You often hear small business owners asking for advice on how to obtain a small business loan that is affordable with the best terms possible. Well, with so many lenders and business loan providers available, financing your business is easier than ever. Businesses can apply for a variety of loans in the market, ranging from SBA loans to lines of credit.
When faced with the decision of whether a business loan is right for your business, you will need to answer these most frequently asked perplexing questions, “WHY should I get a business loan?” Can the business survive without it? Is the timing right for a business loan?
What is a Small Business Loan?
A small business loan is a type of funding that business owners can use to cover the costs of operation and growth. These loans assist businesses to make large purchases and cover the costs of doing business.
Small business loans are typically made in the form of a lump sum that can be used to make specific purchases or manage cash flow. But depending on the loan type, funds can be used for anything from working capital and equipment acquisition to larger purchases such as real estate.
Small business loans, like personal loans, are available from traditional banks and credit unions, as well as online lenders, including those backed by the U.S. Small Business Administration (SBA).
Small Business Loan Consideration
When your company requires working capital for expansion or funds for retooling and repairs, the obvious question is, “Do I need to apply for a business loan right now?” The answer to the question will influence the decisions you make in the future, which could significantly slow or accelerate the growth of your business.
There are some advantages to taking out a business loan. The lender does not have equity in the business as a result of obtaining a loan. Instead, you must simply repay the principal plus interest.
You are not required to share profits with the lender after repayment. By eliminating the need for shareholder meetings and votes, administrative duties are also reduced. Furthermore, loans are not subject to the same regulations as investments.
Business Loan Requirements
Conduct research to determine what information you must provide to apply for a loan. The lending requirements are determined by the business loan service. Lenders frequently expect good credit, collateral, and consistent monthly revenue to approve a loan. A business plan may also be requested by a commercial lender to demonstrate that a company can repay the loan.
Shop for low-interest Loans
The annual percentage rate (APR) is the interest rate charged on your personal or business loan on an annualized basis. In other words, it is a finance charge calculated on an annual basis and typically ranges from about 5% to 30%. The loan’s interest rate is determined by the applicant’s financial history, assets, income, credit history, and other factors.
The APR is your interest rate expressed as a yearly rate which may include fees such as origination fees; is important because it can give you an idea of how much you’ll pay to take out a loan.
Determine how long you believe it will take your business to repay the loan. Repayment agreements are based on the terms agreed upon by your company and the lender. Repayment terms can be as short as 6 months or as long as 5 years. When negotiating your loan, make sure to agree on repayment terms that are compatible with your current financial situation.
Financing Your Business
Knowing what types of commercial loans are available is fundamental to the strategy you will embark on to fund your small business project. There are several ways to finance your business. The following are examples of the most common types of business loans:
- Business Credit Lines: A line of credit that businesses can draw on as needed.
- Financing for Equipment: Loans for the purchase of equipment in which the equipment serves as collateral
- SBA Loan: A loan secured by the Small Business Administration that is low-cost and flexible.
- Short Term Loan: Small loans with repayment terms ranging from three to eighteen months.
Business loans are an excellent way to obtain the capital that your company requires to thrive.
Business Loan Providers
The challenging question is “Where should I apply for a business loan?” Decide on the best funding options for your company, including low-interest rates, favorable repayment terms, and quick approval.
- Fora Financial
- Rapid Finance
- Sutton Funding
Steps to Take Before Applying for a Business Loan
It is now easier than ever to apply for an online business loan thanks to advancements in technology. However, just because it’s easier to apply doesn’t mean it’ll be easier to get funding. Especially if you own a small business.
The vast majority of online business loan applicants are turned down. There are several steps you can take to reduce the likelihood of this happening and to prepare your company to be approved for financing.
Here are 8 Things You Should Do Before Applying for a Business Loan.
- Begin with a business plan
- Manage your Bank Statements
- Create financial statements
- Clearly state the loan’s purpose and amount
- Examine your personal credit history
- Understand your collateral capacity
- Understand how much the loan will cost you overall
- Investigate your borrowing options
Before you get into these important steps you should take a look at all options available to your small business like available seed money from friends and family.
It’s easier than ever to apply for an online business loan, but it’s critical to understand the process and prepare your personal and business credit ahead of time.
Business Line of Credit (BLOC)
A business line of credit is a type of small-business loan that offers flexibility that traditional business loans do not. A credit line functions similarly to a credit card. It allows you to borrow and pay interest on a set amount of money.
This type of business line of credit allows you to borrow up to a certain limit say, $100,000 and pay interest only on the amount borrowed. You can then withdraw and repay funds as you see fit, as long as you don’t go over your credit limit.
A business line of credit is useful when you need to manage cash flow, purchase inventory, or pay for an unexpected expense.
BlueVine Credit Line
BlueVine’s line of credit offers quick working capital for short-term borrowing requirements.
• Cash can be available in as little as 12 to 24 hours.
• A range of term lengths to meet a variety of financing requirements.
• A shorter repayment term means higher payment amounts.
• Personal guarantee required, not available in North Dakota, South Dakota, or Vermont.
Fundbox Credit Line
Fundbox provides a business line of credit to help with cash flow, and qualifying is easier than with other lenders.
• Cash can be available as soon as the next day.
• A low minimum credit score is required.
• Rates are higher than at traditional banks.
OnDeck Credit Line
OnDeck provides a quick line of credit for small-business owners with poor credit who need to manage cash flow or purchase inventory.
• Cash can be available as soon as the next business day
• Requires a low credit score
• Fewer forms to fill out than most lenders
• Because of the fixed-fee structure, early repayment does not save interest
• Requires weekly payments and a personal guarantee
What is the purpose of a business line of credit?
A business line of credit differs from a term loan in that it provides a one-time lump sum of cash that is repaid over a set period or term. Line of credit borrowing limits, which typically range from $1,000 to $250,000, are typically lower than term loan borrowing limits..
A credit line works in the same way that a credit card does. You can withdraw funds as needed and repay them over time with a credit line. You can reuse and repay your line of credit as many times as you want, as long as you make payments on time and don’t go over your credit limit. You only pay interest on the amount you borrow, and several lenders allow you to repay your entire balance early to save on interest costs.
How to Apply for a Business Line of Credit
To qualify for a business line of credit, you’ll usually need at least six months in business and $25,000 in annual revenue. Although not all lenders have a minimum credit score requirement, borrowers must have a credit score of five hundred (500) or higher to qualify.
Traditional lenders such as banks, as well as online lenders such as OnDeck and BlueVine, offer business lines of credit. Borrowing limits and interest rates can vary greatly, depending on the lender’s requirements and the borrower’s circumstances.
Lenders typically require documentation when you apply for a business line of credit, which can include personal and business tax returns, bank account information, and business financial statements such as profit-and-loss statements and a balance sheet.
To qualify for a line of credit, many traditional lenders require businesses to have significant revenue and several years of history. Larger lines of credit may necessitate collateral, which the lender may seize if you fail to make payments. SBA credit lines have similar stringent requirements.
Online lenders frequently have less stringent qualification requirements than banks. These lenders, however, are likely to charge higher interest rates than banks and may have lower credit limits. Lenders may be able to issue business lines of credit within a few days of approval. Banks typically take longer than online lenders to establish new credit lines.
Secured and Unsecured Business Line of Credit?
A secured business line of credit requires you to put up assets as collateral, such as inventory or property. If you do not repay the credit line, a lender may seize your assets.
Although an unsecured business credit line does not require collateral, some lenders may still require a personal guarantee or a lien on the assets of the business.
- If you default on a loan, a personal guarantee gives a lender the right to seize your assets, such as your home.
- If you haven’t repaid a loan, a lien gives the lender the right to seize your company’s assets, such as machinery and equipment.
So, when comparing lenders, find out if they require collateral, a personal guarantee, or a lien so you can choose the best option for your company.
Credit Cards for businesses vs. Credit Lines for businesses
Business credit cards are lines of credit as well, but they differ from traditional business lines of credit in several ways.
- A business line of credit can provide a higher credit limit, collateralized, and deposits actual cash into your bank account when you make a draw.
- A business credit card can be used to obtain cash, but you will be charged fees and have a higher APR. Annual and late-payment fees are two other common fees for business credit cards.
Smaller ongoing expenses and newer businesses without established finances benefit from business credit cards, whereas larger ongoing expenses and more established businesses benefit from a business line of credit.
Business credit cards, like personal credit cards, can offer rewards or cashback for spending. Typically, rewards are tied to business expenses such as office supplies, gas, internet, and cable. They may also offer 0% interest promotions, which allow you to pay no interest on your balance after you sign up for the card for a set period of time.
The SBA assists small businesses in obtaining loans
Finally, a variety of traditional banks and credit unions, as well as online lenders, offer small business loans. However, each lender is constrained by its own financial products and lending criteria.
The SBA collaborates with lenders to make loans to small businesses. The agency does not make direct loans to small business owners. Instead, it establishes guidelines for loans made by its affiliated lenders, community development organizations, and micro-lending institutions. SBA lowers lenders’ risk and makes it easier for them to access capital. Small businesses will find it easier to obtain loans as a result of this.
Traditional banks and credit unions typically offer a limited selection of small business loans, including SBA-backed loans. Not only will the bank already have the financial statements for the company on file, but it may be easier to get approved with a local lender who is familiar with your operation.
While traditional banks frequently have stricter lending standards than online lenders, small business owners may find it easier to qualify at an institution with which they already have a banking relationship.
Online lenders, in general, may have more lenient borrower qualifications than larger, traditional banks. While APRs are higher with online banks than with traditional lenders, approval rates are also higher, and borrowers are less likely to require collateral. Furthermore, many online lenders offer faster funding than their brick-and-mortar counterparts, making them an attractive option for businesses in need of cash quickly.
Start or expand your business with Small Business Administration-guaranteed loans. Lender Match can help you find lenders who can provide loans for your business.
The foregoing information provided herein is not intended to be investment, tax, or financial advice. You should do your due diligence to seek advice from a licensed professional regarding your specific situation.