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There are many different kinds of small business loans, making it essential to do your research before beginning any application process.
The best place to start is by identifying what your specific use will be for the loan. If your objective for the money isn’t clear, it’s safe to say you have work to do before knocking on a lender’s door. Create a solid plan, and then determine the specific amount of money needed to make it happen. Also, consider how long you would like to have to pay the money back.
The following information covers the common routes entrepreneurs take to get the capital they need. Pay attention to the dollar amounts, rates, terms, and other elements that will help you choose the small business loan type that’s perfectly suited for your business needs.
A business line of credit is a bit like having a safety net for your business. Unlike a traditional loan, where you receive a lump sum all at once, a line of credit allows you to borrow only what you need and pay interest on the amount you use. Think of it as a credit card for your business, but typically with lower interest rates and higher borrowing limits. This flexibility makes it an excellent tool for managing cash flow, handling unexpected expenses, or addressing short-term funding needs.
You can get anywhere from $1,000 to $250,000, and the money is typically available in one to two days. The rates vary from 8% to 60%, and the financing usually comes with a 6- to 18-month maturity.
If you’ve been in business for more than half a year, are bringing in $50,000 or more in annual revenue, and have a credit score of 600 or higher, consider yourself a prime candidate.
The Small Business Administration (SBA) was created to assist small businesses through various educational and funding programs. SBA loans are unique because the SBA isn’t the lender. Rather, it guarantees a substantial portion of each loan, which reduces other lenders’ risk and makes them more willing to approve your request.
With an SBA loan, you can expect amounts from less than $50,000 up to $5,000,000. Terms also cover a broad range, typically from 10-25 years. Expect the entire process to take 1-2 months.
The SBA offers an array of loans to small business owners. Here are a few of the most popular options:
SBA loans have stringent credit requirements. You’ll need a minimum credit score of 650, at least two years in business, and a minimum of $8,000 in monthly revenue to be considered by an SBA lender.
Short-term loans are repaid in a term of 1-3 years. They can be structured as a term loan or as a cash advance, line of credit, or invoice factoring.
Many entrepreneurs use short-term loans for times when they need quick solutions to pressing circumstances. So whether you need to pay for unexpected expenses, hire new staff, endure a sales slump, replace a broken piece of equipment, or take action on an exciting business opportunity, a short-term loan can be a solid option.
A term loan provides a lump sum of money repaid in monthly installments with interest over a set term. A business term loan is a great way to acquire working capital, expand your business operations, purchase equipment, hire additional staff, or whatever else it is that you need.
The loan amounts range from $5,000 to $2,000,000, and you can often see that money in as little as 24 hours.
Plan on your business term loan repayment terms to be somewhere between six months and 10 years with interest rates starting as low as 8.49%. These loans have a fixed interest rate, so the payments will never go up during the lifetime of the loan.
With a merchant cash advance, you borrow against your future earnings to secure the financing you need. Once you’ve been approved and the funds are advanced to your account, you’ll begin repaying the loan by having an agreed-upon percentage of your daily credit card deposits withheld for the lender. Your advance can be used for myriad purposes, so this type of financing has earned a reputation among entrepreneurs for being very flexible.
Like short-term loans, merchant cash advances are known for speedy delivery. You can apply for anywhere from $5,000 to $200,000, and time to funds can be as short as 24 hours. This type of convenience comes at a premium rate, and you can expect the factor rates to start around 1.08.
Qualifying for a merchant cash advance is surprisingly simple because the nature and terms of the loan make the risk lower for a lender. Minimum credit score requirements start at 500. You’ll need a minimum monthly revenue of $10,000 and a minimum time in business of three months to qualify for a cash advance.
See if your business is eligible for financing.
Of all the types of small business financing out there, the business credit card is the most user-friendly. If you’ve had a personal credit card, you know how it works. You can access amounts up to $500,000 with a business credit card, with interest rates from 8-24%. It’s not unusual to get a 0% introductory rate. There’s very little paperwork required compared to many loans, and the time to funds rarely exceeds 2 weeks.
This option is excellent for those who don’t feel ready to pursue a business loan or have been repeatedly turned down for them in the past. You’ll boost your working capital with fast access to cash, plus get the added benefits of leveraging a card rewards program and building your credit.
Business credit cards can be used for just about anything related to your operations. Whether you need to buy a new dump truck, add inventory, expand your office, take a client out to lunch, or hold an off-site staff event, this financing can be just the ticket.
Qualifying for a card isn’t difficult, which makes it a good match for those who are new to business. As long as you’ve got a credit score above 680 and have a decent business history, you should be in good shape.
Equipment financing is a specialized form of financing used to purchase equipment. With amounts available up to $5,000,000, you can use them to purchase any kind of equipment your business might need. And that’s where the name is a little deceiving. When most people hear the word “equipment,” they think of things like backhoes, trucks, forklifts, tractors, cubicles, refrigerators, trailers, conveyor belts, and trash compactors.
This type of financing can also be used for less obvious equipment, such as payment processing programs, solar panels, or accounting software for your office. The point is, if the purchase will help to equip your business for its needs, it probably meets the criteria.
One great thing about this type of small business loan is that you can access the money quickly. After submitting your application, you may see funds in as little as 24 hours.
Another strong point is the interest rate, which can start as low as 7.5%. Qualifying for equipment financing is less difficult than many other types of loans. If your business has been running for a year or more, brings in $50,000 or more in annual revenue, and has a credit score of 520 or above, you should be sitting pretty. Some equipment financing companies will work with day-one startups.
With equipment financing, the equipment you purchase will serve, at least in part, as collateral for the loan, so you may need less additional collateral than you would for other loan types. The loan amount your lender approves will depend on your credit profile and the type of equipment you plan to purchase. The lender will also evaluate the value and condition of the equipment as part of the approval process.
A commercial mortgage can be used for just about any property need, whether that’s retail space, an office, a warehouse, or a restaurant. If you’ve been around for decades and want to expand, that’s no problem. Ready to purchase your first location? Perfect.
A commercial mortgage is similar to a home mortgage but with a few key differences. One, you’ll need to provide a down payment. There are typically no options for 100% financing. Two, the terms will be shorter, typically 10-25 years. Three, some commercial real estate loans come with a balloon payment at the end of the term, which is one large payment that pays off the remaining balance of the loan.
This financing option is an asset-based loan, so the amount and rate of your commercial mortgage will be based on your credit and the value of the property you’ll be using as collateral. You can expect amounts ranging from $250,000 to $5,000,000. The interest rates are usually on the lower end, starting at around 6.25%.
Qualifying for a commercial mortgage loan requires a clear plan for how you’ll put the cash to use. For example, if you’ll be making renovations to a property, your lender will want to know how you intend to do it and will also assess the after-repair value (or ARV) of the property. Having a plan in place before approaching a lender ensures you’ll always be able to answer their questions without breaking a sweat.
Lenders will also look for:
You can plan on a lender requesting several property-related documents, including the purchase contract, property blueprints, market analysis for the property, project budget, scope of work, and assessment of the property’s existing condition.
Accounts receivable financing (sometimes referred to as factoring) is tailor-made for the times you need money but cashflow is tied up in outstanding invoices. With this type of financing, you’ll sell your outstanding invoices to a factoring company that will pay you a percentage of the invoice’s value upfront. The factoring company will then collect the money from your customer when the invoice comes due and pay you back any remaining balance minus the factoring fee.
The amounts vary, but you can often get up to 80% of your receivables. The money arrives in as little as 24 hours, and the loan term can last up to a year. As for the factoring fee, it starts as low as 3%.
One of the main benefits of accounts receivable financing is it relieves you of the burden of tracking down those who owe you money to collect on the outstanding debts. Instead, the lender will do the work for you.
Another key advantage is that factoring companies will evaluate the creditworthiness of your customers instead of looking at your credit score, so you can qualify even if you have a bad credit score.
The term “startup loan” can be a bit of a misnomer. While there are a handful of lenders who will work with day-one startups, it’s rare to find financing to start a brand-new business. However, there are still business loan options available for young startups with only a year or two in business. Common loan types for startups include business cash advances, invoice factoring and equipment financing. The SBA also offers two programs for startups: SBA microloans and the Community Advantage program. These programs are meant to support underserved communities and will typically have less stringent qualifying criteria.
A business acquisition loan is one of those small business loans engineered for a specific purpose: buying an existing business or franchise.
Typically these loans will be structured as a term loan or line of credit used to purchase equipment, real estate, and intangible assets. SBA loans can also be used to acquire an existing business.
The terms of the loan will be specific to the loan type, lender, and specific acquisition costs. In general, expect lenders to look for a minimum credit score of 650, steady revenue, post-acquisition business plans and financial projections, and in many cases a significant cash contribution to the overall purchase. Lastly, lenders will want to know about any relevant experience you have that will enable you to run the business successfully.
Once you click submit on a loan application, the lender will use multiple factors to determine their response. These same factors also play a role in determining the loan’s terms and rates if you’re approved.
So how are approval decisions made? Here are 6 essential factors lenders use to evaluate your business credit and decide whether or not to open their wallet to you.
It’s often beneficial to speak with an expert who can evaluate your financing needs and guide you toward the best financing solutions. By doing your research, asking the right questions, and keeping your mind open, you’ll be setting yourself up for success.
Applying is free and won’t impact your credit.
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.
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