The Ultimate Guide to Business Loans in 2024

Credit Score

Your personal and business credit score will help lenders assess how credible you are as a borrower. If you have a bad credit score, lenders will assume you are a high-risk borrower, which may result in higher interest rates. Gather credit reports and make sure to dispute any inaccuracies before the application process. For borrowers that are planning in advance, spend a few months boosting your credit score to ensure you receive the best small business loans available.

Annual Revenue

Lenders will want to see a clear picture of your business trends, sales, and cash flow. Check your financial statements from the previous two years, ensuring everything is accurate. Lenders will look at your current ratio to see current assets divided by liability. Overall, they want to get a sense of your ability to pay off all your bills and, in the future, pay off your loans.

Gather your cash flow statements and keep in mind that lenders will put more emphasis on your rate of growth over your annual revenue alone. That being said, certain loans will require different annual revenue requirements. Some may be as low as $35,000, with an average of $100,000. Loans on the higher end may require $250,000 or more.

Updated Business Plan

You will want to review your business plan and update it to ensure you can communicate the future goals of your company. Lenders will want to see projections of your finances, cash flow predictions, and growth plans. The more you can provide proof that your business is credible and professional, the easier the approval process will be. Remember that lenders are giving you their money, so they want to trust that it will be implemented in an effective and successful way that increases business revenue.

Additional Collateral

Every lender’s goal is to reduce risk on their end. If you get a secured loan, lenders will be seeking additional collateral to cover the loan amount in case you can’t meet repayment deadlines. You’ll want to determine if your lender will require a personal guarantee or additional collateral, which may be real estate or other financial resources. It’s helpful to get this information together ahead of time to expedite the loan approval process.

Supporting Documents

Alongside the four points we covered, you’ll need supporting documents to qualify for a small business loan. Small business owners should gather their driver’s licenses, commercial real estate leases, business insurance plans, and any current financial responsibilities.

SBA Loans

Small business administration loans, or SBA loans, are guaranteed loans with reduced risk on the lender side. Interest rates, on average, fall between 2.8%-13% with repayment terms of up to 25 years.

There are multiple types of SBA loans, which are commonly used for business expansion, acquiring an existing business, purchasing fixed assets, or meeting supply and demand needs. Keep in mind there are also SBA-approved lenders, so you can get an SBA loan from multiple lenders that qualify.

Term Loans

A term loan is one of the most common loan types, and it’s probably what comes to mind when you think of business loans. Your business will borrow money and repay the debt within a fixed timeline. Term loans are great for businesses that want to use their funds on a variety of initiatives. They are commonly sought after by individuals with good credit scores and credit histories.

Short-term Loans

Short-term loans are ideal if you need quick cash with repayment terms of three years or less. Oftentimes you can access funds on the same day or the next available business day. Keep in mind that short-term loans are usually smaller loan amounts, so they may not be ideal if you need a large increase in cash flow for certain investments.

Startup Loans

Startup loans are perfect if you are struggling to qualify for loans that require you to be open for a set amount of time. If you have no or little established credit, a startup loan may offer you money with reasonable interest, fees, and repayment terms.

Microloans

Microloans are defined as smaller loan amounts with smaller timelines. Interest rates are usually lower and sometimes qualification criteria are more flexible. Microloans are sometimes funded by non-profit organizations which target specific groups of business owners.

However, there are also SBA loans that qualify as microloans. If you are a small business owner, consider looking into an SBA loan to see if you meet the requirements.

Business Line of Credit

If you want to borrow money on an as-needed basis, and don’t want to take out more than you need, consider a business line of credit. This is popular amongst business financing options, as you typically only pay interest on the money you use. Keep in mind that there is a draw period, so you can only use funds for the lender’s set timeline.

Invoice factoring

Invoice factoring is an option for businesses that provide B2B products or services, using invoices to collect payments. There are recourse factoring agreements and non-recourse factoring agreements. In sum, you’ll sell your outstanding invoices to a third-party company in return for an upfront lump sum.

Invoice financing

Invoice financing is similar to invoice factoring, however, you don’t sell your invoices. Instead, businesses use their invoices as collateral in return for a cash advance.

Working Capital Loans

If you need help with paying for day-to-day business operations, working capital loans can help you get the capital you need to make payment deadlines. This is beneficial for businesses that see seasonal changes in their revenue or find themselves with unexpected expenses during a sales drought.

Merchant Cash Advances

If you want to access financing based on guaranteed future revenue, consider a merchant cash advance. Lenders will examine your daily credit card sales to determine how much cash you’ll receive in return. If you opt for this type of small business loan, you will likely need to make gradual repayments every day based on a percentage of sales.

Commercial Real Estate Loans

If you need money to buy commercial real estate for your business, you’ll want to look into commercial real estate loans. Similar to equipment financing, all the assets you purchase will serve as collateral. In this case, the size of your down payment will also factor into the loan amount you are approved for.

Equipment Financing

Equipment financing, or equipment loans, is ideal for businesses that need to purchase equipment or machinery for professional use. Additionally, the equipment purchase will operate as loan collateral. If you do proper research, you can find competitive interest rates for equipment financing.

Personal Loans for Business Use

In some cases, business owners may choose to take out personal loans for business use. If you are a small business owner, taking out a personal loan might be easier than a business loan. Lenders will examine your personal creditworthiness, which can lead to simpler approval if you are lacking business financial history.

Keep in mind that personal loan amounts will likely be smaller than a business loan, however, you might be able to secure enough cash flow to get your business up and running.