Starting a small business is no small feat. Every entrepreneur dreams of watching their business grow and thrive.
However, securing financing can be one of the most challenging aspects of getting your business.
My name is AJ, and I have spent the last decade of my career starting and growing a digital agency to an eventual multi-million dollar exit.
Over the years, we’ve used several types of small business loans, and I’m here to share my experience with the Small Business Bonfire (SBB) community!
So, grab a cup of coffee, sit back, and let’s dive in!
- Getting small business funding isn’t challenging
- Some business loans can help build credit scores
- There are better loan options than a business credit card
AmEx Business Blueprint
Step 1: Decide What Type of Loan You Need
When it comes to taking out a loan for your small business, it’s important to understand the different business loans available to you and how your business operates to determine which one fits your specific needs.
To decide which one is right for you, start by researching the type of business loan that is best for your company.
There are a few different options to consider, including:
- Term loans
- SBA loans
- Business lines of credit loans
- Equipment loans
- Invoice factoring loans
- Business credit card loans
Let’s go over each of these in more detail!
Alright, let’s talk about term loans!
What Is A Term Loan?
A term loan is a traditional type of loan that is typically provided by a traditional bank or other financial institutions.
Traditional term loans are one of the most popular options for businesses looking to secure funding because they usually offer larger sums of money (also known as merchant cash advances) and longer repayment timelines than other types of loans, typically ranging between one to ten years.
It is important to keep in mind that the interest rates on term loans can often vary depending on your credit score, the loan amount your borrowed, and the duration of the loan term.
However, these interest rates still tend to be lower than other forms of small business loans, offering fixed-rate financing and predictable repayment terms, making them a more affordable choice for most business owners.
What Is a Term Loan Best for?
These loans can be used for a variety of purposes including, but not limited to:
- Business expansion
- Purchasing new equipment
- Covering business expenses
They can also be a great option for businesses that need a little extra cash to continue growing. At my agency, we used this kind of loan to hire new employees and expand our services.
With a term loan, business owners can get the funding they need to take their operations to the next level! So, if you’re looking to buy a pricey piece of equipment or expand your physical location, this business loan could be the perfect solution for you.
Term Loan Pros and Cons
- Predictable monthly payments
- Lower interest rates
- Longer loan terms
- Fast funding
- Collateral may be required
- Strict eligibility requirements
- Long-term commitment
- Prepayment or late payment penalties
SBA (Small Business Administration) Loan
Next, let’s discuss SBA loans!
What Is an SBA Loan?
If you’re a small business owner looking for loan options, then you’ve probably heard of SBA loans at some point. So, what are they exactly?
The Small Business Administration (SBA) is a government agency that aims to assist entrepreneurs and small business owners throughout the US and provides them with financial support through various loan programs.
One of the best parts about these loans is that the Small Business Administration guarantees a portion of the loan, which reduces the risk for lenders, making it easier for businesses to get approved.
What Is an SBA Loan Best for?
These types of loans are typically best for small businesses looking for long-term financing and who may not qualify for traditional loans from banks.
An SBA-approved lender can offer loans in various forms, such as:
- Term loan
- Lines of credit
These loans not only have low-interest rates but also longer loan terms, which can be helpful for businesses that need access to capital for a longer timeframe to help them expand their operations.
SBA Loan Pros and Cons
- Flexible use of funds
- Backed by the government
- Longer repayment terms of up to 25 years
- Lower interest rates than traditional bank loans
- Collateral might be required
- Lengthy application process
- Funding can take longer to receive
- Additional fees may add to the loan cost
Business Lines of Credit Loan
Now let’s go over business lines of credit!
What Is a Business Line of Credit?
To put it simply, a business line of credit is like a credit card for your business. It’s a type of financing that allows you to access a certain loan amount that you can draw from whenever you need it within a certain credit limit.
Unlike a traditional loan, you’re not required to use the full amount of credit at once and you only pay interest on the amount you use, which can be helpful if you’re looking to manage your cash flow more efficiently.
Plus, it can be a much quicker and easier option to secure compared to a traditional loan. Just be aware that you’ll need to have a good credit score and financial history to be approved for a business line of credit.
What Is a Business Line of Credit Best for?
This loan type is perfect for entrepreneurs who need access to cash regularly.
It can come in handy for small businesses that need quick access to cash to:
- Cover payroll
- Expand operations
- Purchase inventory or equipment
It’s a great option for companies that need a safety net for unexpected expenses or for smoothing out the seasonal ups and downs that can happen in your cash flow.
Business Line of Credit Pros and Cons
- Can improve credit score
- Access to capital for emergencies
- Risk of overborrowing
- Variable interest rates
- Possibility of additional fees and penalties
Here we will explore equipment loans!
What Is an Equipment Loan?
This type of loan is specifically designed to help entrepreneurs purchase or upgrade the equipment they need to operate their businesses without having to pay for everything upfront.
An equipment loan typically covers the cost of any type of equipment your business needs.
Although, it’s important to note that the equipment being purchased usually serves as collateral for the loan, so if you are unable to make payments, the lender can repossess it.
What Is an Equipment Loan Best for?
An equipment loan can be used for everything from office furniture to manufacturing machines and can be customized to fit your unique business needs.
Plus, since this loan is secured, it offers lower interest rates and monthly payments. This means you can spread out the cost of the equipment over time, which can save you money in the long run.
Equipment Loan Pros and Cons
- Competitive interest rates
- Tax benefits may be available
- Several financing options to choose from
- Loan approval may take longer
- Most lenders require a down payment
- Businesses are responsible for maintaining and repairing the equipment
Next up, let’s take a look at invoice factoring!
What is Invoice Factoring
Essentially, this is a small business financing solution in which a business sells its unpaid invoices to a third-party company (known as a factor) for a percentage of its face value. The factor then collects payment from the business’s customers and takes a fee for its services.
By selling their invoices, business owners can receive an immediate cash injection to cover their working capital needs, such as paying their suppliers, employees, or rent.
What Is Invoice Factoring Best for?
This can be a great option for small businesses that need cash quickly and don’t have the time or resources to go through the traditional loan process. Plus, since the factor is taking on the risk of collecting payment, the business doesn’t have to worry about dealing with any unpaid invoices or collections.
However, it’s important to note that invoice factoring can be more expensive than other financing options, so it’s essential to weigh the pros and cons before making a decision.
Invoice Factoring Loan Pros and Cons
- Lower risk of default
- No need for collateral
- No credit check required
- Quick access to cash flow
- Higher fees
- Possible loss of control
- Can affect customer relationships
Business Credit Card
Finally, let’s take a closer look at business credit cards!
What Is a Business Credit Card?
A business credit card loan is a type of loan that is specifically designed to help businesses manage their expenses. Unlike traditional loans, which can be time-consuming and frustrating to apply for, this type of loan can usually be acquired relatively quickly and easily.
The way it works is pretty simple! You just use the credit card to make purchases for your business, and then pay back the money you’ve borrowed in installments over time.
Additionally, one of the many benefits of a business credit card loan (depending on your card and credit report) is that it often comes with rewards and cashback programs, allowing business owners to earn money while borrowing funds.
What Is a Business Credit Card Best for?
This type of small business financing is perfect for companies that need access to short-term loans. They are designed to give business owners access to funding in a fast and convenient way.
Business credit card loans are also a great option if you need to build your business credit score. However, it’s crucial to be aware of the high-interest rates often associated with these loans, so it’s important to budget accordingly to avoid getting caught in a cycle of debt.
Business Credit Card Pros and Cons
- Offers a revolving credit line
- Can help build a business credit score
- Some credit cards offer rewards or cash back
- Higher interest rates than traditional loans
- Late payments can result in high penalty fees
Step 2: Determine if You Qualify
If you’re thinking about taking out a small business loan, you’ll want to make sure you qualify first before wasting your time and energy.
What’s Your Credit Score?
One major factor that lenders take into consideration is your credit score, which serves as a measure of your creditworthiness. Higher credit scores mean you are more likely to be approved for a loan with favorable terms and interest rates.
Lenders typically look for credit scores of 680 or higher (which you can check with local credit unions), although eligibility requirements may vary depending on the lender and type of loan you’re applying for.
If you, unfortunately, have bad credit, there are still options out there for securing funding, but you may end up facing higher interest rates or needing to put up additional collateral.
How Long Have You Had the Business?
Another main factor that can determine if you qualify is how long you have been in business. Most lenders will require that you’ve been in business for at least two years before they consider financing you.
This is because they want to make sure that you have a history of generating consistent annual revenue and have a track record of managing your business successfully.
Do You Make Enough Money?
Your overall annual percentage rate (APR) is another big factor lenders consider. This means that you’ll need to have a steady income stream from your business.
For most lenders, you will be required to make at least $50,000 in minimum annual revenue to be considered for a business loan. However, every lender is different, and each may have its own specific criteria for annual revenue requirements to determine loan eligibility.
Can You Afford the Payments?
Lastly, it’s vital to ensure you can afford the business loan monthly payments, so make sure you have a solid repayment plan in place. Take some time to review your financial projections to figure out how much you need to borrow and how much you can realistically afford to repay each month.
You can use an online loan calculator to estimate these costs based on interest rates and repayment terms.
Step 3: Compare Small Business Lenders
When you compare lenders to get a business loan, it’s important to do your research before making any decisions.
Knowing which type of lender to choose for your specific situation and when can greatly impact your chances of getting approved and the terms you receive.
When to Use an Online Lender
An online lender can be an excellent option for business loans. They offer convenience and speed, with faster loan approval rates and lower requirements for documentation compared to banks. Specifically, I used online lenders when starting my agency due to their ease of use and fast turnaround times. Online lenders also tend to have a wider range of loan options and may be more flexible with loan repayments.
When to Use Your Bank
If you have an existing relationship with your bank and a good credit score, this financial institution is a good option to try to get a business loan. As a traditional lender, banks typically offer competitive interest rates and can be a great option for businesses that have been around for a while and have steady revenue.
When to Use a Microlender
If you’re a small business owner looking for funding options, you may want to consider using a microlender. They are often nonprofit organizations or credit unions that prioritize supporting underserved and underrepresented entrepreneurs, such as women, minorities, and veterans.
These lenders specialize in providing small loans, typically ranging from $500 to $50,000 to business owners who may not qualify for loans with traditional banks. Microlenders can be a good choice if you need a small amount of capital quickly, don’t have a lot of collateral, or have a bad credit score.
Step 4: Get Your Application Materials Ready
Now that you’ve decided to take the plunge and apply for a business loan, it’s time to start gathering your documents!
What Do You Need for a Small Business Loan Application?
First things first, you need to have a clear understanding of what you’ll need for your loan application.
All Business Information
Before applying for a business loan, you’ll need to gather and provide as much information about your business as you can. This includes a solid business plan, tax returns, and any other supporting documents.
Your business plan should outline your business concept, market analysis, management and personnel, operations, and revenue projections and also demonstrates how you plan to use the funds from the loan.
Additionally, you’ll also need to provide personal financial information, such as your tax returns for the last two to three years and personal credit report history, as this will help many lenders assess your financial situation and tax compliance.
Next, you’ll want to have all your bank statements in order. This means having up-to-date records of your business’s income, expenses, and overall financial health.
You’ll need to provide these bank statements to your lender as proof that your business is in good financial standing and can repay the loan.
It is also likely that you will need to submit a balance sheet, income statement, and cash flow statement, which will show how much money your business has, how much it’s earning, and how much is being spent.
Business Ownership Details
Following the financial statements, you will also need to include your business ownership details, which lays out the legal structure of your company, the number of employees you have, and the date it was established.
This should include incorporation documents, partnership agreements, and any applicable business registration licenses. You will also need to provide information about any other business owners, if you are not the sole owner, including their names, social security numbers, and percentage of ownership in the business.
Information on Collateral
Additionally, you will need to provide information on any collateral you may have if you can’t pay the loan. This is any property or personal/business assets that you’re willing to put up as security for the loan, which can include commercial real estate, equipment, or inventory.
Having collateral can increase your chances of getting approved for a loan, as it shows the lender that you’re serious about the investment and have a backup plan in case anything goes wrong.
Lastly, you will want to be prepared and provide a personal guarantee, which means that you’re personally responsible for paying back the loan if your business is unable to. This can include putting up personal assets, like your home or car, as collateral.
It may sound daunting, but this is often required by lenders to ensure that they’re taking on a responsible borrower. However, make sure that you are comfortable with the term arrangement before you decide to proceed with the application.
Step 5: Apply for the Loan
Once you’ve identified your annual revenue, the loan amount needed, a potential lender, and gathered all your documents, you’re ready to apply for your business loan!
You can apply in person or online, which makes it easy to apply from the comfort of your own home. Be sure to read all the fine print, so you understand the terms and conditions of the loan before signing on it.
Don’t be afraid to ask questions and negotiate terms regarding your business loan application, as it could save you money in the long run.
Small Business Loan Conclusion
If you want to get a business loan, the first step is to start researching what’s available and determine which option best suits your financial needs.
Make sure you take the time to understand all the requirements that different lenders need before you apply and that you have a strong business plan and financials to back up your loan request.
By following these steps, you should be able to get a business loan without too much difficulty, and you’ll be on your way to growing your business!
Are you a small business owner or entrepreneur? Do you have any questions about how to get a business loan? Sound off in the comment section below!
FAQs About Small Business Loans
Getting a small business loan can be a bit of a process, but it doesn’t have to be a difficult one. The key is to be prepared and understand how much you can afford and what lenders are looking for.
While the exact credit score needed for a business loan varies depending on the lender and type of loan, a score of 650 or higher is generally considered good.
Yes, banks do offer loans to start a business, but it’s important to note that the approval process can be quite rigorous. Banks typically look for a solid business plan, a high credit score, and collateral as a form of security in case of default.
Yes, online lenders have become a popular source of funding for businesses due to their convenience and accessibility. However, it’s important to do your research and compare different lenders before choosing one.