Where small business loans come from and what you need before you start
Small business loans come from three main sources: banks, credit unions, and the Small Business Administration (SBA), which doesn't lend money itself but guarantees loans made by private lenders. The path you take depends on your business stage, how much you need, and what collateral or personal credit you can offer. Before you contact any lender, you'll need a business plan, tax returns (usually two years), a personal credit report, and documentation of what you're borrowing for — equipment purchase, working capital, real estate, or payroll.
The SBA route typically takes longer but has lower down payments and interest rates than conventional bank loans. A conventional bank loan moves faster if you have strong credit and collateral, but the terms are stricter. Credit unions often fall between the two — faster than SBA programs but more flexible than large banks.
Key Takeaways
- Banks, credit unions, and SBA-backed lenders each have different speed, down payment requirements, and credit score thresholds.
- You will need a business plan, two years of tax returns, personal credit history, and a clear statement of what the loan will fund.
- SBA loans typically require 10 to 20 percent down and take 60 to 90 days to close, while conventional bank loans may close in two to four weeks.
- The SBA 7(a) loan program is the most common option for businesses under five years old or with limited collateral.
- Your personal credit score, business revenue, and time in business all affect which lenders will consider your request and what rate you'll receive.
The SBA 7(a) loan: the most common path for new and small businesses
The SBA 7(a) loan is the agency's flagship program and the one most small business owners encounter first. The SBA doesn't give you the money — a bank or credit union does — but the SBA guarantees up to 90 percent of the loan if you default. This may provide lets lenders take on riskier borrowers than they normally would.
Loan amounts range from $25,000 to $5 million, though most loans fall between $100,000 and $350,000. You'll typically need to put down 10 to 20 percent of the loan amount yourself. The SBA charges a may provide fee (usually 2 to 3 percent of the may provide portion) and the lender charges interest on top of that. Interest rates vary by lender and market conditions but generally run 1 to 3 percentage points above the prime rate.
The process goes to the lender first, not the SBA. The lender reviews your business plan, credit, and financials, then submits the loan to the SBA for approval if it meets their guidelines. This process typically takes 60 to 90 days from process to funding.
Conventional bank loans: faster but stricter requirements
Banks offer conventional small business loans without SBA backing. These loans move faster — often closing in two to four weeks — because the bank makes the decision alone without waiting for SBA review. The trade-off is that banks require stronger credit (usually 680 or higher), more collateral, and often want to see three to five years of business history.
Down payments are typically 20 to 30 percent. Interest rates are usually lower than SBA loans because the bank carries all the risk, but you have to may have access to for that lower rate. Banks are more likely to deny you outright if your credit or cash flow doesn't meet their threshold.
Conventional loans work best if you have established business revenue, personal credit above 700, and collateral to pledge — real estate, equipment, or business assets. If you're under two years old or have credit below 650, a bank will likely decline you before you finish the process.
Credit unions and community lenders: a middle ground
Credit unions and community development financial institutions (CDFIs) often sit between banks and the SBA in terms of speed and flexibility. Many credit unions offer small business loans with less stringent credit requirements than banks, sometimes accepting scores in the 620 to 660 range. They may also move faster than the SBA — typically 30 to 60 days — while still offering reasonable rates.
The catch is that credit unions have smaller loan limits than banks or the SBA. Most cap small business loans at $250,000 to $500,000. You also have to be a member, which usually means maintaining a savings account with them.
CDFIs are nonprofit lenders that specifically serve underserved communities and businesses. They often have the most flexible credit requirements and may work with you on a business plan even if your credit is poor. Funding takes longer — 90 to 120 days — and rates may be higher, but approval odds are better if traditional lenders have turned you down.
What lenders actually look at: the five Cs of credit
Every lender uses some version of the five Cs: character, capacity, capital, collateral, and conditions. Character means your credit history and how you've handled past debt. Capacity means your business's ability to generate enough revenue to repay the loan. Capital is what you're putting in yourself — your down payment and personal net worth. Collateral is what the lender can seize if you don't pay. Conditions are the current state of your industry and the economy.
For SBA loans, character and capacity matter most. The SBA will work with you if your credit is fair (620 to 660) as long as you can show the business will generate enough cash to cover the loan payment. Banks weight collateral and capital more heavily — they want to know they can recover their money if the business fails. Credit unions and CDFIs often prioritize capacity and character over the others.
Your personal credit score is usually the first filter. Most banks won't look at you below 680. The SBA will consider scores as low as 620, though rates will be higher. Credit unions vary widely — some work with scores in the 600s, others require 700 or higher.
Documents you'll need before you explore
Start gathering these before you contact any lender. You'll need two years of personal tax returns (Form 1040 and all schedules), two years of business tax returns if your business is established, a current personal credit report (you can get one free at annualcreditreport.com), and a business plan that describes what you do, who your customers are, and how you'll use the loan money.
You'll also need documentation of what you're buying or funding — quotes for equipment, a lease agreement if you're borrowing for real estate, or a breakdown of working capital needs. Bring your business license, articles of incorporation or partnership agreement, and a list of business assets and liabilities. If you have existing business debt, bring statements showing the balance and payment history.
For SBA loans specifically, the lender will ask for a personal financial statement (Form 413) listing your personal assets and debts, and a statement of personal history (Form 912) if you're the owner. These forms are available on the SBA website. Have your accountant or a business advisor review your numbers before you submit — errors or inconsistencies will slow down approval.
The timeline from process to money in your account
A conventional bank loan typically closes in 14 to 28 days if you're approved. The lender reviews your process, orders a business valuation or appraisal if needed, and makes a decision. Once approved, you sign documents and the money transfers within a few days.
An SBA 7(a) loan takes longer because two organizations are involved. The lender reviews your process in 10 to 14 days, then submits it to the SBA. The SBA reviews it in another 30 to 45 days. If approved, you go back to the lender to sign documents and close, which takes another 5 to 10 days. Total time is usually 60 to 90 days, though it can stretch to 120 days if the SBA requests additional information.
A CDFI or credit union typically takes 45 to 75 days. They move slower than banks but faster than the SBA because they don't have to wait for federal review. The exact timeline depends on how quickly you provide documents and how busy the lender is.
After you're approved and documents are signed, expect another 3 to 5 business days for the money to appear in your business account. Some lenders disburse in tranches — part at closing and part when you've spent the first portion — especially for construction or equipment loans.
Frequently Asked Questions
What's the difference between an SBA loan and a bank loan?
An SBA loan is backed by a government may provide, so the lender takes less risk and can offer lower rates and down payments. A bank loan is the lender's money with no may provide, so they require stronger credit and collateral. SBA loans take longer to close but are easier to get if your credit or collateral is weak.
Can I get a small business loan with bad credit?
Yes, through an SBA loan or a CDFI. The SBA will consider credit scores as low as 620, though you'll pay a higher interest rate. CDFIs often work with scores below 600 if your business shows strong revenue potential. Banks typically won't consider you below 680. Your business revenue and time in business matter as much as your credit score.
How much can I borrow?
SBA 7(a) loans go up to $5 million, though most are under $350,000. Bank loans vary by lender but typically max out at $1 to $5 million depending on your collateral and revenue. Credit unions usually cap at $250,000 to $500,000. The amount you can actually borrow depends on your down payment, business revenue, and what you're using the money for.
Do I have to put money down?
Yes. SBA loans typically require 10 to 20 percent down. Bank loans require 20 to 30 percent. Credit unions and CDFIs vary but usually ask for 10 to 25 percent. The lender wants to see that you have skin in the game — if your business fails, you lose your own money first.
What happens if I'm turned down?
Ask the lender why. If it's credit-related, work on paying down debt and disputing errors on your credit report before reapplying. If it's revenue or time in business, wait six months to a year and reapply. If a bank turns you down, try a credit union or CDFI next — they have different standards. You can also ask the lender if they'll reconsider with a co-signer or additional collateral.