If you are an entrepreneur, startup, or aspiring business owner, you’ve probably considered a business loan at one point or another. There are so many benefits to increasing your cash flow, especially if you are trying to push your business forward towards your professional goals.
Although business loans are popular, it’s difficult to decide what small business loan is best for you and which lenders you should trust. Small business loans come in various shapes and sizes. There are also a variety of loans for different business applications, so you want to make sure you choose the right option without wasting any time.
So you’re probably thinking, how do I know which loan to choose for my needs? Once I know the loan type, how do I find a reputable lender for small business loans?
Our experts took the time to gather all the information you need to understand loans, identify reputable lenders, and gather the resources you need to make loan approval simple.
We know you may not have time to become a financial expert. This article will teach you everything you need to know to make smart financial decisions when it comes to business loans.
Interested in getting a loan for your business? You came to the right place. Keep reading to get your questions answered!
Business loans are a type of lending agreement between borrowers (the business owner) and lenders (banks, online lenders, or credit unions). Businesses regularly need an increase in capital in order to fund projects, expansion, or maintain operations.
Lenders will give businesses a lump sum or line of credit that can be used as cash for business initiatives. However, borrowers must commit to paying back their debt on a set timeline with the addition of interest rates, and occasional fees from lenders.
If you want to use loans as debt capital, your business or startup will need to meet several requirements. Most commonly, lenders will check your credit score, amount of time in business, potential collateral, and overall professional financial health.
Most types of business loans work in a similar way, however, there will be slight differences depending on your loan type, lender, and term agreements. First, you will apply for a loan and fill in a brief questionnaire about your financial background, loan funds, and professional goals. You will either send an application to a direct lender or a lending marketplace that connects you with a variety of options.
Next, a financial institution will reach out and offer you a set loan amount with the addition of fees and interest rates. Oftentimes, you will offer collateral or personal guarantee to ensure you pay back the loan on time.
Once initial approval is complete, and you agree to the loan amount, you’ll be paid cash in a lump sum amount or line of credit. Keep in mind that the time it takes to receive your funds will depend on the lender. Sometimes you’ll receive money the next day or within five business days.
The lender will inform you of the repayment schedule, and you’ll gradually make payments daily, weekly, monthly or bimonthly within that window of time. In the meantime, you can use the cash within your business for a variety of needs and purposes. If you don’t pay off your loan in time, the lender will have the freedom to take your collateral or other assets.
If you are looking into business loans, it’s important to understand the difference between secured and unsecured small business loans. The primary difference between these loan types is the use of collateral. Secured loans are guaranteed but require collateral, however, terms and requirements are generally more flexible. Unsecured loans aren’t guaranteed with collateral so borrowers will usually need to offer a personal guarantee, stating that they are responsible for any debt not paid off.
The benefits of secured loans are that credit score requirements are more lenient, interest rates are usually lower, and a personal guarantee is not required. Unsecured loans do not require collateral so a good credit score and financial history are required. Unsecured loans are usually accompanied by higher interest rates and a personal guarantee.
The best time to get a business loan will look different for every business. Whether you are starting, maintaining, or growing professional operations, business loans can be a beneficial asset. The majority of businesses start with a lot of investment before they receive a sufficient amount of income in return.
Most business loans will require anywhere between 6 months to 2 years in business in order to qualify. If you haven’t started your business yet, make sure to look for loans that specialize in serving startup companies or new businesses.
You’ll know when you should look into a business loan when your business is in good financial health and you see the potential for growth in the future. Inquiring about a business loan could give small business owners the funds necessary to push their businesses forward.
If you are interested in applying for a business loan, start the application process before you need your small business loan. In some cases, approval could take longer than expected so you want to give yourself enough room to secure small business financing.
Get all your information and resources together before applying for a loan. Look into a few different loan options and make sure you meet specific guidelines before capital is needed. Here are some essential things to keep in mind if you want to qualify for a business loan.
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.
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.
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.
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.
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.
Depending on your unique monetary needs and creditworthiness, what you need from a business loan will vary. In general, these are the basic factors you want to compare before deciding on a business loan. Remember that you might have less flexibility if you are struggling with a poor credit score or a lack of credit history.
Interest rates can make or break the benefits of your small business loan, especially if you find yourself paying back immensely more than you initially received. The last thing you want is to get stuck in debt refinancing because you didn’t properly assess different financing options with competitive interest rates.
Interest rates depend on the type of loan, lender, and borrower eligibility. The average annual percentage rate (APR) for a traditional bank loan is between 3% to 7%. However, some loan APRs can fall between 11% to 44%. If you decide to use a lending marketplace, you can easily compare loan options and interest rates based on your unique borrower portfolio.
Every lender will have a different set of repayment terms that can range from a few weeks to multiple years. Based on the loan amount, you’ll need to make sure you’re able to take on the financial responsibility of payments based on your repayment terms. Some lenders are more flexible than others, so it’s always recommended to compare options. Additionally, make sure you know what happens if you don’t meet loan payment deadlines.
Not every lender will provide the same maximum loan amount, so you’ll want to get clear on your ideal loan amount before starting applications. The maximum loan amount will also depend on your overall eligibility and financial qualifications.
Some lenders will require borrowers to pay prepayment penalties and origination fees that can add to overall costs. If you are concerned about additional fees, make sure to explore multiple loan options as there are plenty of lenders that don’t add on additional costs.
We outlined the basic borrower requirements above, which is something you should take into consideration when applying for a loan. You’ll need to look for loans that you qualify for to avoid delays in approval and wasting time on unsuccessful applications.
The best way to decide what business loan is right for you is to outline the current financial standing of your business and the goals you have for your loan money. Here is a brief outline of some common small business loan types and what they are commonly used for.
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.
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.
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 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.
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.
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.
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.
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 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.
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.
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.
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.
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.
Can I get a business loan with a 500 credit score?
You can still get a small business loan if you have bad credit, however, it’s important that the financial health of your business is solid. In more cases, prospective borrowers can still find a business loan or personal loans that require a 500 credit score, six months in business, and a minimum annual revenue of $35,000.
What size loan can I get to start a business?
The size loan you receive will depend on factors like your credit score, business credit, amount of time in business, assets, financial history, and overall ability to meet lender requirements as well as loan terms.
Whether you need a loan to cover unexpected expenses or a large lump sum to cover startup costs, there are a wide variety of loan options to suit your financial needs. If you are struggling to qualify for a large enough loan, consider applying for business credit cards or a line of credit.
How hard is it to get a bank loan for a business?
It is not difficult to get loan approval for a business if you apply to lenders or banks that are asking for requirements you qualify for–for example if you have a minimum annual revenue, credit score, and sufficient time in business.
How large of a loan do I need to start a business?
The size loan you need to start a business will depend on your unique industry and cash flow needs. Every business requires a different amount of money to start and maintain operations.
If you have a preexisting business, consider looking at your profit and loss statement, general finances, cash flow predictions and investment needs. Budget accordingly based on your current and future goals, as well as your ability to pay off loan amounts.
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