A business loan makes sense when borrowed money will fund something that produces enough cash to repay it: starting or buying a business, bridging a working-capital gap, buying equipment or property, or financing growth. Before borrowing, check that cash flow covers the payments, compare lenders, and consider SBA-backed loans and non-debt alternatives.
Key Takeaways
- Common reasons to borrow are starting a business, covering working capital, buying equipment or real estate, and expansion; in the Federal Reserve’s 2025 Small Business Credit Survey, 56% of firms that sought financing did so to meet operating expenses and 46% to pursue an expansion or new opportunity.
- A simple affordability test is the debt service coverage ratio (DSCR): net operating income divided by annual debt payments. Most commercial banks look for roughly 1.15 to 1.35.
- SBA-guaranteed options include 7(a) loans up to $5 million, 504 loans up to $5.5 million and microloans up to $50,000 (SBA figures as of September 2026).
- The bank prime loan rate was 7.00% as of September 24, 2026, according to the Federal Reserve’s H.15 release.
- Loans are not the only route: savings, investors and crowdfunding avoid debt, while merchant cash advances are generally more expensive than bank loans.
In this day and age, it’s important to have a business plan in order. The plan should lay out your goals and how you intend to achieve them. When you have a business plan, it is easier to see when a loan would be beneficial to your company. There are several instances when taking out a loan might be the right decision for your business.
When you want to start a new business
If you’re wondering how to start a new business, a business loan can be one way to fund it, alongside savings, investors and crowdfunding. To secure a loan, lenders typically expect a solid business plan, and many also ask for collateral, although the SBA itself does not require collateral on 7(a) loans of $50,000 or less. This can be in the form of equipment or inventory that will be given as security for the loan. If you have an excellent credit rating and plan to invest heavily in your venture, then this may not be an issue for you. You can also take small business loans for startups.
When it is hard to meet your financial needs through profits
When it is hard to meet your financial needs through profits, you can think of taking one.
Although profits can be a good funding source, more is needed for some businesses. There are many reasons why profits might not be enough, including the following:
- Your business needs additional funding to expand or make more capital investments in your company’s infrastructure.
- You have too many outstanding invoices that need to be paid off before you can use those funds for other purposes.
- The amount of money you need is more significant than what your cash flow will allow, even if all outstanding invoices are paid off immediately after receiving payment from them.
When you need to grow your business
You may need to grow your business if you want to:
- Expand your business. If you are in a successful position, it may be time for you to expand the scope of your business, which means that you will need more capital. This could come in the form of equipment upgrades and new hires.
- Hire more people. If you have been growing steadily but have hit a plateau, it might be time for some fresh blood on board so that your company can continue its momentum forward into the future.
- Buy new equipment/invest in training/expand into new markets, etc.
When you want to extend your credit line
If you’ve already borrowed money but need more for business growth, the best thing to do is talk with your lender about whether or not it’s possible to get an increase in your current loan. This conversation works best when your business is doing well and its cash flow can comfortably support larger payments than the lender currently requests. In that case, both parties can benefit: the business gets room to grow, and the lender is dealing with a borrower that has a proven repayment record.
You should also consider asking about additional financing options if:
- You have a good credit score (yes, even when borrowing money!).
- You have a strong plan for using these funds.
Lantern by SoFi experts says, “The type of loan you decide to take may tell what specific expenses you can address with the funds.”
If your credit rating could be better, then securing additional funding from banks or other financial institutions may be easier with collateral in place.
This article might have helped you better understand why taking a business loan can be a great idea. There are many benefits to doing so, but keep in mind that there are also drawbacks as well. If a loan is right for your business, compare the rates, fees and terms of several lenders before you apply.
Signs a Business Loan Makes Sense
A business loan tends to make sense when the money has a specific, measurable use and the business can show how it will be repaid. The situations below are ones the U.S. Small Business Administration (SBA) lists as eligible uses of its loan programs.
- Buying or improving real estate: the SBA lists acquiring, refinancing or improving real estate and buildings as an eligible 7(a) loan use.
- Working capital: both short- and long-term working capital are eligible 7(a) uses, and meeting operating expenses was the most common reason firms sought financing in the Federal Reserve’s 2025 survey (56%).
- Machinery and equipment: purchasing and installing machinery and equipment is an eligible 7(a) use, and 504 loans cover long-term machinery with a useful life of at least 10 years.
- Refinancing existing business debt: 7(a) loans can refinance current business debt, but SBA microloans cannot be used to pay existing debts.
- Buying a business or a partner’s share: the SBA lists complete or partial changes of ownership as an eligible 7(a) use.
When a Loan Is Probably the Wrong Tool
Borrowing is riskier when the business has no clear repayment source, when losses are structural rather than temporary, or when the owner would have to pledge personal assets the household cannot afford to lose. In the Federal Reserve’s 2025 survey, 59% of small employer firms with debt had used a personal guarantee to secure it and 51% had used business assets, so a default can reach beyond the business. If bills are already overdue, read about what happens when bills fall behind for several months before adding new debt.
How to Check Whether Your Business Can Afford a Loan
The debt service coverage ratio (DSCR) measures whether a business generates enough cash to cover its debt obligations. The formula is DSCR = net operating income / annual debt service, where debt service is principal plus interest plus lease payments.
- DSCR above 1.0: operating income covers the debt payments, with a cushion that grows as the ratio rises.
- DSCR below 1.0: the business cannot cover its payments from operations; a ratio of 0.8 means income pays only 80% of the yearly debt payments.
- Typical lender minimums: most commercial banks require roughly 1.15 to 1.35, and 1.25 is a common minimum in commercial real estate lending.
Example: a business with $150,000 of net operating income and $100,000 of annual loan payments has a DSCR of 1.5 ($150,000 / $100,000). Adding a new loan with $40,000 of annual payments would lower the ratio to about 1.07 ($150,000 / $140,000), below what most banks look for. Your credit score also shapes the rate you are offered, and the choice between fixed and floating interest rates decides whether payments can rise later.
Types of Business Loans Compared
The table below compares the main SBA-backed loan programs with a merchant cash advance, a common non-bank alternative. SBA figures are from the SBA’s program pages as of September 2026.
| Option | Maximum amount | Maximum term | Best suited to | Key limits |
|---|---|---|---|---|
| SBA 7(a) loan | $5 million | Up to 25 years for real estate; generally 10 years or less for working capital | Real estate, working capital, equipment, refinancing, buying a business | SBA guarantees 85% of loans of $150,000 or less and 75% of larger loans |
| SBA Express (a 7(a) type) | $500,000 | Follows 7(a) rules | Smaller 7(a) financing | SBA guarantee is 50% |
| SBA 504 loan | $5.5 million | 10, 20 or 25 years | Property purchase, construction or renovation; long-life machinery | Made through Certified Development Companies with a senior lender; business must be operating and for-profit |
| SBA microloan | $50,000 (average about $13,000) | 7 years | Working capital, inventory, supplies, furniture, fixtures, equipment | Cannot be used to pay existing debts or buy real estate |
| Merchant cash advance | Varies by funder | Repaid from a share of future card sales | Card-heavy businesses | Generally more expensive than bank loans; a New York court treated it as a sale of receivables, not a loan |
For property-backed borrowing outside the SBA programs, see this guide to taking a loan against property for business investment.
What Do Business Loans Cost?
Business loan rates move with benchmark rates. According to the Federal Reserve’s H.15 release of September 25, 2026, the bank prime loan rate stood at 7.00% and the effective federal funds rate at 3.88% as of September 24, 2026.
For variable-rate SBA 7(a) loans, the SBA caps the rate at a base rate plus a maximum spread that shrinks as the loan grows:
- $50,000 or less: base rate plus 6.5%
- $50,001 to $250,000: base rate plus 6.0%
- $250,001 to $350,000: base rate plus 4.5%
- More than $350,000: base rate plus 3.0%
Rates, fees and terms from individual lenders vary, so compare the total cost of each offer, not just the headline rate.
What Small Businesses Borrow For: Federal Reserve Data
The Federal Reserve Banks’ 2025 Small Business Credit Survey, fielded from September 3 to November 14, 2025, collected 6,525 responses from small employer firms with 1 to 499 employees. Its main financing findings, published in the 2026 Report on Employer Firms:
- 60% of firms applied for financing in the 12 months before the survey.
- 38% applied for a loan, line of credit or merchant cash advance, nearly unchanged from the 2024 survey.
- Of applicants, 42% received the full amount sought, 36% received some or most, and 22% received none.
- Applicants most often went to large banks, followed by online lenders and small banks; applicants at small banks were more likely to be fully approved.
- The share of applicants that sought financing from online fintech lenders increased from 17% in the 2020 survey to 29% in the 2025 survey.
How to Apply for a Business Loan: Step by Step
- Define the amount and the use. Write down exactly what the money will buy and how it will generate the cash to repay it.
- Test affordability. Calculate your DSCR with the new payment included.
- Prepare your documents. The SBA recommends having a business plan, an expense sheet and financial projections for the next five years before applying for a loan.
- Check your credit. The SBA lists good credit history, potential collateral and industry experience among the things to have ready; see easy ways to improve your credit score.
- Find lenders. The SBA’s Lender Match tool returns a list of interested lenders within two business days, drawing on more than 800 participating lenders. It is not a loan application and does not guarantee a match or an offer.
- Compare and apply. Compare rates, fees, term, collateral and personal-guarantee requirements before signing.
Alternatives to a Business Loan
The SBA describes several ways to fund a business besides a conventional bank loan:
- Self-funding (bootstrapping): using savings, family money or retirement funds keeps full control, but the owner carries all the risk.
- Venture capital: investors provide capital in return for equity rather than debt, and typically focus on high-growth companies.
- Crowdfunding: many contributors give money, usually in return for a reward rather than ownership; the SBA calls it very low risk for owners because repayment is not typically required.
- SBA-guaranteed loans: when a bank considers a business too risky, an SBA guarantee reduces the lender’s risk and can improve approval chances.
For wider strategy when conditions change, see how small businesses adapt to a changing economic landscape.
Frequently Asked Questions
When is the right time to take a business loan?
The right time to take a business loan is when the money has a specific use, such as equipment, property, working capital or expansion, and the business’s cash flow can cover the new payments. A debt service coverage ratio comfortably above 1.0, often 1.15 to 1.35 at commercial banks, is a practical test.
Can a startup get a business loan?
A startup can get a business loan, but it usually needs a strong plan. The SBA recommends a business plan, an expense sheet and five-year financial projections, and SBA microloans of up to $50,000 are one option for smaller needs. SBA 504 loans, by contrast, require an operating business.
Do you need collateral for a business loan?
Collateral depends on the loan and the lender. The SBA does not require collateral on 7(a) loans of $50,000 or less; for 7(a) loans from $50,001 to $500,000, lenders follow their own collateral policies, but a loan is not to be declined solely for inadequate collateral.
What is the maximum SBA loan amount?
The maximum SBA loan amount is $5 million for a 7(a) loan and $5.5 million for a 504 loan, according to the SBA as of September 2026. SBA Express loans go up to $500,000 and microloans up to $50,000.
Is a merchant cash advance a loan?
A merchant cash advance is structured as a sale of a share of future card sales rather than a loan, and a 2016 New York court ruling treated it that way, which can keep it outside state usury limits. It is generally more expensive than a bank loan.
How long does it take to find an SBA lender?
The SBA’s Lender Match tool returns interested lenders within two business days of a request. The SBA lists its own turnaround for a standard 7(a) loan as 5 to 10 business days, and the full lending process can take longer.
