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A great small business loan can help you start strong and grow with confidence, but finding the right one can take time, which is in short supply for many business owners. 

Start with this overview: A few minutes now means you’ll be better positioned to do informed research, avoid the stress that comes with last-minute financing, and make the best decisions for your business. 

Common loan options

Here are common loan options, along with pros-and-cons. As you review them, keep in mind that small business loans are like steps on a ladder: It’s easier to qualify for loans with more favorable rates and terms as your business matures and your financial history gets stronger.

Loans from friends and family: For many small business owners, borrowing from friends and family is the first step on the financing ladder.

  • Pros: Thanks to personal relationships, these loans are relatively easy to get – often, the only requirement is to pay the money back, although the terms are often flexible.
  • Cons: The amount of financing may be limited and if you can’t repay the loans, you risk putting personal relationships in jeopardy.

Loans from CDFIs: Although you may not be familiar with CDFIs – Community Development Financial Institutions, like Grow America – we’re one of the best financing options for small businesses.

CDFIs are lenders with a mission of providing loans to businesses that don’t meet all the criteria for conventional lenders (such as banks). CDFIs also increase access to financing for women, people of color, and businesses in geographic areas that may be underserved by traditional lending–although you don’t need to be a member of one of these communities to borrow from a CDFI.

  • Pros: CDFIs have flexible eligibility and lending criteria, making it easier to approve loans for a range of businesses. Repaying a loan through a CDFI also helps borrowers build strong credit histories that can lead to future approval for bank loans.
  • Cons: Many small business owners don’t know about CDFIs, which means that you may miss an excellent financing option. An online search that includes your city or state can help you find CDFIs, like Grow America, that lend to small businesses in your area.

Online loans: An online loan is applied for and processed entirely online–you won’t visit a bank branch and, often, you won’t even have to speak with anyone by phone. While this is appealing, there can be significant drawbacks.

  • Pros: Online lenders often offer fast applications with little-to-no supporting documents and quick money in the bank for approved loans.
  • Cons: If a lender offers you a loan with no documentation required, this is a red flag. You also need to review the repayment terms – high interest rates and short repayment terms make it difficult to repay the loan and can leave your business at financial risk.

SBA loans: These are offered by CDFIs, like Grow America, as well as some banks and credit unions, and are guaranteed by the U.S. Small Business Administration (SBA). Since the SBA guarantees the loan, lenders can take more risk, which means your chances of qualifying are improved. 

SBA loans can be tailored to each individual business to meet their needs. Think of it this way: applying for a business loan from a bank can be like buying clothes off-the-rack, with standard criteria that isn’t flexible. Financing with an SBA loan is like getting custom-made clothing, as your loan will have a custom rate, term, and monthly payment that will work for you.

  • Pros: SBA loans have flexible eligibility and approval criteria and a range of approved uses. They can also finance many kinds of businesses that are hard for conventional lenders to finance including restaurants, retail, and childcare. And SBA loans offer lower interest rates and longer repayment terms, so that your monthly payment is easier.
  • Cons: The steps and paperwork are more intensive than with other options and the timeline can be longer, so it’s important to work with an experienced SBA lender, like Grow America. Our team will walk you through every step and design a loan that will benefit your business and support success. And, keep in mind that good things take time—since you’ll be repaying any business loan for at least a few years, investing the time in obtaining a well-structured loan will pay off in the long run!

Bank loans: It’s common to apply for commercial loans at a bank, although strict lending criteria can make it hard for small businesses to get approved (remember the off-the-rack clothing analogy!)

  • Pros: Banks typically offer lower interest rates and longer terms for commercial loans than some other small business loan options.
  • Cons: They have strict eligibility and lending criteria, so loans through banks are typically reserved for well-established businesses.

Evaluate your options and contact Grow America today

When researching loans, it’s important to know the types of financing available for your business and to review your options with your accountant or financial advisor before moving forward.

Then, when you’re ready, contact Grow America. As a certified CDFI lender, you can be confident that you’ll get a loan that’s tailor-made for your business.