Every entrepreneur knows how difficult it is to start and get the first business loan. Most of them know that keeping that business afloat is even more difficult. Unfortunately, over half of new small businesses fail within the first 5 years, primarily due to the lack of funding. If you don’t want to become a part of this statistic, you must ensure you have the means to stay in business. Applying for a small business loan is the best way to do this.
- Uplyft Capital offers business loans to qualified small businesses and entrepreneurs. It provides quick funding, easy sign-up, and same-day decisions. Comany’s goal is to give you the flexibility to grow your business and help you meet your goals. See Uplyft Capital Review.
- Supermoney Business Loans – is the best place to find your best loan offer from competing lenders. With loans up to $5M, we offer a low APR of 4.99%. You can apply online in seconds and choose your best offer. If you’re approved, you’ll get your money in minutes.
- Capital City Funds – is a company that offers loans to people who need capital to start or grow a business. The company’s mission is to provide you with a fast, free quote and quick funding. CCF also offers a 100% loan guarantee and a wide range of business funding options.
- Upstart Small Business Loans – a fintech startup that enables small businesses to get a business loan in minutes. You can also get an instant rate check. Upstart offers transparency and no hidden fees or prepayment penalties.
Remember that small business loans are nothing to be taken for granted, and you must be very responsible and research before applying. So, look at this overview of small business loans to learn the fundamentals and stay in the know.
What is a Small Business Loan?
If you’ve ever taken out a personal loan, a mortgage, or at least used a credit card, you probably understand how borrowing money works. You’ll need to (a) apply for a line of credit, (b) get approved, and (c) pay back the money within a specified period. At their core, small business loans work essentially the same way. If you and your business meet the lender’s requirements, you can quickly get the cash you need to keep your business afloat. The money can be used for business expenses, payroll, inventory, equipment, or marketing.
Secured vs. Unsecured Small Business Loan
When applying for a small business loan, you first need to consider whether you want a secured or unsecured loan.
- As always, unsecured business loans come with (a) stricter requirements, (b) higher fees, (c) higher interest rates, and (d) lower limits. This is all because unsecured loans are riskier for the lenders. There’s no collateral they can seize in case you don’t pay off your loans or security deposits they can keep.
- Secured business loans are typically better for both the lender and the borrower. The lenders can collect your deposit/collateral in case you’re not paying your loans back so that you will have (a) more flexibility, (b) lower rates and fees, (c) higher limits, and overall (d) better terms and conditions.
If your business has no assets or properties that can be listed as collateral, many lenders will allow you to use your personal property to secure the business loan. While this might not sound ideal, as long as you’re diligent with your loans and debts, you shouldn’t have anything to worry about.
7 Types of Small Business Loans
You can choose from various small business loans depending on your current financial situation and business needs. You must take time and carefully consider your choices, as different loans have different limits and overall terms and conditions. Below are some of the most popular seven types of small business loans.
- Microloans
- Personal Loans
- Term Loans
- SBA Loans
- Business Credit cards
- Business Line of Credit
- Equipment Loans
Microloans
Microloans can be ideal for new business owners, startups, and businesses in disadvantaged communities. As their name would suggest, these loans have very low limits and typically don’t go over $50,000. They’re not offered by banks or credit unions but by non-profit organizations and individuals. Microloans are a type of unsecured loan that comes at a lower cost. Your fees mainly depend on your credit score, previous borrowing behavior, and overall creditworthiness. If you’re seen as a less risky borrower, your interest rates can be as low as 6%.
Personal Loans
Another type of loan for a startup is a personal loan. Many banks and credit unions will reject loan applications from businesses with no operating history, so this might be your only option to get your new business off the ground. Your loan limit, rates, fees, and terms and conditions will depend entirely on your credit history and creditworthiness, and you’ll need a good or excellent credit score to be approved. The biggest downside is that you can harm your credit score if you don’t pay off your debts on time.
Term Loans
Businesses that are looking to expand can benefit from term loans. You can take a specific amount of money from a bank or credit union and agree to repay it within a specified period. Your borrowing amount can be higher with term loans, although you will typically have to offer an asset such as a piece of real estate as collateral. If your business has established a good credit history, you can get approved for a term loan in weeks and immediately call your predetermined lump sum.
RELATED: Check Your Business Credit Score (Equifax)
SBA Loans
Small Business Administration (SBA) is a government agency that can get you the funding needed to keep your business operational. The government will support your loan, meaning you can expect lower interest rates and fees and more favorable terms and conditions. This also means that the requirements will be stricter and that your business has to have a good credit history. If approved for an SBA loan, you can get a high borrowing amount of up to $5 million and an excellent repayment period from less than 10 years to up to 25 years. Remember that you will have to be patient with this loan, as it can take up to a few months to find out about the status of your application.
Business Credit Cards
If you’re interested in a revolving line of credit for your business, you can apply for a business credit card. They operate the same way as personal credit cards. You will need to make minimum monthly payments. You’ll have a credit card limit, and you can collect rewards, bonuses, etc. Business credit cards can come with numerous fees, so always check the fine print of your credit card agreement before you sign. These cards are the most beneficial if you have ongoing expenses such as utilities, travel, etc., and since they don’t require collateral – they can be a good option for business owners. Also, check Business Checking Accounts for additional options.
Business Line of Credit
If you need to deal with unexpected expenses or have short-term financing needs, a business line of credit might be a good option. You will have a credit limit, but you’ll only pay interest on the money you’ve spent/drawn. It’s a similar option to term loans, but you’ll have more flexibility at a lower cost. Speaking of the price, there might be some unexpected fees with business lines of credit, so again, read the whole agreement and the pricing and information section before you sign anything.
Equipment Loans
The last type of small business loan we’ll cover is equipment. They serve to help new business owners buy the proper equipment they need. Usually, the equipment’s expected lifespan will set the loan term, and the equipment will serve as collateral if you don’t pay your debts off in time. Your rates and fees for equipment loans will primarily depend on your business’s creditworthiness and the value of the equipment you buy. This can be an excellent solution if you need to purchase company cars, machinery, and, e.g., kitchen appliances for a restaurant. Since you own everything you buy, you can build your business around the equipment. As you can see, depending on your needs, you can find various small business loan offers that suit you.
Small Business Loan Lenders
Small business owners can find loans from 3 different lenders:
- Banks/credit unions. A loan from a bank will typically carry a lower interest rate, and you’ll be able to find out pretty quickly whether or not you’ll get approved. Most business owners get an answer within 2 weeks. The problem is that banks have higher requirements for their applicants and approve only about 20% of all applications.
- SBA. An SBA loan has its pros and cons. As a government agency, the SBA offers several loan programs, has favorable terms for borrowers, and is a safer bet for lenders. Of course, as with anything government-related, you’ll need a lot of paperwork, and the whole approval process is much longer.
- Alternative sources. You can also apply for a small business loan online. These alternative lenders don’t require an excellent credit score or an impeccable financial history. They have a lower maximum amount you can borrow, which can come with hefty fees and interest rates. Always read the fine print of your loan agreements before signing them.
Application Requirements for a Small Business Loan
As with any other type of loan or credit, the exact application requirements will vary from lender to lender. Some will allow you to get a small business loan with a poor credit history, while others require a more extended business financial history. As a general rule of thumb, you’ll need to provide the following information when you’re applying for a small business loan:
- Personal credit history
- Income tax returns
- Business overview
- Profits and losses statements
- Proof of ownership
- Business financial statements
You might be required to provide additional information, so to stay safe, it’s always best to keep all your financial documents on hand when you’re applying for your small business loan.