Small business loans are an important source of financial support for business owners. They can help you cover startup costs, expand your business, purchase new equipment, or invest in marketing or other initiatives. Making large down payments can interrupt cash flow. Loans allow you to balance growth with liquidity.
As the old saying goes, it takes money to make money. When carefully considered and strategically spent, a small business loan program can help you take advantage of the business opportunities available.
It’s worth emphasizing “carefully considered.” Applying for and managing a loan can be tricky. Before you take on any debt, it’s essential to make sure you understand the risks, costs, and benefits associated with different types of small business loans.
TL;DR
- Small business loans help business owners to propel their businesses forward, allowing them to hire new staff, purchase new equipment or relocate to keep up with expansion demands.
- Many options are available, including SBA loans, bank loans, and online lenders.
- Which is best depends on the needs of your business. This article explores them all, including the eligibility requirements and examples of how they work.
What Types of Small Business Loans Are There?
Small business loans come in a variety of forms from different financial institutions to meet a diverse range of business needs and goals. The most common loan types are;
SBA loans
The US Small business administration provides SBA loans by making funds available to non-profit intermediary lenders. They are a type of government-backed loan. The SBA lender guarantees the loan, meaning they will reimburse the lender if you cannot repay it. This is an attractive financing option for entrepreneurs since it helps reduce lenders’ perceived risk.
The application process for SBA loans is lengthy and requires extensive paperwork, but it is often worth the effort to gain access to its competitive terms and low-interest rates.
Say a borrower who has been running their business for two years and plans to expand. To do so, they will need to take out a loan. They can apply for an SBA loan by submitting the necessary paperwork, including business and personal financial statements, tax returns, profit-and-loss statements, and other documents. Once they have received approval for their business funding, the funds are available in their bank account to start expanding their operation.
There are a few different types available:
SBA 7(a) loans
These are the most common type of SBA loan and can be used for a variety of needs, such as working capital, purchasing inventory or equipment financing, refinancing debt, and more.
SBA 504 loans
These loans focus on helping businesses purchase large fixed assets like real estate or long-term machinery.
SBA microloans
These loans are for amounts under $50,000 and provide financing to businesses in underserved communities.
Visit SBA.gov funding programs to check the options and your availability.
SBA pros:
- Low-interest rates
- Long repayment terms
- Government backing reduces lender risk.
SBA cons:
- Lengthy and complicated application process
- High credit score/good financial standing is generally required to qualify.
Bank Loans
Bank loans are typically long-term and secured with collateral like real estate or equipment. These can be difficult for borrowers to secure as the lender needs some assurance that you can repay the loan. To this end, the bank or credit union will typically require a business plan and financial projections as part of the small business loan application process. They will also examine your credit score to understand how you manage debt.
The approach to a bank loan will be almost the same as the SBA loan. Say you’ve calculated that expanding your team will help you amplify your earning capacity. With a bank loan, you can receive a lump sum payment which will cover the cost of payroll and other expenses. You will likely be asked for the same information. The bank will likely approve the loan if you have this and a good credit score.
There are a few types of bank loans to consider:
Business line of credit
This is a revolving loan with a pre-approved credit line limit. It will usually come in the form of a business credit card. You can access funds up to your approved limit, using it when you need it, and only paying interest on the amount that you use. This is particularly well suited to help finance day-to-day operations such as purchasing inventory or covering payroll costs.
Business term loans
These are larger, fixed payments spread out over a period of time. They can be useful for equipment loans, expanding property, and more.
Merchant cash advance
This type of loan provides businesses with access to capital in exchange for a percentage of their daily credit card sales. This can be useful for businesses that don’t have the collateral or good credit score necessary for other types of loans.
Bank loan pros:
- Access to larger amounts of money than other types of loans
- A broad range of loan products available to meet different needs
- Longer repayment terms than other loans.
Bank loan cons:
- High credit score/good financial standing is generally required to qualify
- Lengthy and complicated application process
- Requires collateral to be provided as security.
Online lenders
Online lenders such as Stax Lending provide another great option for small business owners who need more flexibility than traditional lenders offer, with fewer requirements and quicker turnaround times. If merchants meet all the criteria, they can receive a loan within 24 hours to put toward business expansion, equipment, renovations, new employees, or other business necessities.
This application process is a little different. In this case, the owner may have been running the business for less than a year. He sells handmade jewelry online and in local stores, but he’s finding it difficult to keep up with demand. He needs capital to expand to meet demand.
He doesn’t meet the minimum requirements for time in business, and he’s heard that online lenders can offer quick approvals and fewer requirements than traditional banks. Within 24 hours of applying, his loan is approved, and he can start using the money to grow his business.
There are several types of online loans available:
Term loan
This loan is similar to a traditional bank loan but with fewer requirements. You can access funds quickly and repay the loan within 6-36 months.
Accounts receivables advance
This loan is based on the value of your business’s outstanding invoices, giving you access to capital faster than if you waited for customers to pay up.
Process online invoices
With this loan, businesses can receive up to 80-90% of the value of their invoices when they’re due.
Mobile security
This loan is unsecured and provides funding options to businesses through their mobile device or website.
Online lender pros:
- Quicker turnaround time than banks
- Easier qualifying criteria
- Flexible repayment structures
- No collateral required.
Online lender cons:
- Higher interest rates than banks
- Shorter repayment terms than other loans
- Limited loan amounts available.
It’s important to remember that there is no one-size-fits-all solution for business loans. Every lender has different requirements and criteria, so it pays to research beforehand to find the best option for you.
What Are the Requirements for These Loan Options?
The requirements for small business loans vary depending on the lender and the type of loan you apply for. However, there will be many similarities across all options. Even if all don’t require these, they are good to have prepared nonetheless:
- A solid business plan and financial projections
- A credit score of 650 or higher for bank loans
- Collateral, such as real estate or equipment
- At least one year in business
- Personal credit check to ensure you do not have other debts
- Personal guarantee from the business owner
- Sales or annual revenue figures for the past year to prove your credit history and cash flow
- Tax returns from the previous year
- Bank statements dating back three months
- Business license and other licenses.
If you met all of the above, you would be eligible for just about any of the loans above. More likely, you will meet some of the criteria, which will help you identify which options are thus available to you.
No matter which type of loan you choose, it’s important to read the fine print and fully understand the terms and conditions before signing on the dotted line. Doing your research ahead of time will help ensure that you get the best deal possible for your business.
Things to Consider Before Applying to a Lender
Before applying for a loan, it’s important to consider the following:
- What type of loan do you need? Review those discussed above.
- How much money do you need to borrow? Crunch the numbers to determine what you need to reach your goals.
- What’s your credit score? This will help you understand what types of loans will be available to you.
- How long will it take you to pay back the loan? Calculate your ability to meet the monthly payment requirements of the loan.
- Do you have enough collateral and/or a good credit score to qualify for the loan? Your credit score and collateral will determine which types you qualify for.
- Will you be able to meet the repayment terms of the loan? Crunch the numbers. Don’t apply for the loan if you can’t meet the repayments.
- What’s the annual percentage rate of the loan? Carefully consider the percentage rate to ensure the loan is worth what you have to repay.
- Does the loan come with prepayment penalties? A penalty may be applied if you plan to pay the loan back faster than the terms state.
By asking yourself these questions, you will be better equipped to determine which type of loan is best for your business. This will help ensure that you get the most out of your loan and can effectively manage it going forward.
What’s the Best Small Business Loan?
The best small business loan depends on your individual needs. Again, it’s important to consider your options and thoroughly research the terms and conditions of different loans. For small businesses looking to get faster access to cash and in a position to comfortably meet the repayment terms, online lenders help you take action quickly, exactly when you need it.
Stax Lending offers a range of flexible financing solutions tailored to meet businesses’ unique needs. If you turn over $10,000 or more in monthly revenue, have been in business for six months, and have a credit score of 550, Stax can offer financing solutions to help you reach your business goals.
FAQs
Can I apply for small business financing with bad credit?
Yes, you can apply for small business financing with bad credit. However, your options are more limited than someone who has good credit.
What is the maximum amount of an SBA loan?
The maximum loan amount of an SBA loan differs for each type of loan. For example, the maximum amount for an SBA 7(a) loan is $5 million, and the maximum amount for an SBA 504 loan is $20 million.
What credit score is needed for an SBA loan?
The minimum credit score for an SBA loan is typically around 680, but it can vary depending on the lender and the type of loan.
What is the typical repayment term on a business loan?
The typical repayment terms for business loans vary depending on the type of loan and the lender. Generally, terms range from one to five years for short-term loans and up to 25 years for long-term options. Online loans have shorter repayment terms, between three-six months and three years.
What are the interest rates for a small business loan?
The interest rate for a small business loan depends on the type of loan and the lender. The SBA sets caps on interest rates, but other small business lenders can still set their own rates, which often depend on your creditworthiness and other factors.
What is a prepayment penalty?
A prepayment penalty is a fee charged to you by the lender when you pay off your loan earlier than the agreed-upon repayment schedule. Some lenders may charge a penalty for paying off your loan early, and others may not—you must read over your loan terms carefully before signing any documents.
Can I use a personal loan to fund my business?
Yes, you can use a personal loan to fund your business. However, you should ensure the funds are used for business purposes only. Additionally, you should be aware that personal loans typically have higher interest rates than business loans.
How do I apply for a small business loan?
The application process for a small business loan will vary depending on the lender and type of loan. Typically, you can submit an online application where you’ll need to provide documentation such as financial statements, tax returns, and bank statements. It’s also important to shop around and compare different lenders’ terms and conditions before signing any documents.
