September 23, 2019

Business Loans

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A small business loan can expand operations and grow your profits. But how do you pick the right loan for your business? Here's everything you need to know.

Finding the right loan is an important step forward for your small business. Consider these questions before you proceed:

  • Can I realistically repay this loan?

  • Will the payment fit into my cashflow, whether it is daily or monthly?

  • Am I 100% sure this is the lowest rate I can find?

  • Do I know and understand all fees associated with this loan?

If the answer to any of these questions is "yes," read on for more information.

How To Qualify

Lenders will review these factors to determine whether you're a good candidate for a business loan.

  • Credit Score
    Lenders may check your business AND personal credit score. Small business owners with lower scores risk getting turned down.

What is a good credit score to get a business loan?
Many lenders want a business owner with a credit score of at least 680 to demonstrate financial responsibility. Some short-term lenders, however, will accept lower credit scores around 550.

  • Business Plan
    Potential lenders want to see a business plan plus a roadmap for how you'll return their money.

  • Revenue
    Lenders will want to know how much your business makes and what you can afford to pay back in a loan. Be ready to share:
    • Business Bank Statements from the last 3—12 months
    • Balance Sheet updated in the last 60 days
    • Profit and Loss Statements for 2 years
    • Business Debt Schedule
    • Tax returns (both business and personal)

What is a Debt Service Coverage Ratio (DSCR)?
This formula tells lenders how much cash you have to pay off your debt.

To calculate your Debt Service Coverage Ratio:
Divide your cash flow by your loan payment amount. If you have $4,000 of cash flow every month, and your projected monthly loan payment is $1,000, your DSCR ratio is 4.

You'll want a DSCR of at least 1, though most lenders would prefer at least 1.5.

  • Time in Business
    Most lenders prefer a business with at least a two-year history. Online lenders may be a good option for businesses six months to one-year-old.

  • Size of Loan
    Before you apply, be completely clear on how much funding you need and whether or not this loan will help grow your business. Lenders will want to see a return on the investment.

Types Of Small Business Loans

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Choosing the ideal business loan can be overwhelming. But your business history, needs, and financial strength will help narrow down the field.

Read on to find out which small business loan is best for you.

Common Reasons for Small Business Loans
  • Expanding your small business
  • Starting your small business
  • Cushion your cash flow
  • Finance equipment
  • Purchase inventory
  • Managing daily expenses

Term Loans

Term loans are the most common form of business financing. Lenders give you the amount of cash upfront (typically $25k–$500k). You then pay it back over a set period of time with a fixed interest rate.

It takes one to five years to pay back a term loan with interest rates anywhere from 7% to 30%.

How to Qualify
You'll need a good credit score, a business history, and revenue. This option is best for strong businesses looking to expand.

Pros

  • The money is upfront
  • Consistent payment structure
  • The loan can be used for a variety of purposes
  • This loan is usually faster than other options

Cons

  • You need to be in business for a while
  • You need a credit score
  • Collateral or a guarantee may be required

When you apply for a term loan, be sure to ask about any fees, including prepayment penalties. Discuss the specific terms with your lender.

Small Business Administration (SBA) Loans

Small Business Administration (SBA) loans are among the most desirable because the SBA guarantees the loans. The money from an SBA loan ($500–$5.5M) can be used for most common business purposes, including long-term fixed assets and operating capital.

These loans can help strong borrowers looking to grow or refinance existing debt. Business owners should be prepared to wait a while for approval.

How to Qualify
Businesses must be registered and operate legally, located in the U.S. or its territories, and cannot get funds from other financial lenders. The owner must have time and money invested in the business.

Long-term loans and low-rate loans, such as SBA loans or business lines of credit, require a higher credit score—around 700 and above. To learn more about SBA loans, click here.

Pros

  • Lower down payments
  • Flexible overheard requirements
  • No collateral for some loans
  • Some loans require continued counseling
  • Competitive rates

Cons

  • More paperwork
  • Business owners still need good credit
  • Rates may be high compared to other options.

Are SBA loans issued by the government?
The government doesn't actually make SBA loans, Rather, the SBA guarantees the loans that banks or direct lenders make. Most of these are low-interest, long-term loans. They can help small business owners get started, buy equipment and more.

There are several popular options for government loans including SBA 7(a) loans, SBA CDC/504 loans, SBA microloans, USDA Government loans, and more.
Your SBA office is a good place to start—most major cities have a regional office. In addition, most major banks - like Wells Fargo and Bank of America - offer SBA-backed loans.

Business Lines of Credit

A business line of credit provides access to funds to increase your credit limit. You only pay interest on the money you've used.

Business lines of credit work best as a short-term option. These lines of credit can help businesses manage cash flow or handle unexpected sudden expenses.

How to Qualify
Qualifications vary depending on the lender, though you will benefit from a strong credit rating and a solid business plan.

Pros

  • Balances cash flow during slow periods of time
  • No collateral typically required
  • Pay for exactly what you use

Cons

  • Some additional fees, like maintenance or draw fees
  • Strong credit needed
  • Solid revenue stream required
  • Difficult to apply for a business line of credit

Equipment Loans

These loans help you buy equipment for your business, and the equipment is your collateral.

The life of the loan matches the life of what you buy, and the rates depend on the value of your equipment and your business's strength.

How to Qualify
Qualifications depend on the lender, though you can expect your credit score, cash flow, and business plan to be considered. In some cases, you will also need to offer collateral.

Pros

  • You own the equipment and build equity
  • Good rates for strong credit

Cons

  • Down payments
  • Equipment may become outdated before the loan is up

Invoice Factoring

Customer invoices are normally paid in 60 days. However, you can get the cash now by selling invoices to a factoring company. The factoring company will collect from your business when the time comes.

This option works best for businesses that are looking for fast cash and are willing to give up control of their invoice process.

How to Qualify
In addition to good credit, you may also need a specific profit margin percentage or invoices that have not already been pledged as collateral to other organizations, such as a bank.

Pros

  • An option for fast cash
  • Easier approval than other traditional options

Cons

  • Invoice factoring can be costly
  • Loss of control over invoice collecting

Invoice Financing

Invoice financing is similar to invoice factoring. Instead of selling your invoices to another company, you use the invoices as collateral for a cash advance.

This option works best for businesses looking to maintain control over their finances.

How to Qualify
Qualifications are similar to those of invoice factoring. In general, you'll want to have good credit, no liens or encumbrances, and good invoicing practices.

Pros

  • An option for fast cash
  • Customers unaware their invoices are used as collateral

Cons

  • Invoice financing can be costly
  • You need to collect the invoice payment

Merchant Cash Advances

Merchant cash advances give you a lump sum of cash upfront, though the repayment process can be tricky.

You can either withhold a percentage of your daily credit card and debit card sales or enact weekly withdrawals from your bank account

This option works for businesses that cannot get financing elsewhere, though you'll need to be able to make frequent repayments.

How to Qualify
Many lenders require at least 6 months in business, as well as a minimum 500 credit score and various specifications for your deposits.

Pros

  • Fast cash
  • Unsecured financing
  • The amount you owe does not increase
  • Can qualify even with bad credit

Cons

  • Possible high borrowing costs
  • Frequent repay can be difficult to track with cash flow
  • Lenders do not operate in a regulated industry

If your credit score is lower than expected, you may have a better chance of getting an MCA or smaller business lines of credit.

Personal Loans

Using a personal loan for business purposes can be risky, but some small businesses with few options opt for this choice.

Newer businesses with strong credit are able to take advantage of personal loans. Banks may not lend to new businesses with little to no operating history.

How to Qualify
You'll need a strong credit score to qualify, though these loans may pose a risk to your score.

Pros

  • Startups and new businesses can qualify
  • Fast funding option

Cons

  • Cost of borrowing can be high
  • Not repaying the loan damages your credit score
  • Maximums of usually $50,000

Business Credit Cards

A business credit card is a revolving line of credit and can be a flexible way to finance business expenses. Be sure that you can pay off the card's monthly payments and not exceed the credit limits.

This option works for businesses that have ongoing business expenses spread out over a period of time, such as travel, utilities, and more.

How to Qualify
In addition to basic business information, such as annual revenue and estimated monthly spend, you'll need to calculate your total annual income and debt-to-income ratio.

Pros

  • Rewards and points on purchases
  • No need to put up collateral
  • Can be easy to apply

Cons

  • Can negatively impact your credit score
  • Variable interest rates
  • Added fees, such as annual fees

Microloans

Nonprofit organizations and alternative lenders offer microloans of up to $50,000, though most microloans offer significantly less.

Microloans are meant for startups, newer businesses, and businesses in lower-income communities.

How to Qualify
Most organizations require proof that you can repay the loan. You will need to be clear about how much money you need and why.

Pros

  • Low cost for small businesses
  • Distributed quickly
  • May come with added services, like training
  • Can be used to finance a variety of costs

Cons

  • Smaller amounts of money
  • Tough eligibility requirements
  • Additional fees from some lenders
  • Each lender has their own eligibility requirements

Small Business Loans for Startups
Startups, or businesses less than 6 months old, don't have the proven track record that most lenders require. But they do have some business loan options, including:
  • Small Business Administration (SBA) Microloans
  • Business Credit Cards
  • Alternative options including crowdfunding sites like GoFundMe

Small Business Loans with Bad Credit

A bad credit score reflects poorly on your financial capabilities as a business owner and individual. That makes it difficult—but not impossible— to get a business loan.

If you have a credit score of 500—600, there are still small business loans available for you. Traditional and alternative lenders have started offering options for people with bad credit. However, there will be other terms attached to the loan.

Take a look at these examples:

  • Fundbox
    This lender has no minimum credit score or minimum annual revenue requirements. Instead, they look at your invoices and ability to repay the loan. You'll need to use bookkeeping software with a minimum of six month's history.

  • OnDeck
    This lender offers term loans and lines of credit - both solid alternatives to a business loan if you have bad credit. For a term loan, you'll need a credit score of at least 500. For a line of credit, you'll need at least 600.

OnDeck reports to all three credit-reporting agencies, so paying off your term loan or line of credit can really boost your credit score. Likewise, not paying it off on time will negatively impact your credit score.

  • BlueVine
    This lender offers advances based on your invoice values. It works best for business owners who have poor credit, lack collateral or have unpaid invoices. To qualify, you'll need a personal credit score of 530 or more - plus, an annual invoice of $120,000 or more.

  • Dealstruck
    This lender offers a variety of products for people looking for alternative options. You'll need a credit score of at least 500 to qualify, plus at least $150,000 in revenue. The company offers asset-based lines of credit and term loans, among other options.

Denied for a Small Business Loan?
Not everyone qualifies for a small business loan. In fact, large banks have been reducing the number of small business loans over the past few years. Sometimes lenders give a specific reason for your rejection. If they don't offer an explanation, here are a few reasons your application may have been denied:
  • Bad credit
  • Weak cash flow
  • Not enough time in business
  • Lack of documentation

Small Business Loans for Veterans

There are multiple options geared specifically for veterans. Take a look at these options:

  • Military Economic Injury Loans
    This SBA-sponsored business loan program helps active-duty veterans called to service. Veterans released from active duty within one year can apply for the loans; the loan terms go up to 30 years. Loans will require up to $50,000 in collateral.

  • StreetShares
    StreetShares is owned and operated by veterans. The online auction marketplace helps connect veterans and other small business owners with loan opportunities. Veterans are connected with fellow veterans to help them through the process. Read more about StreetShares below.

  • Hivers and Strivers
    Hivers and Strivers is an angel investment group that provides business loans to people who have graduated from the U.S. Military Academy. Graduates from the U.S. Military Academy run the program.

  • Veterans Business Fund
    This up-and-coming nonprofit helps veterans open or grow their small business, in addition to helping them purchase a franchise business. Donors provide the nonprofit, and loans will be non-interest bearing, following local regulations.

  • SBA Service-Disabled Veteran Business Contracting Loan
    This specific loan program helps veterans injured in the line of duty. The initiative helps veterans by listing specific jobs for them as well, evening out the playing field.

  • 7-Elevan Veteran Franchising
    Like many other companies, 7-Eleven offers benefits and assistance for veterans that are franchising. Eligible veterans will receive up to 20% off the franchising fee. In addition, veterans will get up to 65% financing from 7-Eleven.

  • SBA Express Loan Program
    Veterans can apply to the SBA's Express Loan Program. The loans provide up to $350,000 and credit decisions come in less than 48 hours. All authorized veterans will have fees waived through this program.

Government Loans

If you're looking for a long-term option, a government loan may be the best fit. But the process will be much slower since banks and direct lenders partner with government agencies like the Small Business Administration (SBA).

Most of these loans are low-interest, long-term loans, which can help owners start their small business, buy equipment and more.
However, these loans tend to be much more competitive

There are several popular options for government loans: SBA 7(a) loans, SBA CDC/504 loans, SBA microloans, USDA Government loans, and more.

How do you find small business government loans?
Your local SBA office is a good place to start. Most major cities have a regional office. In addition, most major banks - like Wells Fargo and Bank of America - offer SBA-backed loans. Keep reading to learn more.

Companies that Give Small Business Loans

Major banks and corporations across the U.S. offer small business loans. From Wells Fargo to Street Shares, here are some companies worth considering if your business needs a loan.

Wells Fargo
One of the best options for small businesses, Wells Fargo has long repayment terms for loans. For small business owners, that means lower monthly payments. In addition, the bank has advanced online and mobile banking features.

But Wells Fargo's small business loans can take months to get approved and applying means plenty of paperwork. In addition, if you do not already have an account with the bank, you'll need to apply in-person.

Wells Fargo offer 10 types of small business loans:

  • BusinessLoan Term Loan
  • FastFlex Small Business Loan
  • Advancing Term Loans
  • SBA 7(a) loans
  • SBA CDC/504 loans
  • Secured lines of credit
  • Unsecured lines of credit
  • Equipment Express Loans
  • Wells Fargo prime lines of credit
  • Commercial real estate loans

You'll need a good credit score and evidence of a profitable business to qualify for a Wells Fargo business loan.

Bank of America
Bank of America helps more than 3 million small businesses through their loan programs. The bank offers several options for small business owners, including unsecured business loans, business lines of credit, secured business loans, equipment financing and more.

Funding is based off, in part, your business relationship with Bank of America. In addition, Bank of America considers the five C's of credit:

  • Capacity: You'll have to prove to Bank of America that you can repay your loan.

  • Capital: You need to show your business' capital investment, like assets, cash, and equipment. The bank double-checks to see if you can repay the loan.

  • Collateral: Not all small business loans require collateral. However, for the loans that do, Bank of America wants to know what you can offer.

  • Conditions: Bank of America looks at the current market conditions, what is going on in your industry, any pending legislation related to your business and more.

  • Character: Bank of America also looks at your background and experiences.

BlueVine
Known as one of the fastest ways to get funding, Blue Vine offers funding up to $5 million. If you've been in business for at least six months and have at least $100,000 in revenue, you may qualify.

BlueVine offers three primary types of loans:

  • Line of Credit
  • Term Loan
  • Invoice Factoring

You'll need a credit score of at least 550 to qualify for a Blue Vine small business loan.

StreetShares
A veteran-owned and managed company, StreetShares has a number of options for small businesses and veterans specifically. It offers funding from $2,000 to $250,000. StreetShares also pre-qualifies businesses, which can speed up the process.

Your small business will need to be running for at least a year with at least $25,000 in revenue to qualify. In addition, you'll need a business guarantor and a 600+ credit score.

StreetShares offers several types of loans, including:

  • Term loans
  • Lines of credit
  • Invoice financing

Before You Sign

Always make sure you fully understand all the "fine print" before accepting a small business loan. This may include the loan cost, repayment structure, and term.

Here's what you need to watch for:

APR
The annual percentage rate, or APR, is the cost of a loan factoring in the interest rate and other fees. By comparing APR, you can ensure you're taking into account all fees across the board.

Loan Fees
You might think you're getting a great deal on a loan but always check for hidden fees which may make the loan less attractive.

These can include:

  • Origination Fee
    This fee is the cost the lender incurs to make the loan. It covers things like administrative fees. In most cases, origination fees are given as a percentage of the principal loan.

  • Application Fee
    When applying for a loan, companies run a background check and acquire your credit report. Sometimes, lenders pass on this fee to you in the form of an application fee.

  • Guarantee Fee
    The SBA doesn't directly make the loan, but it does guarantee part of the loan for the lender. In order to do this, they have to pay a portion of the loan upfront. Sometimes this fee is passed onto the applicant.

  • Late Payment Fee
    Some lenders charge an added fee if you're late making a payment. To avoid this, consider setting up automatic payments from your account.

  • Prepayment Fee
    Paying off your loan early can cost you a fee. The fee is calculated as a percentage of the outstanding principal at the time you decide to pay it off.

  • Check Processing Fee
    Sending in payments via check may cost you a processing fee. Discuss this with your lender to ensure you won't be billed for your chosen payment method.

Be Wary of Predatory Lenders
Watch out for these warning signs when shopping for loans:
  • Interest rates significantly higher than market value
  • Fees greater than 5% of the loan value
  • No APR disclosed
  • No repayment schedule disclosed
  • Lender pressuring you to take the loan
  • Lender asking you to lie on paperwork or leave boxes blank

If you are unsure about the lender you're dealing with, double-check with a financial professional.

THE BOTTOM LINE

A small business loan can help your business grow and thrive. But finding the right loan can have a huge impact on your company.

Improve your chances of getting approved by being prepared. And remember to pay off the loan as soon as possible to reap the benefits for your business.

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