Small business loans are used for business expenses. While some loans are for general business funding, other small business loans are for specific uses, such as working capital, commercial mortgage, or the purchase of new equipment or furniture.
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Qualifying for a small-business loan is easier when you’re prepared. Below is Types of Small Business Loans
Types of Small Business Loans
Term loans:
A business term loan offers a lump sum with a fixed term and repayment amount. With each payment, you'll pay the principal and interest.
Business lines of credit:
Business lines of credit are very similar to credit cards and offer a lot of flexibility. With a business line of credit, a lender approves you for a revolving line of credit with a maximum limit you can borrow. Similar to credit cards, you’ll be charged interest for the amount of money you draw, not on the maximum limit.
You can access your line of credit for any of your business needs, whether it’s to purchase inventory or equipment, invest in marketing or manage fluctuations from seasonal sales. As long as you make the minimum payments and don’t go over your limit, you can use your line of credit and repay what you borrowed for as long as you like.
Equipment loans:
Equipment loans can be used to purchase and spread out the cost of a large piece of machinery or equipment for your business. The down payment can be up to 20%, but some loans may be available with no down payment. Usually, the equipment serves as collateral for the loan. Instead of taking out a loan, you may also have the option to lease equipment.
Invoice financing:
If your small business struggles with cash flow issues because you’re waiting on invoices to be paid, you can use invoice financing, also known as factoring. With invoice factoring, you sell your unpaid invoices to a lender at a discount. The lender will provide you with the majority of the amount owed on the invoice upfront and hold a portion of the outstanding amount (usually 20%) until the invoice is paid.
You should carefully weigh the costs when considering invoice financing. There is a fee that is based on a percentage of the invoice, plus interest charged on the cash advance.
Merchant cash advances:
If you need cash immediately, a merchant cash advance can provide access to capital. With a merchant cash advance, the lender provides you with a lump sum of cash in exchange for a portion of your future sales. You’re responsible for paying the amount of the loan plus fees.
You repay the advance with either a portion of your future credit and debit card sales, or with fixed daily or weekly transfers from your bank account. Your fee is determined by a risk assessment, with lower fees for lower-risk borrowers. Because of the high interest rates which can be in the triple digits, merchant cash advances are not recommended.
Commercial mortgage loans:
The money borrowed from a commercial mortgage loan is used to buy, develop or refinance commercial property such as a warehouse, mixed-use building or retail center.
Franchise loans:
Franchise loans can be used for standard business opening expenses and franchise-specific expenses such as marketing fees or the franchise fee, which is paid upfront to open a franchise. While you can finance a franchise with a traditional term loan, some lenders that offer loans specifically for franchises. Some franchisors may offer funding to help you establish your franchise.
How To Get a Business Loan ?
Small business loans require important documents. You will need to fill out a request and submit supporting documents, which you must be prepared to submit to the lender. Required documents often include:
Personal Background:
You'll need to provide personal information on the application or a separate document, such as:
- Criminal record
- Previous titles
- The names used
- Educational background
Resumes:
you will need to submit professional biographies to each manager. Some lenders require applicants to have prior experience in management or work, especially for emerging business loans.
Action Plan:
All loan programs require a sound and detailed business plan. The business plan should include a full set of expected financial statements, including a statement of profit and loss, an in-depth five-year financial statement, a cash flow and a balance sheet.
Income tax returns:
Most lenders require applicants to provide personal income tax returns and business returns for the previous three years.
Loan history:
You must provide past and current business loan records.
Banking data:
Many lenders require one year of personal and business banking data.
Use the loan:
This document explains how you plan to use the loan.
Debt schedule.:
A debt schedule shows all your business’s outstanding loan and credit amounts, monthly payments, interest and payment dates.
Legal documents:
Depending on the specific loan requirements, the lender may ask you to provide one or more legal documents. Make sure that the following items are ready, if possible:
Some Requirements For A Small Business Loan:
- The business must be registered and operate for profit.
- The business must be able to demonstrate operations within the U.S.
- The business must be be in operation for at minimum two years.
- It must qualify as a small business.
- It must be able to demonstrate a need for financing.
- It must be able to demonstrate qualified business purpose for funds.
- There can be no delinquent debts to the government.
How to Choose a Small Business Loan
You should focus on eligibility requirements, loan options, costs and reputation when choosing a small business loan lender. Focusing on these factors will help you identify a lender that is most likely to approve your loan, offer acceptable
terms and costs, and offer good service during approval, closing and repayment.
Loan types:
Find a lender that offers the type of loan you’re looking for. To save time and ensure you get enough capital to start or grow your small business, create a business plan and pinpoint the type of funding you need before you begin your search.
Loan term:
Your loan’s term is the time frame you have to repay the loan. Loans with shorter lengths have higher monthly payments, but you may pay less in total interest on the loan. If you take out a loan with a longer term, your monthly payments may be lower, but you may have to pay more in total interest over the life of the loan.
Costs
Keeping loan costs minimal allows you to invest profits back into your business and not back to the lender. Look for a lender with the lowest costs, including:
Down payment:
the down payment for your small business loan is covered by collateralIn some cases. Other small business loans require an equity investment. Down payment requirements vary, but you should expect to invest at least 10% to 30% of your own capital when taking out a loan.
Factor rate:
A factor rate is typically used for merchant cash advances and short-term loans to determine how much you will owe in interest. Instead of a percentage, like with APRs, the interest rate for invoice factoring is expressed in decimal form. For example, if a small business takes out a $5,000 loan with a 1.2 factor rate, it will pay a total of $6,000 on the loan. Your factor rate is determined by the industry your business is in, how long you’ve been in business, the stability of your business and your monthly credit card sales. With factor rates, you generally pay more in interest than with loans that use APRs.
Origination fee:
This fee is for processing a new loan. Some lenders include the origination fee in their interest rate or total loan balance, and some do not charge an origination fee.
Underwriting fees:
These fees are charged by underwriters to review and verify the provided documentation in your loan application and for preparing the loan.
Closing costs:
These fees are any other costs tied to closing the loan, such as a business valuation, commercial real estate appraisal, filing and recording fees or loan-packaging fee.
SBA loan guarantee fee:
The lender pays this fee and has the option to pass it along to you at closing. This fee is not based on the total loan amount, but the maturity and dollar amount guaranteed. If the guaranteed amount of an SBA-backed loan is 85%, the fees are based on that 85%. For example, for a 7(a) loan with a maturity of more than one year, the fee is 3% of the portion that is guaranteed by the SBA on loans of $150,000 to $750,000, and 3.5% on loans that are more than $750,000. Note that lenders can’t charge a separate origination fee on an SBA 7(a) loan, though they can charge packaging fees that are reasonable and customary for the services performed.
Additional fees:
Other fees associated with a small business loan include late payment fees, check processing fees and prepayment fees, which are charged if you make early payments.
Best Banks for Small Business Loans
Below are the banks that most actively approve Small Business Loans . They offer SBA and non-SBA loans,
however, non-SBA small business loans have more strict eligibility requirements that typically limit lending to businesses that are well-established and successful.
These lenders are a good place to start your search for small business loans with a traditional bank.
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