Getting a business loan can be essential to managing and growing your business, whether you’re expanding into a new location, preparing for busy periods, or dealing with emergency repairs. However, requirements, rates and repayment terms may differ depending on the type of loan. If you want to balance your finances with your goals, you need to understand and consider your options.
What is a business loan?
A business loan is a loan that a company takes out and uses to support its operations or grow. Often, the business will need to apply and qualify for the loan based on its credit. For small business loans, the credit quality of the owners can also affect eligibility, rates, and terms.
Types of Business Loans.
Small business owners can apply for different types of loans depending on their eligibility and how they plan to use the money.
Term loans are unsecured
An unsecured term loan allows you to borrow a small amount of money and repay the loan, plus interest and fees, over a set period of time. You’ll usually make monthly loan payments, although some loans have variable interest rates, which can cause your monthly payments to change.
Since you are not providing support for the loan, your eligibility, rate and terms will depend entirely on your personal and professional experience. If you have poor credit, it may be difficult for you to qualify or only be able to get a loan with no cash and high fees and interest.
Fixed term rental
Companies can also offer cosigners to get secured loans. Since the lender can foreclose on you if you default on the loan, you may be able to qualify for a larger loan or better loan terms. Sometimes you can use the money as you want, but there are also secured loans that require you to use the money to buy things that are used to save the money.
Some types of secured business loans are:
- Property backed business loans. Depending on the lender, you can offer machinery, equipment, real estate and other assets as collateral for a secured payday loan.
- Resource funds. You can use a property loan to buy specific equipment, just like you would use a car loan to buy a car. The loan can be from a bank or credit union, or from the finance department of the manufacturer.
- Business Finance. If you are buying real estate, consider commercial real estate financing options. Once you own the home, you can use your home equity to qualify for a business home loan or line of credit.
- Invoice money. Also known as accounts receivable financing, invoice financing allows you to use your unpaid invoices as collateral for a short-term loan or line of credit. Another type of financing called invoice factoring allows you to sell your unpaid invoices to a factoring company instead of using them as collateral for a loan.
Some business loans will also require you to get a general loan. This type of agreement gives the lender the right to seize any of your business assets, including accounts receivable and equipment, to settle outstanding debts.
Business lines of credit
A business line of credit is a flexible type of financing that gives you the option, but not the obligation, to take out a loan. When you open a line of credit, you get a maximum credit limit that you can borrow against using a single loan or loan process (called drawdowns). You will only pay interest if and when you borrow money, although there may be account maintenance and finance charges.
Credit terms can be set up in different ways. A revolving line of credit is similar to a credit card and allows you to borrow money, pay off your debt and borrow again, as long as your balance does not exceed your credit limit. Fixed lines are rare and limit the total amount you can borrow. Once you reach the limit, you will continue to repay the money and cannot get anything else.
The United States Small Business Administration (SBA) and lenders guarantee small business loans. Collateral reduces the lender’s risk, which can make it easier for small business owners to get financing at lower rates and fees.
There are many types of SBA loans, including
- SBA 7(a) loans. This loan program is the most widely used and covers many types of loans, including standard, small and high street loans. Loan limits and terms vary depending on the specific loan type, but you can borrow up to $5 million with a standard 7(a) loan.
- SBA 504 loans. These are long-term loans with interest. You can borrow up to $5 million and use the money to buy or upgrade assets that will help your business grow and create jobs. The loan has a repayment period of 10 or 20 years.
- Fees of the SBA office. Under this program, small businesses can borrow up to $50,000 to use in a variety of ways, including for capital and to purchase or repair equipment. Loans generally have interest rates between 8% and 13%, and up to a six-year repayment period.
You must meet certain eligibility criteria to qualify for an SBA loan, such as being gainfully employed (although there are other criteria) and doing business in the United States or its territories. A business owner should also invest time or money and try to get financing from other lenders before switching to an SBA loan.
The specifics for the loan vary depending on the type of business loan and the lender. Even SBA lenders, who must follow industry guidelines, can talk about who they lend to and the rates and terms they offer. However, if you are looking for a business loan, the following will be part of the criteria:
- Personal and Business Credit Scores. As a small business owner, your personal credit score and history can affect your eligibility and loan process. A credit score and company report, which is separate from your personal credit, may also be important.
- Personal commitment. Regardless of the type of loan, small business owners can enter into a personal guarantee, which is a promise to repay the loan if the business falls behind on payments. Large businesses that qualify for loans based solely on business income and credit may not require a personal guarantee.
- Annual income. Some lenders have minimum annual income requirements for borrowers, and you can share your most recent bank statements and business tax returns.
- Years of service. How long you’ve been in business can also affect your eligibility. For example, a lender may require your business to be in existence for at least two years to qualify for an unsecured business loan or line of credit. However, you may qualify for a secured loan or some other type of financing before that.
- Department of work and measurement. You don’t have much control over these, but the size of your business and the industry you work for can also influence the lender’s decision. After all, some companies are riskier or more regulated than others, and some lenders prefer to work with smaller (or larger) companies.
- Business plans, financial statements and loan plans. You can also share a business plan, including a copy of your business financial statements, and what you intend to do with the loan.