Looking for a small business loan? When it comes to small business loans, one size does not fit all. Find the best option to meet your business.
A small business loan provides much-needed working capital that business owners can use for a variety of functions, including expanding the business, hiring staff, purchasing equipment, or keeping cash flowing. Sometimes lenders require collateral to guarantee small business loans. Typically, the borrower pays back the loan in installments over a designated period of time.
With so many businesses affected by the coronavirus pandemic, many small business owners are struggling with cash flow. They aren’t looking for business financing to grow or expand; they need funds to stay afloat
The application process for each lender may be somewhat different but it will generally involve the following:
You’ll share details about your business. You’ll typically be asked about:
You’ll agree to a credit check. Not all financing offers will involve a personal credit check but many will. Oftentimes a personal credit check is a “soft” credit check that doesn’t impact your personal credit scores, but if you’re concerned about this be sure to ask. Some lenders will also check business credit.
You will verify business revenues. Some lenders will allow you to provide copies of recent bank statements (3-6 months is typical) or business tax returns plus up-to-date financial statements. Increasingly though, lenders will ask you to link your business bank account so they can analyze your business revenues to determine if you meet their requirements.
Some types of financing may have other requirements. For example, for invoice factoring you may need to supply an accounts receivables (A/R) aging report that shows your outstanding invoices. For loans with collateral, such as equipment or real estate, you may need an appraisal.
Once you have submitted the required documentation, the financing company or lender will make its decision. Online lenders can typically offer a preliminary decision very quickly. They will then request any additional documentation so they can underwrite the loan and make an offer.
Banks tend to take longer to approve loan applications, and a lot more documentation may be required. Expect more back and forth, greater scrutiny, and a longer wait before you get a decision.
Once you are offered financing you’ll want to read the loan documents carefully to make sure you understand the terms of the financing, including daily or monthly payments, the cost of the financing and whether a personal guarantee is required. Some financing sources may require you to use some of the proceeds to refinance other debt.Once you accept you can expect funds in your account within hours, or up to a couple of days depending on the lender.
Eligibility for different types of small business financing will vary. With a bank, you may be asked to provide financial statements with your small business loan application. For a merchant cash advance, you’ll likely need to provide proof of your monthly and/or annual revenue.
Qualifying for a small business loan often means you need good credit, especially if your business is young or does not have a lot of employees. Pay attention to any required credit score. Even one business credit card to the next may have different requirements, so read through that lender’s site to see if a minimum credit score is required. If you don’t know your personal or business credit score, find out how to check them for free here.
Some lenders will also require a down payment or collateral, so know whether you have assets valuable enough to qualify for those loans. And some lenders want you to have been in business for a certain amount of time, so make sure you meet those requirements.
There are several factors that will guide you to choosing the right small business loan:
The further out you plan for your financing needs, the better the deal you can get because you won’t be desperate to get the funds immediately. If you can wait a few months, you may qualify for an SBA loan at a great rate. On the other hand, if you need cash today, you may have to pay for the privilege of getting an alternative online loan with a higher interest rate.
There are many different loan options, so it may make sense to weigh your financing options with different lending products from various lenders before making a decision.
The type of business need you’re trying to meet should determine the type of financing you seek. For example, the type of financing you need to purchase quick-turnaround inventory is decidedly different from the type of financing you might need to expand to an additional location across town. Fortunately, there is financing designed to meet those short-term needs as well as longer-term needs.
Generally, a loan with a term of 3-36 months is considered a short-term loan and can be a good choice to meet shorter-term business needs. A business loan with a term of five years or more is typically considered a longer-term loan. When shopping for a loan, depending on your loan purpose, consider the term that best suits your business needs.
By following the steps above, you’ve already learned how to apply for a business loan from a bank. Banks have some of the strictest application requirements, but you will likely pay lower interest rates and fees than other financing options—provided you qualify.
One of the most common questions people ask when launching a startup business is “how can I pay for it?” When looking for a loan to start a business, without a track record or revenue, it will be difficult. You can demonstrate your business acumen with a well-written business plan, and secure your loan with collateral—which will improve the odds, but it will still be challenging. Since you don’t have a business yet, your personal credit score will be the only thing a lender has to evaluate your creditworthiness.
It’s not always necessary to start a company from scratch these days. If you see a promising business for sale, it may be a good investment to buy it. You’ll likely need a business acquisition loan to finance the endeavor, however. A down payment may be required. Use the steps above for this type of loan, as well. Instead of providing all the documentation for your own business, however, you’ll need to include the same type of information for the company you’ll be buying. Note that some SBA loans may be used to buy a business.
SBA loans are available in amounts from $50,000 – $5 million, you’ll get lower rates and favorable repayment terms. These programs primarily offer business term loans, though there are some business lines of credit available and some SBA loans may be used for refinancing debt. The loan process can take weeks or months, depending on the type of SBA loan you are trying to obtain. Only SBA Disaster Loans are made by the SBA. All others are made by participating lenders.
Get a term loan or business line of credit from a bank you already do business with (or a new one) and pay some of the lowest rats of all the options—if you meet the often rigid criteria. Loan amounts vary, and repayment terms range from one to twenty years. Get an answer in less than four months with approved personal or business credit.
These lenders don’t consider your credit to be as crucial as others, but your credit profile still matters. These lenders are also more inclined to work with younger businesses with loan amounts much smaller (up to $50,000), hence the “micro” name. Get an answer within three months for these loans with rates that are comparable to the better credit cards.
Because of the quick response to a loan application and the speed with which they can make funds available, online lenders are the first choice for many small businesses today. If you’re willing to pay up a higher APR and pay your debt in less than five years, you could possibly get a loan for between $25,000 – $500,000. Credit may still count, but revenues are often more important. Many lenders can approve your loan the same day and have funds available in your account within a day or two.
Post PPP, a business cash advance will likely be one of the only available financing options for many businesses for the next several months. Available amounts are based upon revenues and can range from $5000 – $250,000 or more. Even those with less-than-perfect credit can get approval, provided they have the transactions to justify the advance, and the turnaround time is often within 24 hours.
As the name implies, cash flow loans are very focused on your cash flow. Although your credit profile will be part of the equation, these lenders want to confirm you have the cash flow you’ll need to service debt. Get approval within minutes from some lenders for amounts of up to $100,000. Be prepared to pay a minimum of 25% APR and up to 90% APR or more.
Business credit cards are one of the best ways for a younger business to access borrower capital (and are a great tool for mature businesses as well). Pay industry-standard rates of up to 25% for business credit cards that offer between $1000 – $25,000. These make good short-term funding solutions, and although your credit profile is a major approval factor, it is often easier to qualify for a business credit card than a term loan or line of credit. Find out if you’re qualified within three weeks of applying.
One of the most under-rated and often-overlooked options, you can get between $1,000 and $100,000 from a vendor you already work with. Some charge no interest, but the repayment time is short (as soon as ten days.) Those with a good business credit history might get an approval within hours.
It might not be a small business loan, but 30- to 6-day terms are a great way to build or strengthen your business credit profile.
One final option for an existing business is a line of credit, which can generally be borrowed against again and again. This is traditionally a popular source of borrowed capital for many business owners, but depending on the lender can be more difficult to qualify for. Credit profile and revenues are often major factors for these loans, which range from $1,000 – $100,000 for qualified borrowers.