Small business loans: banks, online lenders, and what to try when banks say no

Where term loans come from

What the cost is made of

APR combines the interest rate and most fees over the life of the loan, which is why it is the right number to compare loans against each other and against an advance's estimated APR. Look separately at: origination fees (quoted as a percentage of the amount; the exact figure is in each offer), prepayment terms (some lenders charge interest for the full term even if you pay early), and any packaging or closing fees.

What lenders look for

• Time in business. Minimums vary by lender; bank programs commonly look for a longer track record than online lenders.
• Revenue and cash flow. Enough to cover the new payment with room to spare. Lenders call this debt-service coverage.
• Credit. Personal credit matters for most small businesses because owners usually sign a personal guarantee.
• Documentation. Bank statements, tax returns, a profit-and-loss statement, and sometimes a balance sheet and debt schedule. The document checklist.

When banks say no

A "no" is usually about one of four things: too new, too small, too thin on cash flow, or credit. The alternatives map to the reason:

• Too new: new-business options, microloans, equipment financing for a specific asset.
• Too small an amount for the bank's cost structure: SBA microloans and community lenders.
• Thin cash flow: fix the driver first; a line of credit for swings only if the base business is profitable.
• Credit: revenue-based products look at deposits more than scores, at higher cost.

Loan vs. advance: the honest trade

Compare the two on written total cost for the same amount and period; in our illustrative examples, a term loan’s APR is well below an advance’s estimated APR, and the advance’s advantages are speed and accessibility. If you take an advance for a short gap, plan the exit: what replaces it, and when. Never let a six-month product become a permanent fixture through renewals.

Common questions