How To Find the Best Small Business Loans
Choosing the Best Small Business Loan Program
Small business owners searching for information related to business loans must ask themselves first which business loan options are best for their business investment. What works for the business needs of one company might not work for yours. Similarly, the loans or small business financing you need for business renovations might not be the same one you’d get if you were experiencing a short-term cash flow problem.
Where do companies get the necessary information to make solid financing decisions? While traditional routes such as bank loans are often difficult for the average small business owner to get approved for loans, you still have many other financing options in the marketplace. The following are the most common types of loans for small companies.
Small Business Loans
Traditional term loans are similar to that of a conventional bank loan in that it is a fixed amount of funds provided upfront, with fixed cost, term, and payment. New online lenders have come on the scene that offer loans with various terms to include prepayment penalty and loan amounts.
Loan Amount Limits: $10,000 to $1,000,000
Interest Rate: Varies depending on lender and loan interval
Eligibility Requirements: All credit types considered for credit approval
Loan Application Timeline: As little as two days
Repayment Guidelines: 1-25 years; offers both short and long term financing
Business Line of Credit
A business line of credit is an open revolving credit facility. This type of business funding allows companies to draw funds when needed on-demand or to make purchases. A business line of credit charges principal & interest. Business lines of credit have a limit that cannot be exceeded without a lender’s approval and is not open-ended forever, and requires renewal by lenders either semi-annually or annually to be extended. The primary reason businesses choose a business line of credit instead of term loans is the draw feature, affordable rates, and flexible repayment intervals. Although not a loan, a line of credit is popular with companies that need working capital and a fast way to get funds.
Loan Amount Limits: $10,000 to $500,000
Interest Rate: Starting at 5.50% or treasury index plus 1% to 2.5% depending on lender
Repayment Guidelines: Open revolving lines of credit
Fees: Origination fees ranging from 0% to 3%
Payment: Monthly, Bi-Weekly, or Weekly
Credit Profile History: Fair to excellent credit score required
Documentation: Reduced documentation to include one page application and three months bank statements
Loan Application Timeline: 1 to 2 Days from application to funding
An excellent option for small businesses when a traditional business term loan falls through is short-term loans. These funding options provide a fixed amount of cash upfront (lump sum), with a set payback amount calculated using a factor rate over a short fixed term of typically 6 to 18 months. Rates are not principal & interest but are based on a “factor cost” and cost more than traditional loans. Real estate collateral is not required to get approved.
These financing needs are incredibly popular with small businesses, given that they require very little paperwork and have much more forgiving creditworthiness requirements than traditional loans. These popular features are possible because short-term loans charge more for costs, and payments are more frequent.
Loan Amount Limits: Up to $500,000
Loan Term: 6 to 18 months in duration (typically 12 months or less)
Installments: Weekly, Bi-Weekly, and in some cases daily Monday-Friday
Credit Standards: All credit types considered for credit approval
Documentation: Reduced documentation to include one page application and three months bank statements
Loan Application Timeline: Same day to 24 hours
The fast, convenient, and straightforward way to get the small business loans you need for your business – now! Get your quote today by filling out our simple form.
Equipment financing is when you use the equipment you are purchasing as collateral to acquire the funding. Due to this fact, repayment intervals can go longer than traditional financing, up to 5 years. Standard companies that use equipment financing are manufacturers and construction contractors. This product can come in the form of an advance or leasing.
Loan Amount Limits: $10,000 to $1,000,000
Credit Score Requirements: All credit types considered
Application Timeline: Same day to 24 hours
Loan Term: 1 to 7 years
Invoice financing advances the outstanding balance to a business to increase the speed of cash flow to the company. This solution provides cash quickly, and there is no need to wait for outstanding invoices to be collected and received by the client (people) with invoice financing in place. Invoice financing has affordable costs ranging from 1% to 2.5% fee off of the face value of the invoice advanced. This product is exclusively for businesses that issue invoices to their customers (people) with terms up to a net of 60.
Interest Rates: None
Repayment Guidelines: Not like traditional loans; invoice advances are paid back in line with invoice terms
Fees: 1% to 3% fee based on the invoice; monthly service fees may apply depending on the volume of invoices factored
Borrower Credit Requirements: Credit score of the business owner does not matter
Application Process: A couple of days for approval and set up
The fast, convenient, and straightforward way to get the money you need for your small business – now! Get your quote today by filling out our simple form.
Merchant Cash Advance
A merchant cash advance is a way to raise funds for your business by leveraging your monthly cash flow. This works for those small business owners looking to avoid providing financials, have a credit impairment, or show low balances in their business bank account.
What is unique about this product is that the repayment is made by a set fixed percentage of future sales, therefore having a flexible repayment period with no term limit. This is not a loan but an advance of a lump sum of money. The business owner sells a portion of the business’s future sales at a discount to a funder in exchange for cash today. Repayments are made either by credit card percentage splits at the transaction or fixed daily Monday – Friday ACH payments. This product is top-rated for businesses that accept sales predominantly from credit cards. Merchant cash advances are not loans but advances of future sales of the company.
Funding Amounts: $10,000 to $1,000,000
Credit Requirements: All credit types considered
Application Process: As little as one day
Repayment Guidelines: Flexible
Small Business Administration Loans
The U. S. Small Business Administration (SBA) is a government agency that provides information, resources, programs, guidelines, and loan guarantees to approved Small Business Administration lenders to issue a small business loan application for loans to small companies. This administration’s mission is to help American enterprises to start, build, and grow their business successfully. The SBA is not a lender. The Small Business Administration provides a guarantee that gives the approved SBA lender the ability to take on the risk of lending and decisions under specific terms that they would not ordinarily follow on their own. Real estate collateral is not required for all financing options.
SBA Loan Programs & Information for Small Businesses
An SBA-approved lender is authorized to provide the options listed below:
- SBA Standard 7(a)
- SBA 7(a) Small term loan
- SBA 504 C
- SBA Express
- Paycheck Protection Program (PPP) Funding
- Export Express
- Export Working Capital
- International Trade
- Veterans Advantage
- CAP Credit Line
SBA Standard 7 (a) Loan Program -The SBA’s primary program for providing financial assistance to small businesses. The guidelines, like the guarantee percentage and loan amount, may vary by the type of loan.
SBA 504 C Loan –The SBA CDC/504 provides long-term, fixed-rate financing of up to $5 million for significant fixed assets that promote business growth and job creation. The SBA 504 is available through Certified Development Companies (CDCs), SBA’s community-based partners regulating nonprofits and encouraging economic development within their communities. CDCs are certified and regulated by the SBA.
An SBA 504 loan can be used for a range of real estate assets that promote business growth and job creation. These include down payments for the purchase of real estate or construction-related needs, the improvement or modernization of property, land, streets, utilities, parking lots, and landscaping of existing facilities.
An SBA 504 loan cannot be used for:
- Working capital or inventory
- Consolidating, repaying, or refinancing debt
- Speculation or investment in rental real estate
Economic Injury Disaster (EIDL) –In response to the Coronavirus pandemic (COVID-19), small business owners, including agricultural businesses and nonprofit organizations in all U.S. states, Washington D.C., and territories, can apply for the EIDL. The EIDL is designed to provide economic relief to businesses currently experiencing a temporary loss of revenue due to COVID-19.
Paycheck Protection Program (PPP) –The Small Business Administration has established the SBA Paycheck Protection Program (PPP) loan in response to COVID-19. This relief option provides financing resources to small businesses affected by the Coronavirus pandemic and needs financial help. Under the right conditions, this SBA loan offers forgiveness. The PPP loan was designed for small business owners across the U.S. to retain employees and protect jobs during the Coronavirus (COVID-19) pandemic. The new Paycheck Protection Program (PPP) will allow for loans to 2 million.
Business Credit Cards
Business credit cards function as a revolving line of credit in which a card is issued that can be used for both purchases and payments. Most companies use credit cards in conjunction with other loan products that may be used for cash flow every day. Lenders of this product are primarily banks. A business credit card is not an unsecured line of credit and will require a personal certificate. All businesses commonly use this product for working capital and in conjunction with other loans or financing.
Rates: Pay interest rates starting at 0% up to 28.99%
Repayment Guidelines: Revolving; no term limits
Fees: 1% to 3% origination fees
Payments: Low flexible monthly payments
Credit Score Standards: Must have good to excellent credit score and deep credit history
Identify Why You Need a Business Loan
The first step in any search is clearly defining why your small business needs the funds. The “why” will direct you many times to the right loan product. Working capital is the most popular reason because there are so many ways it can be used. When cash flow gets tight due to fluctuations in sales, extra capital can provide the buffer needed to carry the business through rough times.Other reasons for the need for business financing include, but not limited to:
|Working Capital||Sometimes cash flow can get tight, and a working capital loan is needed to maintain proper levels of money to operate the business.|
|Business Needs||A new venture that requires a down payment, upfront capital, recruiting key employees, initiating a new business relationship, or research and development.|
|Inventory||Common need for eCommerce, manufacturers, and other retailers.|
|Marketing/Advertising||Small business owners need funds to promote their business. A variety of advertising strategies include internet marketing, direct mail, radio advertising, flyers, and paper ads, to name a few.|
|Equipment||Most small businesses have some type of equipment. Perhaps you’re a business that requires machinery, furniture, medical equipment, construction equipment, computers, or tools. These are common requests from restaurants, auto repair shops, construction industries, medical practices, and manufacturers.|
|Infrastructure Improvements||This category could include a move to a more prominent location or office that requires capital.|
|Information Technology and Software||In today’s world, capital may be needed for business needs related to website development and site maintenance, customer relations management software, computers, machines, and other products essential for a business’s success.|
How to Qualify For a Small Business Loan
There are a few factors involved in your approval.
1. Creditworthiness: Credit Score
How does your personal credit and credit report as a business owner affect qualifying for small business financing?
Personal credit score information of the business owner plays a significant role in determining what, if any, loans you can be approved for by lender loan applications. As a business owner, the better your personal credit is, the more business funding options you will have to choose from. However, it’s essential to know that not all financing offers involve a personal credit check.
How to Understand, Review, and Analyze your Credit
A smart thing to do is pull your own credit information using all three credit bureaus to see your credit scores: Equifax, Experian, and TransUnion. (Be wary of sites that offer you “a credit score” as that may be another credit risk model other than FICO.)
FICO credit score risk model:
What is a good credit score to get approved during a business loan process?
As a rule of thumb, a 750 FICO score and up is Excellent, 720 FICO and higher is good, 680 FICO and higher is Fair, below 680 to 620 FICO is marginal, and below 620 is considered poor. For the most part, the longer the term and the lower cost small business loans will require the highest credit scores and standards.
2. Length of Time
How long you have been in business is a significant factor in determining qualifications and repayment guidelines for loan products. Let’s face it; business lending is a risky business. Business lenders need to see a track record to take a calculated risk in providing you a term loan. Many small businesses don’t make it past the first year in business, so obviously, business lenders will be cautious if you have less than two years in business when providing loans.
3. Financial Statements
What financial documents and information will business lenders need for small company loans?
Business Bank Statements
Almost all small loans will require bank statements to review. Typically three months are needed, but sometimes 6 to 12 months may be necessary if the business is seasonal or has made a considerable loan amount request. Bank statements show business lenders the cash flow activity of the company and your ability, as the business owner, to manage the business’s finances.
Profit & Loss and Balance Statements
These statements provide a more detailed view of the business and its health and may be required for the longer-term and lower-cost term loan options. The good news is that Profit & Loss and Balance Sheet statements typically are not necessary for alternative business lending products.
Business and Personal Tax Return
Some business lenders will need to see tax returns. If that is going to be a challenge, there are a lot of alternative business online lenders who will not require these documents, but keep in mind, most likely, the term loan offers you receive will be impacted by the lack of documentation and therefore be reflected in the costs and repayment guidelines you will be provided.
How to Break Down Business Loan Offers/Terms
What are the terms and costs of Small Business Loans?
Interest Rate of Factor Cost
There are two most common types of small business loan rates out there when shopping for a loan. Some business loans charge an interest rate like consumer lending, but others charge a “factor rate” or “factor cost,” which is a flat cost and not principal and interest.
Interest rates are charged based on the daily principle, whereas factor rates are flat costs.
This means you pay the same total cost whether you pay off early or not unless they offer an early pay discount or penalty. But interest rate or factor cost does not tell the whole story. Most lenders charge additional fees, so you have to count those in overall cost when comparing.
Terms of Small Business Loan
The length of the repayment term for loan products varies greatly and can be from 6 months to 7 years, depending on the product and qualifications. Although one loan may seem cheaper than another, you must factor in the length of time of repayment.
You may want to consider a more affordable payment with longer-term versus short-term loans if you are willing to pay more in rate and/or cost for that benefit. If the option is a principal and interest rate loan, then check for the APR (Annual Percentage Rate), which factors not only rate and cost but also the length of repayment and payment frequency.
Installments and Method of Repayment
Disbursements can be monthly, biweekly, weekly, and even daily (weekdays), depending on the business funding product. It is very common for collection to be in the form of an auto deduction from your bank account via an ACH. Although payment frequency can be a factor if you have very low average daily balances in your business bank account, the interest rates, costs, and term should be a more significant consideration than that of payment frequency.
This is a charge for services at the time of consummation of the loan. The fee is often a percentage of the loan amount, typically ranging from 0% to 5%.
The fast, convenient, and straightforward way to get the money you need for your business – now! Get your quote today by filling out our simple form.
How to Choose the Best Business Loan
Business Owners Should Ask the Following Questions:
Do I have all my facts and research about the different loans available to me and my business?
Create a chart and plug in your offers using the breakdown discussed above.
What is more important to you? Costs or payments of your loan offer?
Discover what’s most important to you because you will have to balance costs and payments in making your decision. Total cost does matter but make sure you are comfortable with the payment, whether daily, weekly, bi-weekly, or monthly.
Am I comfortable with the length of time of the loan it will take to pay it back?
Ensure you understand the details of your loan and are comfortable with the terms.
Does the business lender have good customer service in repayment?
You’ll want to make sure you work with a reputable lender who is willing to work with you if problems arise. Finding your lender’s phone number will be helpful.
Can I repay this business loan?
Ensure you can repay the loan promptly.
Frequently Asked Questions
What are the four types of business loans?
Long-Term Business Loans-The loan terms for this type of term loan have repayment guidelines greater than 24 months up to 25 years from the small business administration. 2 to 3-year term loans are also available through companies like Funding Circle. Funding Circle is a new breed of online business lenders offering loan terms of mid-term financing. It’s recommended to review Funding Circle’s privacy practices.
Short-Term Business Loans-The loan payment terms for this type of term loan have repayment guidelines of less than 24 months.
Business Lines of Credit-The loan terms for this are a revolving line of credit and not a term loan. This credit line is usually up for renewal annually.
Alternative Financing-There are multiple non-bank products with various loan repayment guidelines and other financing options such as Merchant Cash Advance, Invoice Factoring, asset-based loans, and Purchase Order Financing.
How can I get a first-time business loan?
When small businesses are looking for initial small business financing, a business will need a track record of sales revenue for a finance company to review its ability to repay. Loan terms and options will be dictated by its cash flow and revenue and the small business’s time in operation, and the business owner’s personal credit (creditworthiness). Qualifications will dictate the loan repayment guidelines.