In this article weâll cover:
- Choosing the right small business loan
- The difference between a loan and a line of credit
- Loan qualification basics
- How to calculate your estimated monthly loan repayment
- Taking the first step to securing a small business loan
For small business owners, securing a loan can be overwhelming due to the sheer volume of financing options, online lenders, and information available online. However, knowing a few pieces of critical information at the beginning of your search can de-stress the process and can help you craft a clear, concise road map to securing a loan for your small business. In this article, we will provide an overview of the small business loans landscape every small business owner must know so that you have a good understanding of the basics. Keep in mind you can always contact a lender like Biz2Credit directly to explore your options and get professional, personalized advice.
Choosing the right small business loan
Small business owners have a lot of options when looking to secure capital for their business. But how do you know which loan is right for you? Understanding which loan is right for your situation will help you secure your loan faster. Below is a breakdown of the different types of small business loans, links to the appropriate resources for each loan type that will provide an even deeper look, and information on how to start the application process.
Loans from the U.S. Small Business Administration (SBA)
The SBA is a federal agency that provides loan guarantee programs and other services to support and encourage the growth and development of small businesses across the United States. For businesses that might have trouble securing a loan through a traditional bank – whether in need of long-term loans or short-term loans – due to them being in a higher risk category, the SBA guarantees a portion of the loan. Sometimes new businesses can have trouble qualifying for a loan from a traditional bank due to a lack of credit history.
From $500 to $5 million to fund a business, the SBA has a number of loan programs designed specifically for small businesses including microloans, SBA 7(a) loans, and CDC/504 loan program:
- Microloans: The SBAâs smallest loan program, providing $50,000 or less to help businesses start and expand.
- 7(a) loans: A group of SBA loans that guarantee portions of the total amount, cap interest rates, and limit fees. The max loan is $5 million.
- 504 loans: Long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery, or other assets. The max loan is $5 million.
If these loan options from the SBA sound like they might be a fit for your situation, head over to Biz2Creditâs how-to guide on SBA loans to learn more about eligibility, financing, how you can use the proceeds, and more.
Business Line Credit
A business line of credit is similar to a credit card. Lenders will establish a credit limit for the maximum amount of money they will lend you and you can tap as much as you need up to your limit. Like a credit card, you pay interest only on the amount you borrow. A business line of credit can help a small business navigate periods of uncertainty or stress, such as a customer being late on a payment. This could cause a cash flow issue where you have plenty of sales but not enough cash to make payroll on account of outstanding accounts receivable. Having that on-demand access to capital via a business line of credit empowers you when your business needs it. Key information to know:
- Loan Amount $10,000 – $1 million
- Term loans 6 months – 5 years
- Interest Rates 7 – 25%
- Time of Funding As little as 48 hours
For a deeper dive, including how to prepare your company to apply for a line of credit, requirements, credit needs, and more visit our how-to guide: business line of credit.
As the name suggests, an equipment financing loan for small businesses allows you to borrow money to purchase required business equipment. The borrower agrees to pay back the capital borrowed, plus interest and fees over a pre-arranged period. Key information to know:
- Loan Amount Up to 100% of equipment value
- Loan Terms Estimated life of equipment
- Interest Rates 8 – 30%
- Time of Funding As little as 48 hours
For more details on this loan option head over to our in-depth how-to guide: equipment financing.
Merchant Cash Advance
A merchant cash advance provides lump-sum capital to the business owner. The principal (plus interest and any fees) is paid back directly from a portion of future daily or weekly credit card sales. Key information to know:
- Funding Amount $2,500 – $250,000
- Payment Terms Deducted daily from merchant account
- Factor Rates 1.14 – 1.45
- Time to Funding As little as 24 hours
For more information, including what businesses typically apply, qualifications, and how to apply, please see our guide: merchant cash advance.
Unsecured Business Loans
An unsecured business loan does not require the borrower to pledge assets of the company to borrow funds. For the benefit of not having to pledge business assets to secure the loan, an unsecured loan does require a personal guarantee of repayment and generally comes with a higher interest rate (other loan products typically have lower interest rates) and fees. Key information to know:
- Loan Amount Up to $100,000
- Term loans Up to 7 years
- Interest Rates 4 – 36% APR
- Time of Funding As little as 4 days
Because unsecured business loans can be more difficult to get, head over to our in-depth guide on unsecured business loans for a closer look.
Business Acquisition Loans
For an entrepreneur working on their business plan, there are myriad ways to grow a business and increase annual revenue. Whether you are a well-funded startup or a seasoned enterprise, one popular path is through acquisition. A business acquisition loan is a great choice if you are looking to purchase an existing business, buy out a partner, or purchase/expand a franchise. Key information to know:
- Loan Amount Up to $5 million
- Term loans Up to 25 years
- Interest Rates 3% – 10%; may be fixed or variable
- Time of Funding As little as 48 hours
Getting a loan to buy a business, buy out a partner, or expand a franchise can be more complicated and take a longer time than other types of business loans. Our guide on business acquisition loans takes a deep dive into everything you need to know.
The difference between a loan and a line of credit
Both a small business loan (whether a bank loan or an SBA loan) and a line of credit can give you access to capital, but what exactly is the difference between the two, and which is right for your business?
When considering capital options for your business, ask yourself one simple question to help you decide if a loan or a line of credit might be the right option for you, âDo I need a lump sum of cash or do I only need access to cash when I have cash flow issues?â
If youâre leaning towards, âI need a lump sum of cash for my business nowâ, a loan is most likely the right path for you to continue to explore. For example, if you are looking to expand by acquisition, purchase vital equipment, or purchase property that you need to operate your business. Typically loans also have urgency around them as most business owners need to have their loans approved fast so they can access capital to continue to grow.
If you need access to capital, but don’t necessarily have a critical immediate need for it, a business line of credit can be a good option. A business line of credit can be seen as a cross between a business loan and a business credit card. Like a business loan, an unsecured line of credit provides business financing that can be used for general business expenses. For example, if a key customer is late on their payment, and you now have a cash flow issue and canât make payroll without their payment, being able to tap into a business line of credit to provide working capital and continue operations while waiting for the customersâ payment to clear is a powerful instrument.
Keep in mind that the amount of capital available to borrow is typically subject to annual review. Interest begins to accrue only when money is borrowed and interest only applies to whatever is borrowed (not the credit limit). For example, if you take out a $25,000 business loan, you owe interest on all $25,000. If you have a $25,000 business line of credit and borrow $1,000, you only owe interest on the $1,000.
Basics of Loan Qualification
When applying for a small business loan or business line of credit, lenders view you and your business as essentially the same thing. Since you own the small business, the success or failure comes down to your personal effort. Therefore, having good credit on your personal credit score is one of the most important things when attempting to secure capital for your small business. The better your credit history and credit score (FICO), the better the chances you will get a loan and likely on better terms.
Before starting your application process, you should run a credit report to determine your credit score to know where you stand. You should aim for a score of 650+ in order to feel good about your chance to secure capital via a business loan. Credit scores range from a low of 300 to a high of 850. Below a score of 500 is considered a bad credit risk.
Before qualifying for an SBA loan, in addition to a good personal credit score, you will need to show that your business operates for profit, is considered a small business, is engaged in, or proposes to do business in, the United States or its possessions, have reasonable invested equity, have used alternative financial resources, including personal assets, before seeking financial assistance, be able to demonstrate a need for a loan (for example, a financial institution like a bank has denied your loan request), use the funds for a sound business purpose, and not be delinquent on any existing debt obligations to the U.S. government.
There are many websites to check your credit; https://www.freescoreonline.com is one such resource.
Requirements for a Business Line of Credit
To qualify for a business line of credit from a funder, you’ll typically need to show that you have:
- Credit score 580+ – This refers to your personal FICO score. It is important to maintain your personal score, especially if you have a small, young business.
- 12 months in business – Funders will almost always require that you have been in business for at least one year before extending a business line of credit.
- Minimum Revenue Requirements – $10,000 in average monthly revenues are a guideline. This may vary from lender to lender. Just ask your funder before applying.
- Collateral – Funders may wish to see your ability to pledge short-term assets (like accounts receivable)
- Major Derogatory Credit Events – No recent bankruptcies, foreclosures, or tax liens
Monthly Payment Calculator
The Small Business Loan Calculator is a free resource to help calculate monthly loan payments for fixed-rate loans. Simply input your loan details including loan amount, interest rate, and loan term, and then click “Calculate” to see the results.
Whether you are after a loan to acquire a business, or you have a business that you want to expand, Biz2Credit is a great place to start. Our helpful staff will provide you with exceptional customer service and will work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing can help you.