Small Business Loans
Small business loans, sometimes called commercial loans, provide essential funds for company operations. You can request a small business loan at any point during your company’s development, whether you need funds to launch a startup business or money to replace the equipment your warehouse workers have used for decades.
Entrepreneurs and business owners often wonder how to get a small business loan. This guide provides essential information about loans for small businesses, including:
- What is a small business loan?
- Who can request a small business loan?
- What are the qualifications for a small business loan?
- What are the different funding options for small business loans?
- What should you know about SBA loans?
- How do you apply for a small business loan?
- How do you create a business plan?
- What are some common mistakes you should avoid during the application process?
- What are the terms for a small business loan?
- How do you choose a lender for a small business loan?
- Do you need perfect credit for a small business loan?
- What are the pros and cons of small business loans?
- How do you know a small business loan is right for you?
- What should you know before you apply for a small business loan?
- FAQs about small business loans
As we share the ins and outs of lending for small business owners, we cover these key topics:
- Eligibility for small business loans
- Gathering important documents
- Explaining why you need a loan
- Business versus personal credit scores
- Calculating your debt service coverage ratio
- Determining how much money you need
- Making the most of your funds
- Understanding your repayment terms
- Funding options other than traditional business loans
We want to help you make an informed decision during every step of the loan process, from selecting a lender to determining how much money your business needs.Fill out a Lendzi application today and learn everything you need to get started below.
What Is a Small Business Loan?
A small business loan refers to funds borrowed by a current or potential small business owner. Borrowers can use these funds to purchase a small business, launch a small business or generate additional income for their current small business. Various funding options are available for small business owners, including term loans, SBA loans, microloans and merchant cash advances.
People often ask if a small business loan is the same as a startup loan. Sometimes borrowers use the terms interchangeably, but not every small business loan is also a startup loan. Sometimes you can differentiate between these loan types by considering how long a company has been in business. Company owners can request a small business loan for new or existing establishments, but startup loans are geared toward new businesses. Also, startup loans often have more stringent requirements than traditional loans for small businesses, as some lenders prefer working with established companies.
Some business owners want a loan reserved for their background or industry. Here are some examples of loans that fulfill this preference:
- Small business loans for women
- Small business loans for veterans
- Small business loans for minorities
- SBA loans for rural small businesses
- SBA loans for new businesses
- Small business loans for felons
- Small business loans for people with disabilities
- Disaster recovery small business loans
If you’re searching for one of these loans or a similar type of funding, let Lendzi know. We’re happy to match you with a lender who understands your unique situation.
Who Can Request a Small Business Loan?
Anyone can request a small business loan, but approval depends on several factors. Requirements vary by lender, but generally, you must meet the following guidelines:
- You must own a small business or plan on buying or starting one with your funds.
- You must be at least 18 years old.
- You must have a business in an approved industry.
- You must have verification your business exists or is in the process of launching, such as an EIN, tax documents, business license or bank statements.
- Your business must have the ability to generate a profit.
- You must meet credit requirements.
- You must use the funds for business-related purposes unless otherwise specified.
What Are the Qualifications for a Small Business Loan?
Start by determining what your lender considers a small business. The SBA offers a Size Standards Tool that calculates whether or not your company meets small business guidelines for government contracting purposes. Sometimes companies are classified as small businesses based on the total number of employees they have. Other times, annual sales play a role in classification for small businesses. It’s possible, though not mandatory, to meet more than one requirement for the classification process.
Here are some other factors that may impact your eligibility for small business loans:
- Credit history, including your personal FICO score and your business score
- Length of time your company has been in business; many lenders prefer at least one to two years of operation
- Net operating income, typically of at least 1.25 times higher than your total expenses
- Annual revenue, preferably at least $50,000 to $150,000
- Personal credit utilization ratio; the lower, the better
- Assets, such as equipment or inventory, for collateral
What Are the Different Funding Options for Small Business Loans?
A term loan is a loan that’s paid back over a set amount of time, such as 30 years for a home loan or 60 months for a car loan. The payment schedule is fixed, but it can be paid off early without penalty. It can either have a fixed rate or a floating interest rate.
Stringent; full documentation is required, including tax records, proof of current income or business earnings and a high credit score. Collateral or a down payment is sometimes required to alleviate risks for the lender.
Term loans generally require a good to excellent credit score. Your chances of being approved increase greatly with a higher score. Most banks prefer over a 620, while some insist on a 740 or higher. There are exceptions, however. FHA-backed home loans only require a 580 credit score for financing with a 3.5% down payment and could accept lower credit scores with a 10% down payment.
Term loan amounts vary greatly depending on your needs, credit score and debt-to-income ratio. They can range in size from $2,000 to $50,000 for personal loans while small business term loans can be as high as $5 million. Term loans tied to real estate are often limited to the appraised value of the real estate.
A term loan requires full documentation, which adds to the overall length of time before funds can be disbursed. The funding timeline can range from as little as one week to 60 days or longer.
There are different types of term loans:
- Short-term loans, which usually last 18 months or less
- Intermediate-term loans, which typically last one to three years
- Long-term loans, which last three years or more
Most loans are paid in full at the end of the term, but some can have a balloon payment, which means the remaining balance is due at the end of the term. Balloon payments help keep monthly payments low. Many people refinance at the end of the term in order to pay off the balloon payment balance.
SBA loans are often misunderstood. The Small Business Administration doesn’t loan money, but they guarantee the loan. The loan comes from a commercial lender who has partnered with the government agency to reduce lender risks.
In other words, if you own a small business or want to start one, you need to secure a loan through a traditional bank or credit union. The SBA then guarantees that they will pay the bank back 85% of your remaining loan balance if you default on the loan.
SBA loans come with the added benefit of education and professional counseling for the small business owner. The extra guidance for tasks such as creating a business plan is often highly beneficial for new business owners.
Each individual lender has their own requirements for documentation, but SBA guaranteed loans generally require both personal finance records, such as tax returns, bank statements and credit reports as well as business financials. These business financials include property and loss statements, year-to-date earnings and even your Articles of Incorporation. It’s also important to remember that SBA loans are strictly for business owners who operate their companies in the United States.
Banks are typically cautious with SBA loans and require better than average personal credit scores of the owner-borrower. They don’t necessarily expect the small business to have its own credit rating.
SBA backed loans can be as little as $500 to as much as $5 million depending on your company’s needs.
Because an SBA loan has to be approved by both the lending institution and the SBA itself, the funding timeline can easily stretch to 60 days. Make sure you submit all required documents with your application to prevent additional delays.
Repayment terms vary depending on the lending institution and the amount of the loan, but borrowers often repay funds on a monthly schedule.
Microloans are one of the newest loan options available to small business owners. Microloans are small loans of less than $500 available for individuals and small businesses. Kiva.org, an international nonprofit, revolutionized lending when they started crowdfunding microloans to impoverished individuals in third world countries back in 2005. The idea was that a small loan of just $100 could help lift an individual out of poverty by helping them buy what they needed for their business. These purchases included profit-boosting essentials, such as one goat, a new fishing net or a pottery wheel.
The success of Kiva led to interest in microloans for small businesses here in the U.S. While national banks don’t usually offer microloans, they’re available at some credit unions, at local chambers of commerce, via national nonprofits and on crowdfunding platforms.
It’s important to note that the majority of lenders in this space are mission-focused. This means that while they need to be paid back, their main goal isn’t profit. They’re interested in helping their niche of borrowers succeed. Many microloan lenders offer other means of support, such as networking and education, to ensure success.
The required documentation varies greatly depending on who’s doing the lending. A credit union may have stringent requirements, while a peer-to-peer lending platform may require limited documentation.
It’s important to mention that there may be other requirements not normally associated with traditional loans, such as minority or female ownership, physical location or customer base. These requirements are in line with mission-focused lenders who want to make a difference in the world.
While your credit score may be checked, it’s generally not a strict requirement for funding. Lenders of microloans realize that your credit may not be perfect, and they’re typically okay with that. You may be asked to write a letter explaining any negative marks on your credit report.
Microloans were designed to be less than $500, but some nonprofits are pushing that envelope to amounts of up to $50,000.
Microloans have unique timelines. Peer-to-peer lending platforms can take up to 60 days for your loan to generate enough interest to fund in full while a microloan from your chamber of commerce may have to wait until the next quarterly meeting for a vote.
Repayment terms vary depending on the amount of the actual loan, but they typically are very generous. The lenders want you to succeed, not stress about high monthly payments or short loan terms.
Merchant Cash Advances
If you have an established credit card account, you can use those sales for a merchant cash advance. Basically, a lender examines your credit card sales for the last six to 12 months and then loans you a percentage of that amount.
Small business owners should be aware, however, that merchant cash advances are not held to the same standards as a traditional bank loan. Read the small print and make sure you understand the interest rate, repayment terms and fees before moving forward.
This type of loan isn’t based on credit worthiness; instead, it focuses on credit card sales. Lenders typically only require access to those receipts.
Your credit score will rarely be checked for a merchant cash advance loan.
Lenders can loan up to 250% of your credit card sales, often maxing out at $250,000.
The funding timeline is very brief for merchant cash advances. Once the paperwork is signed, your loan can be funded in just a few days. In some cases, you may wait up to one or two weeks for your funds.
The lender maintains access to your merchant account and takes payments on a monthly, weekly or even daily basis directly from those funds. The repayment rate could be anywhere from 8% to 30% of your sales.
Equity financing is raising money by selling shares of your company. While you may not be a huge corporation, such as Coca-Cola or Starbucks (yet), you can still use equity financing as a way to raise funds for your growing business.
You can also use equity financing to borrow money from friends and family. Borrowing $1,000 from a loved one benefits both of you when your lender receives a stake in your company in exchange for the funds.
You can also use equity financing to borrow from angel investors and venture capitalists. They may require more than one share, however, to ensure that the transaction benefits them.
Whether you’re working with a family member or a venture capitalist, you should be able to provide them with a viable business plan, a property and loss statement and information on any existing debt that your business has incurred to date.
While equity financing has nothing to do with your credit score, a venture capitalist may request a copy of your credit report in order to gauge what type of person you are. A low score may indicate to them that you’re not fiscally responsible. Be prepared to explain any negative marks on your credit report.
Equity financing is based on the value of a business. Small business owners can expect to value their establishments at two to four times their profit. A business that makes $200,000 in gross revenue with $40,000 in net sales can expect to value their business at two to four times the $40,000, or $80,000 to $160,000. The real multiple in which you calculate the value is net income.
If we use the example above at a 2% multiple and value your business at a reasonable $80,000, each share that you offer to sell is valued at $800. We determine this by using the calculation $800 x 100 shares = $80,000. If you need $4,000 to buy a new piece of equipment for your business, you need to sell five of those shares.
It’s important to note that if you grow to be a company valued at $10 million, those five shares would now be valued at $250,000.
There’s no timeline on equity financing. Your loved one could be very proactive and ready to give you the money tomorrow. You should, however, take the time to draft legal documents to protect you both, which would add to your funding timeline.
There are no repayment terms. You are selling a share of your company, not borrowing money. The lender has an ownership stake in your company.
Debt financing is a broader term for any loan — term, micro, SBA, even a family member. Any time you borrow money and agree to pay it back with interest, you are debt financing.
Small businesses can use debt financing to sell a bond to investors.
You will need to provide a profit and loss statement and a business plan to demonstrate the health of your business and your future plans.
Debt financing with bonds is not based on your credit profile, but an investor may want to see your personal credit report before purchasing a bond in order to determine your overall creditworthiness.
The amount is completely negotiable between you and the bond purchaser.
The timeline will be relatively short, especially when working with an angel investor with readily available cash.
Using debt financing to sell bonds leads to drastically different repayment terms. While you and the lender can jointly decide on whatever terms you want, it’s typical for a bond to have only one lump sum payment at the end of the term and no monthly payments. Some bonds require interest-only payments at the end of each year with the principal being paid back at the end of the term.
You may have seen ads for factoring on late night television commercials. They often feature a lottery winner claiming that they want all their funds now. Despite these dramatic commercials, factoring is a valid opportunity for many small business owners.
Small business owners often have to wait 30, 60 or even 120 days for payment from large organizations, which can hamper cash flow dramatically. Factoring eliminates the waiting game by paying you for your outstanding invoices now.
Factoring companies pay 70% to 90% of the value of your outstanding invoices. For example, if you have an invoice for $10,000 and you know you will wait three months for that check to arrive, you could sell the invoice to a factoring agency for $7,000 to $9,000 and get paid much sooner.
Factoring companies require copies of outstanding invoices as well as any accompanying contract paperwork. They may also require proof that you are a solid business, like your Articles of Incorporation, a profit and loss statement or even a copy of your business card.
Your credit is not used when you are factoring receivables.
There is no limit to the amount of invoices you can factor; however, please realize that factoring companies are typically not interested in working with invoices in small dollar amounts. They prefer a few thousand dollars per invoice.
Factoring has a fast turnaround time.
You do not repay any money. You are selling your accounts receivable. Most factoring companies are professional and respect the privacy of you and your clients. Your clients will not know that you used a factoring agency.
|Funding Type||Purpose||Amount||Disbursement||Payment Schedule|
|Traditional bank loan||General business use||$150,000+||Two to four months after approval||Monthly|
|SBA loan||General business use||Up to $5 million||Three to six months after approval||Monthly|
|Merchant cash advance||Payroll and other essential expenses||Up to $500,000||One week or less||A fixed percentage from daily sales; typically three to 12 months|
|Factoring||Operating expenses||70% to 90% of invoices||One to two weeks||2% to 3% of invoice totals; typically 30 days|
Other Funding Options for Small Business Owners
Some small business owners choose other funding options for their career ventures. This often occurs when business owners are building or boosting their credit history. When you believe in yourself and your business, eschewing normal routes of business financing may be necessary to achieve your goals.
Business Credit Cards
Every financial expert will tell you not to max out your credit cards, but sometimes business owners decide to go for it anyway. In fact, Google, Guitar Hero and the movie “Clerks” were all bootstrapped with credit cards.
There are no required documents for credit card usage. If you decide to ask for an increase in your spending limit, be prepared to discuss why you need the credit limit increase.
There are a variety of credit cards available — both personal and for your business — that accept a wide range of credit scores. You can even get a business credit card with poor credit, though you may need a cosigner.
Your credit limit is often based on your credit score for a personal card or on your net profit for a business card. You can, however, bootstrap your business with multiple cards, transferring to zero balance/no payment cards as necessary to delay payment and the accruing of interest as long as possible.
Funding is immediate when you use a credit card for purchases or cash advances. Please be advised that cash advances often include a higher interest rate and can be exempt from available zero-interest promotions.
Credit cards require a minimum payment each month towards your balance. This could be a fixed amount, like $25 or $50 dollars, or it could be 1% to 2% percent of the balance.
If your small business hasn’t established any credit in its name yet, it may be hard to get a loan. You can get a personal loan in your own name and then ‘loan’ that money to your business. You’ll need to keep careful track of the transaction and repayment for tax purposes later. Talk to your accountant or tax adviser to ensure you’re creating an accurate paper trail.
You should be able to get a small personal loan without much documentation. If you have a primary job aside from your small business venture, you’ll need two paycheck stubs. You can also use collateral to secure the personal loan, such as refinancing a paid-off car or putting up a piece of jewelry as collateral.
Your credit score needs to be at least 620, preferably 740 or higher, to get an unsecured personal loan. A secured loan, or one that is based on the collateral that you offer, may accept lower credit scores. That’s because your funds are backed by collateral, which the lender can seize or place a lien on if you default on your agreement.
Personal loans vary depending on your personal credit worthiness and the value of your collateral. You can typically expect a personal loan in the amount of $1,000 to $25,000.
Personal loans take about two weeks to process.
Repayment terms on personal loans vary based on the amount of the loan. The bigger the loan, the longer you have to pay it back. Somewhere between 24 to 60 months is typical for most loans.
Loans from Friends and Family
Sometimes borrowing money from your family is just as, if not more, risky than using your credit cards to bootstrap a business. Think long and hard about this decision, as issues may arise.
If you determine that family is your only choice for funding, request funds in a professional manner. Have a lawyer draw up legal documents stating the amount borrowed and the loan terms. Make sure you pay a reasonable interest rate. Treating this like the business transaction that it is can help avoid tensions later.
Nothing is required for family, but you should offer copies of your current profit and loss reports and your business plan to keep things professional.
Your family and friends don’t need to see your credit report.
The amount of the loan is between you and your family member. Don’t borrow more than they can afford to lose, even if they’re willing to give it.
If their funds are fairly liquid, you can get the money quickly.
Have clear repayment terms and conditions written out for each party to see and understand, preferably by an attorney.
There are numerous crowdfunding sites online that focus on different aspects of lending. Donation sites, such as FundRazr, focus on crowdfunded money that’s donated and doesn’t have to be paid back to the lender. Sites such as KickStarter help entrepreneurs raise funds to make new products. Crowdfunders aren’t paid back in cash, but they often receive the first products a company or individual produces.
Rather than supply paperwork about your company, you’re required to write a compelling introduction to the product or service you want to bring to market on the crowdfunding site.
Your credit isn’t a deciding factor when you crowdfund money for your business.
Unlike banks that give you your loan in one lump sum, crowdfunding involves multiple investors shelling out increments such as $25 or $50 until you raise the amount you need.
Most sites give you 30 to 60 days to raise your funds. How fast you actually accomplish that goal depends on how exciting your product is and how well it’s received by the community. You can use any method to get the word out, including social media, emails or text messages.
One of the main differences between traditional financing and crowdfunding is that you don’t pay back the money. Instead, you offer rewards at various donations levels. These rewards can be something as tongue-in-cheek as your undying gratitude to the first actual product off the production line or a tangible product that you ship to the donors.
Peer lending, or peer-to-peer lending, is a subset of crowdfunding and a relatively new phenomenon. Peer-to-peer lending focuses on crowdfunding cash for small business owners. The money could be used to buy new equipment or expand into a new territory. Traditionally, the funds aren’t used to meet monthly expenses, such as payroll or rent.
Like traditional crowdfunding, you’re required to write an explanation of why you need the money and how it will be used.
Your personal credit report isn’t used to determine availability of funds.
Peer-to-peer lending is typically used for microloans of less than $500. Some sites allow loans of up to $10,000. You may have to borrow and repay several smaller loans before you can borrow larger amounts.
Like other crowdfunding sites, peer-to-peer lending sites give you 30 to 60 days to get your loan funded.
Each site has its own rules, fees and interest rates, but most loans are repaid in three to five years, less for microloans. You don’t pay each lender back individually; instead, you’ll make monthly payments to the platform, which then distributes the money accordingly.
While most small business loans are used for something tangible, such as buying equipment, adding software or expanding operations into a new area, most don’t help with the day-to-day expenses of running a business. A working capital loan can help meet your needs when your company’s cash flow is restricted.
Working capital loans are most often used by seasonal businesses that need help getting by during the slow season but can repay funds quickly when business resumes as usual. Examples include a window cleaner who brings in generous amounts of money all spring and summer but has no work in the winter or a retailer who earns the bulk of its revenue during the holiday season.
You can get a working capital loan from many types of companies. Some, including the much-maligned payday loans, require very little documentation, while others, such as a working capital loan from a bank or credit union, require excessive paperwork. This paperwork may include your business plan, Articles of Incorporation, two years of profit and loss statements and current accounts receivable information.
Whether your credit is checked is determined by the lender type.
The loan amount is usually based on projected sales.
Funding is generally fairly quick, as working capital lenders typically understand the sense of urgency small business owners experience during slow periods.
Repayment terms are usually a percentage of future sales as they come in, ranging from 10% to 30%.
What Should You Know About SBA Loans?
SBA loans, which are guaranteed by The Small Business Administration, are a good option for some small business owners. You should know that these low-cost loans are provided through lenders and not the SBA itself. The government guarantees part of your loan, usually anywhere from 75% to 85%. This means that if you’re unable to continue making payments on the loan, your lender can collect funds from the SBA.
You should also know that the application process for this kind of loan is quite long and will require documentation. An SBA loan isn’t the only small business loan option to consider.
How Do You Apply for a Small Business Loan?
To get a small business loan, you must first prove your needs and explain what you plan to do with the money, as lenders will ask you this question before you officially apply. You’ll also need to decide what kind of lender to use. You have many options when choosing your lender: You can get a loan from a credit union, bank, an online lender or The Small Business Administration (SBA). Keep in mind, though, the SBA only backs loans; they typically only offer direct loans for emergencies.
Just like with any loan, it’s a good idea to compare a few options and rates from various lenders before making a choice. Look into your finances and credit score, and make sure that you meet any qualifications that are in place. If your credit score needs some TLC, take some time to repay delinquent debts or pay down credit card balances before requesting a small business loan.
How Do You Create a Business Plan?
A business plan is an essential part of nearly every small business funding application. Your business plan helps lenders understand why they should provide funds for your company, but it also explains potential risks.
When you create a business plan, make sure it includes the following information:
1. Executive Statement
Your executive statement is a quick summary that recaps the purpose of your business plan. You should provide clear, specific information here so lenders aren’t left guessing why you need funds for your company.
Here is an example of a detail-rich sentence from a business plan: “Beautiful Butterflies Childcare Center provides compassionate care for infants and toddlers up to age 6 in a safe, loving environment similar to their own homes.” This is a solid sentence because it provides the name of the childcare center, explains why it’s a quality business and mentions the target market the business serves. When you draft your executive statement, use info-packed sentences like this rather than vague statements, such as “I want to open a daycare for kids.”
2. Target Market
Who will benefit from your new business? It’s okay to list your current demographics if your business is already in operation. Make sure your business plan includes information about age range, gender, ethnic background and any other identifying data you have, such as average household income or hobbies.
3. Describe Your Competition
Beautiful Butterflies Childcare Center likely isn’t the only daycare in the community, so list its competitors, such as Bouncy Babies Childcare Center or Kids ‘n Babies Educational Center. Explain how your business stands out among competitors, and explain how you attract — and retain — parents.
4. Identify Company Leaders
Are you a one-person operation, or do you have a team of dedicated employees? If your business is still in the startup phase, draft details for the positions you’d like to fill. Make sure you list yourself if you hold a position in the company, such as general manager or CEO. This information shows lenders that you know how to execute a successful business plan rather than just brainstorming ideas.
5. Discuss Goods and Services
Tell lenders what makes your company special. Perhaps you offer candy that starts with every letter of the alphabet, or maybe your daycare teachers all have degrees. Highlight your company’s advantages, but after that, list everything you offer. This is a good time to bring up inventory.
6. Share Your Marketing Plans
A business needs customers to thrive, so explain where and how you plan to get their attention. This may include creating radio commercials, advertising on TV, posting vibrant photos in magazines or creating eye-catching online banners. Detail the funds needed for these marketing goals so lenders understand your financial needs.
7. Explain Your Funding Requirements
Why are you applying for a small business loan? Now is your chance to share your vision with an attentive lender, so don’t hold back on essential details. Explain why and when you need the money as well as how you plan to spend it. This may include payroll expenses, inventory, equipment, marketing or other expenses. List every cost, even if it seems minor, such as the $200 you plan to spend on printer paper each month. Lenders need a clear picture of your expenses, big and small.
8. Estimate Your Company’s Profit
You can use actual profit and loss statements if you currently operate a business. If not, create an estimate for annual earnings by providing supply and labor costs, then subtract them from your projected sales. This reassures lenders that you have a profitable business venture rather than just a costly hobby.
What Are Some Common Mistakes You Should Avoid During the Application Process?
It’s easy to make mistakes when applying for a small business loan, but you can plan to avoid them. Here are some common mistakes that you’ll want to avoid:
- Applying for the wrong loan type: Make sure you apply for the right small business loan for your specific business needs. This might be a startup loan, an SBA business loan or a loan for veterans. Lendzi can help you decide if you’re unsure which options are best for your professional goals.
- Not meeting loan qualifications but still applying for the loan: It’s always a smart idea to read all of the minimum qualifications that are in place before you apply for any loan. You don’t want your credit to be pulled only to find out that you don’t even qualify, thus resulting in an immediate denial.
- You don’t have a plan: You need to have a plan for your business as well as how you plan to use the loan funds to grow your company. Lenders want to give loans to business owners who have a plan in place because it shows that you understand how to manage a business rather than winging it as you go.
- Ignoring the need for supporting documentation: When you apply for a small business loan, it’s often a very time-consuming process that requires quite a bit of documentation. Don’t skip important information or leave parts of your application blank, as this may result in a denial.
- Not knowing where your finances stand: You need to know where your finances and credit score stand before you apply for a small business loan. You may get a loan denial, or you may not get the loan rate that you’re hoping for if you apply when you have poor or bad credit. Understanding your financial and credit situation can help you make smarter choices.
- Not being honest about income and business expenses: Inflating numbers will only hurt you. When reporting income and business expenses, honesty is the best policy. If a lender finds out you lied on the application, they can often revoke your loan agreement, even if funds have already been disbursed.
What Are the Terms for a Small Business Loan?
When you accept funds for your business, the lender provides a contract that details the terms of your loan agreement. Small business loans often have specific payment schedules, interest rates and penalties included in the terms. Look at the terms carefully before agreeing to any loan, as this will help you avoid problems later.
For example, your loan agreement may state that you received a $50,000 loan that you must repay within five years. Your payments are approximately $834 per month before you consider the 10% interest rate, which increases your payments by $83.40 per month. Your loan agreement may also mention that you must pay a $39 penalty fee for late payments and/or deal with a temporary APR increase for six to 12 months.
Not every term is clearly defined, though. Scroll through the helpful tips below before signing a loan agreement.
Watch Out for Hidden Fees
Many business owners assume they only pay an APR or annual interest rate on their funds, but that’s not always the case. There may be other hidden fees, such as loan application and processing fees, administrative fees, annual loan fees and prepayment penalties. Be sure to look into all term details to avoid unexpected fees.
Make Sure You Understand Your Interest Rate
There are different types of interest rates. Make sure you understand which type your loan offers and whether it may fluctuate over time. It’s also good to calculate how your interest rate impacts the final repayment amount if your loan document doesn’t already have this information.
Ask if Fees Are Negotiable
Some fees are standard, while others are negotiable. If an interest rate is too high or you aren’t comfortable with the amount of the origination fee, talk to your lender. You may find they are willing to tweak the terms slightly, especially if you have good or excellent credit.
Find Out Whether Payments Are Reported to Credit Bureaus
A small business loan can boost your personal and business credit scores, but only if your lender reports timely payments. Keep in mind that lenders also report missed or delinquent payments, so do what you can to remain current on your loan.
How Do You Choose a Lender for a Small Business Loan?
Compare multiple rates before you select a lender so you get the best value. At Lendzi, our team reviews the APR, interest and terms for small business loans before offering recommendations. We understand every business owner has different needs and expectations, which is why we compare an assortment of funding options for every potential applicant.
Take some time to ask potential lenders about their products and services. Here are some questions you can ask:
- Do you work with small businesses often?
- Have you ever worked with someone from my industry?
- How long have you been in the lending business?
- How much communication, and via what methods, should I expect from you?
- Do you offer any other products that might benefit my business?
- Can I make payments online?
- What payment methods are available?
- What are the benefits of working with your business to meet my company’s goals?
After getting to know more about your lender, you should ask some product-specific questions. For example, you may want to know the credit requirements for a startup loan or need information on how quickly funds are disbursed for SBA loans. If you don’t qualify for any of the lender’s products, Lendzi can help you choose a company that better suits your needs.
Do You Need Perfect Credit for a Small Business Loan?
The good news is that you don’t need perfect credit to get a small business loan. Ideally, you should have a high FICO score, as it typically makes the lending process a better experience. The higher your score, the better the loan rate and terms you’ll be able to get. You should aim for a score in the mid 600s or higher, though it’s not impossible to get approved with scores in the mid 500s to low 600s.
If you do have a low credit score, don’t get discouraged. There are still plenty of bad-credit small business loans available from reputable lenders. Interest rates are typically higher, and you may need collateral or a cosigner, but getting a loan may help boost your score. Paying your loan on time shows lenders that you are responsible, and eventually, you may qualify for loans geared toward people with good credit.
What Are the Pros and Cons of Small Business Loans?
There are pros and cons to consider before applying for any loan, including small business loans. When considering a loan, make sure the pros outweigh the cons. If not, you may want to request a different financial product or consider switching lenders.
Some of the pros of small business loans include the following:
- Small business loans can get you access to the cash flow that you need.
- You can use small business loans to reach new business goals.
- You can get access to significant funds, depending on your needs.
- Low interest rate loans are available, providing a more affordable option than merchant cash advances and other funding options for small businesses.
Some of the cons of small business loans include the following:
- You may not get access to as much funding as you would like to receive.
- Your loan may come with a higher interest rate, especially if you have poor credit.
- Most small business loans don’t allow you to build equity, so you can’t access the funds that you’ve already paid off.
- The approval process for small business loans can take weeks or even months.
- Some small business loans may require collateral.
As long as you fully understand the pros and cons of taking out a small business loan, you can make an informed decision as to what is the right move for your company.
How Do You Know a Small Business Loan is Right for You?
To decide whether a small business loan is right for you, you must first consider your needs and your goals for the funds. You also need to take a look at each loan type and compare the offerings. Before you make a choice, ask yourself the following questions:
- How much money do you need, and why do you need it?
- What is the interest rate, and can you afford it?
- How long is the length of the loan?
- Does it make sense to take out a short- or long-term small business loan?
- What are the repayment terms?
- How will this loan impact your business?
These considerations can help you compare various small business loans and choose the right loan for your situation. You may find that it’s better to wait until you boost your credit score or rack up higher revenue before you request funding.
What Should You Know Before You Apply for a Small Business Loan?
You should know that there are many small business loan types and lenders out there. Prepare for a lengthy application process, and be ready to prove how much money you need and why you need it. You should also have information available that explains your current business financial situation.
Small business loan requirements vary by lender, but there are some common themes. Consider the information below before you submit an application for a small business loan.
How Much Money Do You Need?
Decide how much money you’ll need and what you plan to do with that money. Carefully consider why you’re applying for this loan and what bills or expenses need to be paid for with the funds. Make a list of every expense your business has, including:
- Office supplies
- Company vehicles
- Rent or mortgage
- Maintenance and repairs
- Cleaning supplies
- Licensing fees
Include all expenses, even those that have a minor impact on your business. You need an accurate view of your monthly expenses so you can request a business loan that covers necessary costs.
What’s Your Credit Score?
Know where your credit stands and what your score is before you apply for a small business loan. Your credit score plays a big part in how lenders decide if they want to lend money to you and what kind of interest rate they’ll be willing to offer. You can use free online tools to get an idea of your approximate credit score before you apply.
If your credit score is lower than you expected, don’t panic. You can boost your score by practicing good financial habits, such as paying debts on time and repaying former obligations that have been sent to collection agencies. Consider starting with your lowest debt first and then working your way up to the highest one. This is known as the snowball method of debt reduction, and many people find it helpful.
What’s Your Debt Service Coverage Ratio?
You also need to know your debt service coverage ratio, or DSCR, before you apply for a small business loan. This ratio gives lenders an idea of how much cash you have to pay off debts. Lenders want to know that you have money available or coming into your business even though you’re requesting funds.
What Will You Do With the Funds?
You should show how you plan to use the funds from the loan. Lenders like to see a plan so they know that the funds are being used wisely and going toward business growth. Businesses with a plan have more success getting approved for the funds they need.
Make sure your plan clearly outlines your intentions. If you want to use your loan for a business expansion, say so, and explain why and where you feel your company should expand. If you plan to go on a hiring spree to meet the demands of seasonal shoppers, explain how this is a cost-effective decision after the holidays end. Make sure your plan shows profit-garnering opportunities so lenders realize you are a reliable investment.
How Will You Repay Your Small Business Loan?
Lenders also want to see that you have a plan in place for the loan repayment. If you can show that you’ll be able to meet the repayment schedule based on sales projections, they’ll be more likely to lend money to your business.
Some companies have fluctuating sales, but that’s okay. Focus on your busy months then explain how you stay afloat during slower periods. If you have a plan in place to boost sales year round by offering a customer loyalty program or special promotions, explain why you think this will work.
How Long Will It Take to Get Your Loan?
The majority of lenders don’t fund small business loans instantly, as it takes time to review your application and verify your information. Because of this, your disbursement date may occur a few months after you apply. There are exceptions, which is why some borrowers prefer a short-term financing option with repayments based on invoices or daily sales. Short-term solutions, such as factoring and merchant cash advances, may only require a one or two week delay before funding.
You may also find it beneficial to apply for a business credit card. This helps you build up your business credit score while providing quick access to funds. You can have a business credit card and a small business loan at the same time if you feel comfortable managing both payment schedules.
What Should You Do If You Can’t Pay Your Small Business Loan?
Contact your lender ASAP if you suspect you may fall behind on payments. Many lenders empathize with borrowers who hit a temporary setback, especially if you have a history of on-time payments. Let your lender know what happened, and ask for deferred payments. If you’ve already missed a due date but have gotten back on track with your payments, ask for a courtesy late-fee removal.
Try not to make a habit of paying your loan late. This may impact your business credit score as well as your personal credit score. As your score decreases, you may find it harder to secure additional funds for your personal or professional life.
FAQs About Small Business Loans
You may have unanswered questions after reading our detailed guide about small business loans, and that’s completely understandable. Navigating the requirements of small business loans can get confusing, which is why we’re here to help clarify the pros, cons and key factors.
How old do you have to be to get a small business loan?
Most lenders require that applicants interested in obtaining small business loans are at least 18 years old. However, some credit cards let teens who are at least 16 years of age apply with a parent.
How do you get a small business loan?
Small business loans are available online or at brick-and-mortar financial institutions. You can request a traditional business loan or apply for an SBA loan backed by the government.
How do you find the best small business loans?
Compare offers from multiple lenders before determining a loan is right for your situation. Our knowledgeable team can help you find loans based on your unique needs, whether you want small business funding for a startup, a woman-owned business, a family restaurant or another business venture.
Where can I find small business loans near me?
Visit local financial institutions for small business loans in your community. If you need help locating a lender, let us know. We’re here for you!
What documents are required for a small business loan application?
Each lender has their own requirements, but most applicants need a driver’s license and Social Security card for identity verification. You also need tax returns, expense sheets and/or bank statements for income verification.
A business plan is another crucial document for your small business loan application. Make sure your business plan provides a detailed description of how you plan to spend the money, including what you’re buying and how it benefits your company and its customers.
Where can I get help with my business plan?
Contact our team at Lendzi, and we’ll help review your documents. You can also find information about business plans on SBA.gov.
Can I submit a small business loan application if I’m missing some documents?
Wait until you have all your documents to submit your small business loan application. The approval process takes weeks, sometimes even months, and failing to provide an important document may further delay your application. Make sure your papers are clean and free of creases or ink smudges. Some lenders reject applications that are incomplete or illegible.
Are there small business loans for women?
Small business loans are available for women.
Are there small business loans for minorities?
Small business loans are available for minorities.
Are there small business loans for veterans?
Veterans can request small business loans for qualifying industries.
Do credit unions offer small business loans?
Numerous financial institutions, including credit unions, offer small business loans for customers. If you need help locating a credit union that provides these services, let us know.
What are SBA loans?
SBA loans, also called government small business loans, are government-backed loans offered by commercial lenders. Commercial lenders work with the SBA, which provides a partial repayment guarantee. This helps new business owners and small business owners gain access to funds that they may not have otherwise received.
SBA is the acronym for the Small Business Administration. The SBA partners with other lenders rather than offering direct funds for small businesses. Exceptions may occur when business owners have been impacted by a natural disaster or similar crisis.
What type of business loans does the SBA offer?
There are SBA loans for women, SBA loans for startups and SBA loans for nearly every industry. However, loans are typically not available for industries involving crude acts, religious practices, gambling or pyramid schemes.
How can I find SBA lenders near me?
Contact the Lendzi team! We’re happy to help you locate SBA lenders in your area. You can also review the list of lenders provided by the U.S. Small Business Administration. There are SBA lenders in nearly every part of the United States.
Can you get small business loans for international businesses?
Loans are available for international startups. Some lenders require that you keep your business on U.S. soil, but you can sell products internationally. Loans are available for businesses that provide international sales.
SBA loans are only for U.S. companies.
What is an unsecured small business loan?
An unsecured small business loan refers to funds that are not backed by collateral, such as equipment or a vehicle. If you are interested in obtaining an unsecured loan, you typically need good or excellent credit for approval.
What are some examples of collateral for a small business loan?
Lenders who want collateral request that you provide something valuable before your loan is funded. This may be a car, mobile home, boat, jewelry, artwork or other high-value item. If you default on your loan, the lender has the legal right to seize or place a lien on your property until you fulfill the obligations of your agreement.
Can you get a small business loan if you have poor credit?
Small business loans are available for all credit types: poor, fair, good and excellent. Some lenders understand that sometimes life interferes with financial goals, so they specialize in bad-credit small business loans. These loans often have high interest rates because it’s risky to lend money to someone with bad credit, but over time, you can request a different loan with a better APR.
What are the credit score requirements for a small business loan?
A score of at least 620 to 650 is ideal, but some lenders work with applicants who have scores ranging from the mid 500s to the low 600s. Applicants with scores on the lower end of the FICO scale may need to provide collateral or obtain a cosigner in order to get approved for a small business loan.
How are small business loan rates determined?
Small business loan rates are based on several factors, including your income, the type of loan you choose, the lender you use and whether you choose a fixed-rate or variable loan.
Are loan disbursements taxed?
State and local governments typically do not tax business loans because borrowers agree they will repay the funds. There are exceptions, so check with your lender and your tax adviser before filing a return. Tax laws change annually.
Which industries can request a small business loan?
Small business loans are available for nearly every industry, including the following: medical, retail, restaurant, technology, marketing, personal finance and real estate. Talk to potential lenders before you submit your application, as individual lenders may impose their own guidelines. Generally, your industry should be eligible as long as it doesn’t involve illegal or controversial practices.
Can you have more than one small business loan at a time?
You can have several small business loans at the same time as long as you meet the requirements of the lenders. Sometimes business owners with excellent credit take out multiple loans from different providers. Before doing this, make sure you can keep up with the payments for your borrowed funds. If you fall behind on payments, your credit score may decrease, making it harder to get future funding.
Can I request a small business loan for my startup?
Small business loans help many new business owners fund their startup, but sometimes it’s harder for new business owners to get approved. Make sure you have a solid business plan that outlines your goals.
Can I request a small business loan if I’m an established business owner?
Small business loans are appropriate for every step of the business process. Established business owners often use funds for inventory, equipment, payroll and expansion.
Can you make an SBA loan payment online?
Pay.gov provides an online payment portal for qualifying borrowers. You may also have the option to make payments through an online portal for the commercial lender that partnered with the Small Business Administration.
Are there SBA grants for small business owners?
The SBA offers grants as well as loans for small business owners. Grant options for small business financing include research and development grants, exporting grants, nonprofit grants and local government grants.
Where can you get fast small business loans?
Applying for small business loans online may speed up the approval process as long as you submit all of the required documents. However, the entire process may still take several months. If you need fast cash, consider applying for a merchant cash advance or receiving funds via factoring.
What fees are associated with small business loans?
Fees vary based on your lender and loan agreement, but generally, you can expect some sort of interest rate. You may also have an origination fee, installment fees, late payment fees and other expenses. Review your loan documents carefully so you don’t get hit with surprise fees after signing.
How can I improve my odds of getting a small business loan?
Review your credit report and address any issues. This may mean paying off old debts, establishing a consistent payment history for current accounts or paying down high balances on credit cards or other borrowed funds.
Can I reapply if I get rejected for a small business loan?
Absolutely! Give us a call so we can review your rejection and help you proceed accordingly. Some lenders request that applicants wait a specific time frame, such as 30 or 60 days, before reapplying. With our help, you can develop a plan to improve your chances of getting approved. This may mean tackling blemishes on your credit report, including documents that were omitted during the original application or revising your business plan.
Harness Your Potential With a Small Business Loan
Transform your vision into a lucrative business venture with help from a small business loan. At Lendzi, we understand the hard work that goes into small businesses, whether you’re creating goals for your startup or expanding an existing company. Many founders help manage daily operations, but they still need help from employees. We make it easy to develop, maintain or expand your business by connecting you with reputable companies that offer small business loans for people just like you.
Regardless of your credit history or business goals, we’re here to help. Contact Lendzi today to learn more about funding options for small businesses, whether you want a traditional loan or need information about options, such as equipment financing, merchant advances or debt consolidation. We look forward to speaking with you.
About MARK B
I have nothing but good things to say about CashOne's team. They have helped me in such critical situations when I felt suffocated.More articles by MARK B