding option that has no application process. It’s used primarily for growth funding and has a fixed 12-month term. Small businesses can loan between $200 and $2 million. The loan is repaid automatically as a percentage of your sales.
- No credit checks required.
- Repay funding as a percentage of sales.
- You don’t need to give up equity in your business.
- Can be used to fund any business expense, including payroll, inventory, and advertising.
- No application process—eligible businesses are pre-approved based on their store sales.
- Only available for Shopify merchants.
- Not available for those just starting out as it requires a history of store sales.
We weren’t old enough as a business to be approved for a bank loan…that’s when we found out about Shopify Capital. They already had access to all of our business data and they made an educated decision quickly about how much money we qualified for. We received the funds in our bank account a few days later.
The average small business loan amount is $663,000. That’s for all business loans regardless of loan type. Don’t be alarmed if that number sounds big. In the U.S. and Canada, a small business is defined as a company with fewer than 100 employees, so the size of loans can vary significantly by company size—from a few thousand dollars to over 5 million dollars.
Here’s a breakdown of the different types of business loans available to small businesses and their average lending amounts.
- The average short-term business loan amount is around $20,000.
- The average medium-term business loan amount is $110,000.
- The average SBA loan amount is $107,000.
- The average business line of credit loan amount is $22,000.
Loan sizes also depend on the lender. Here’s a breakdown of the average size loans by lender type.
- The average large bank loan size is $564,000.
- The average small bank loan size is $185,000.
- The average alternative lending loan size is $80,000.
Approval rates by loan type and lender
Before putting in your business loan application, it’s worth understanding which types of small business funding have the highest approval rates. Getting approved for a loan can be tough: 48% of small businesses said their small business lending needs were met. And only 20% of small businesses qualified for the full financing they requested.
Research shows that merchant cash advances have the highest approval rate of 87%. That’s shortly followed by equipment loans (86%), business lines of credit (79%), and business loans (70%).
Approval rates can also vary depending on the lender they’re coming from. Biz2Credit’s Small Business Lending Index lists the loan approval rates for each type of lender as of May 2021:
- Alternative lenders: 24.3% (up from 20.5% in 2020)
- Institutional lenders: 23.6% (up from 21.4% in 2020)
- Credit unions: 20.4% (up from 20.3% in 2020)
- Small banks: 18.7% (up from 16.9% in 2020)
- Big banks: 13.5% (up from 11.5% in 2020)
Reasons why business loans are declined
Securing small business funding isn't always easy, especially from traditional sources like big banks. Lenders can choose to turn down applications for many reasons, but the most common reasons are as follows:
- 44% of loan applications are declined because the business already has too much debt.
- 26% of loan applications are declined because of low credit scores.
- 33% of loan applications are declined because of insufficient collateral to secure the debt.
- 30% of loan applications are declined because the business is too new/insufficient credit history.
- 18% of loan applications are declined because of weak business performance.
When to think about small business lending
Unsure whether you need to finance your small business? Below are some key moments that may require additional financing.
Although there are many small business ideas, getting a business off the ground can be expensive depending on the industry you’re in and the size of your team. According to Shopify research, the average small business (defined as 4 or less employees) spends $40,000 in their first year.
If you're not making enough revenue to sustain the first year of your business, you should think about lending options. You could also apply for a personal loan if other applications are denied due to a lack of established business credit—a common issue for early-stage startups.
To increase your chances of being approved by a traditional lender, write a business plan, including how much money you will need at various stages and how you plan on allocating any funding you'd receive. Having a good handle on your small business finances and the exact funding you might need before you get started can save you lots of headaches (and rejections) down the road.
Working capital is the cash your small business is able to spend. It’s the difference between your assets/income and your total expenses—including accounts payable, inventory, and payroll costs.
Securing a small business loan helps to increase your working capital. The more you have in the bank to spare, the better your cash flow. This helps reduce the risk of not being able to pay for expenses (like stock) because you don’t have enough money coming in.
Seasonal gaps also cause short-term problems with cash flow. If you’re ramping up advertising spend prior to the holiday season, for example, you may not make any revenue until months later.
Funding options like accounts receivable financing and merchant cash advances are good options here. Applications are processed quickly with these types of loans and approval rates are higher, so you can cover unexpected bills on short notice. (But keep in mind: the faster the loan, the higher the interest rate in most cases.)
Managing inventory is one of the most important things about running a small business. You can’t make revenue if you don’t have stock to sell. Financing your small business can help you purchase larger volumes of stock.
With Shopify Capital, for example, you can borrow anywhere from $200 to $2 million. Merchants like Quartz & Rainbows use that funding to purchase inventory, stock up for peak seasons, or explore new products. They repay the loan as a percentage of sales—meaning repayments are flexible to suit your small business.
Because of Shopify Capital, I’ve been able to grow during the pandemic, I've been able to add new products, and I've been able to get orders shipped out as quickly as possible. Now I can have bigger goals to work towards.
Check if you’re eligible for Shopify Capital
With no lengthy application process or credit checks, Shopify Capital is a fast funding option to grow your business your way. Repayment terms flex to fit your business.Learn more about Shopify Capital
Purchasing equipment and machinery
Extra cash gives your small business the opportunity to purchase equipment and machinery that’ll help you work faster and more efficiently. Lending options like equipment financing gives you money to spend on tools. As a result, you get time to spend on other areas of the business.
When you’re growing a business, there comes a time when you need an extra pair of hands. Whether you’re hiring customer service associates, marketing staff, or someone to fulfil orders, you need cash to pay their salary.
If you reach that point before you have enough working capital to hire, consider more traditional small business lending options. An SBA loan has broad eligibility requirements and large sums of money available to borrow over longer terms. Despite its longer application process, it’s a good option to consider if you’re thinking about hiring staff. And if you're a Shopify merchant, Shopify Capital is also an excellent option for payroll funding.
Find out how much a loan will cost you
Shopify's small business loan calculator will give you an idea of how much it will cost to take out a loan. Adjust the term and add extra monthly payments to see how much of an impact you can have on repayment.Try our Small Business Loan Calculator now
Is small business lending right for you?
While there are many small business lending options to choose from, that doesn’t mean they’re all available to you. Or right for your business. So, before you apply for a loan, ask yourself the following:
- What would I do with the cash infusion?
- Can I afford to make the payments every month?
- How quickly can I pay the loan off?
- What happens if I can't pay it off?
- Which lender will best understand my business needs?
Once you've assessed each financing option and determined what's right for you, get your bookkeeping in order and apply with enough time for your application to be approved. You don't want to be left in a sudden cash flow crisis.
Finally, remember to savor these exciting moments in your journey. Even though preparing to expand and grow can come with some anxiety, it's also an exciting opportunity to take your business to the next level. With some research and financial planning, small business lending could be exactly what you need to pursue your goals.