After the 2008 recession, it became difficult for business owners to acquire small business loans. The requirements are tougher and it is not easy for businesses to meet them. Due to this development, many businesses owners rely on alternative lenders for extra funding.
Types of Business Loans
- SBA Loans
The Small Business Administration offers this loan through approved lenders. They guarantee up to 85% of loans lower than $150,000 and 75% of loans up to $500,000. There are four types of SBA loans. The first type which is also the most popular option is the 7(a) loan program. This loan can be used to fund several business projects including the renovation of a business area, working capital, debt financing, and business expansion. However, there is a limitation; you cannot use to funds to pay off business owner’s share in the business. This loan amount ranges from $25,000 to $5 million. The repayment term also ranges from five to twenty- five years.Another SBA loan option is the Microloan program. Your business can receive up to $50,000 in this loan program. However, this cash cannot be used by real estate to settle existing debts. With this option, the maximum repayment term is six years. There is another program often referred to as the CDC/504 loan program. This loan is specifically used to purchase an existing building, machinery, or land. This loan is secured by the Certified Development Company (CDC) and 100% guaranteed by the SBA. The maximum amount you can access when you apply for this is $5.5 million. You can repay this loan in 10 or 20 years.There is the disaster loan also guaranteed by the SBA. With this loan, the lender can grant you up to $2 million. This loan is a low interest loan that can be used to replace or repair business assets that have been destroyed through disasters.
- Business Line of Credit
The business line of credit is another type of business funding. This form is funding is flexible and it works like the credit card. The lender will approve the maximum amount for a revolving credit. You can draw from the line of credit and since it is revolving, your limit will increase once you pay back. The interest is charged only on the cash you draw and not your line of credit.
- Equipment Financing
Equipment financing allows you to borrow cash to purchase a huge machinery. With equipment financing, the equipment you will purchase becomes the collateral for the loan. Usually, 10% to 20% of down payment is required. However, some lenders can request for a down payment as low as 5%.
- Invoice Financing
This option is ideal for people who are struggling with their finances because their customers do not pay their invoices on time. The invoice financing will offer you cash that will amount to a percentage of the total cost of the outstanding invoice. When the customers pay their invoices, you will then pay the companies. These companies charge certain fees and it becomes more expensive when your customers do not pay on time. Invoice financing is similar to invoice factoring. However, you will sell your invoices to the factoring company and they will be in charge of the invoice collection from the customer.
- Merchant Cash Advance
If you need cash for something urgent, a merchant cash advance can sort you out. You will receive a lump sum in exchange for a percentage of your future sales. You will need to repay the advance at the agreed period. This form of funding also attracts fees and the fees is calculated based on the results of a risk assessment. If the risks are high, you will end up paying higher fees. Repayments are made with fixed daily payments or weekly payments.
Applying for a Business Loan
When you apply for a small business loan, it is important for you to prepare so that the process moves swiftly. You should decide on the amount you want to acquire through the loan. when making this decision, it should be two-sided; the decision should not only depend on the amount you need. You should also think about the amount you can afford to pay. You can use the Debt Service Coverage Ratio to calculate your affordability. The DSCR is calculated by finding a ratio of your net income to your total annual debt. In the ideal situation, lenders will prefer DSCR of 1.35.
The next thing is to check your credit score. When applying for a small business loan, your personal credit score is just as important. Hence, you should check both personal and business credit scores. The higher your credit score, the better the terms of loans. You will get more loan options and loans at lower rates.
You should also prepare a strong business plan. Your business plan should be comprehensive and should be able to convince the lender about the potential of your business. Your plan should include a summary of your plan. The summary should provide an overview of your plan. It should also include a description of your business and the objectives of your business. You should also talk about the services or products your business offers. You are also expected to mention your managerial staff in the plan. Your target market, your competition, promotional plans, and sales in the business plan.
Do not forget to mention your financials in the plan. This should feature the breakdown of your business expenses. You can also consult a business mentor to help you review your business plan.
Requirements for a Business Loan
When you apply for a small business loan, you will need to provide the following:
- Personal data: You will be required to provide your personal data including names, addresses (including previous addresses), educational background, and contact information.
- Resume: You will need to provide a professional resume for all the principal executives of the firm. If you are startup business, some lenders expect that you provide details about your previous management experiences.
- Business plan: Your business plan which includes all the details that have been mentioned above should be provided.
- Income tax returns: Lenders request that potential borrowers submit a personal and business tax returns from the past three years.
- Loan Application history: You will also need to provide a record of all loans taken and how they were paid.
- Bank Statements: You will also need to provide a one year personal and business bank statement.
- Collateral: This depends on the lender. In most cases, high-risk loans require collateral.
- You will also need to outline the purpose of the loan.
- Debt Schedule: Your debt schedule should include all your business debts. It should include your payment schedule, payment dates, amounts, interest rates, and monthly payments for all outstanding debts.
- Legal Document: You will also need to provide all the legal documents that will prove that the business is actually yours. You will need to provide business licenses and registrations, business lease, business formation documents, Franchise agreements, and copies of contracts.
Best Small Business Loans
Kabbage is a small business lender that is based in Atlanta. The firm started operating in 2009 and it has provided finances for business over the years. Over $4 billion has been provided to small businesses over the years. The application process is quick and you can finish your application in no time. Kabbage has one of the lowest annual revenue requirements. You will need a minimum annual revenue of $50,000 to apply. You can access between $2,000 and $250,000 as a business line of credit.When you draw from your line of credit, you will need to pay back within 12 months. You will need to be in business for at least 1 year. Kabbage offers loans at APR that ranges from 24% to 99%. There is no minimum credit score requirement. They do not request for a personal guarantee as well. Fortunately, you will not pay an origination fee. This lender has an A+ rating from the Better Business Bureau and an excellent score from TrustPilot.
OnDeck since its inception in 2007 has offered several financial help to several small business firms. They offer two types of small business financing. These are term loans and business lines of credit. You can get up to $500,000 in term loans and $100,000 in business lines. You need a minimum credit score of 500 to access this loan. The loan term varies and it is up to 36 months. This lender has an A+ Better Business Bureau. When you apply for this loan, you will need to provide a personal guarantee. Your business should also be operating for at least one year. You will need a minimum annual revenue of $100,000.When you apply for a business line of credit, you will not pay an origination fee. You will, however, pay an origination fee that is from 2.4% to 4% of the loan amount. OnDeck has an excellent score from TrustPilot.
BlueVine was established in the year 2013, and it has over $1 billion in funds. It has granted loans to over 10,000 business owners. This lender offers a business line of credit and invoice factoring. The repayment term for invoice factoring is a minimum of three months and that of business line of credit is at least 6 months. You will also need a minimum credit score of 530 to apply for invoice factoring. For line of credit, you will need a higher credit score; at least 600.For invoice factoring, you will need a minimum annual revenue of $100,000, and you will need a minimum annual revenue of $120,000 for lines of credit. For both loan options, your business needs to operate for at least one year. You will not pay an origination fee for both options. BlueVine has earned an A+ rating from the Better Business Bureau. They also have an excellent score from TrustPilot.
- Funding Circle
Funding Circle is a peer-to-peer lending platform that has helped small businesses to raise over $7 billion in loans. You will need a minimum APR of 620 to apply for their funding. You will also need to be in business for at least 2 years to qualify for this loan option. The minimum loan amount you can access is $25,000. They can fund your loan in 5 to 10 days. There is no minimum annual revenue requirement. You will, however, pay an origination fee that ranges from 0.99% to 6.99%.
- Wells Fargo
If you want to apply for an SBA loan, Wells Fargo is one of the best lenders. This lender has over $8,500 branches nationwide and that makes it easily accessible. They offer SBA 7(a) loans, 504 loans, and Express loans. They also offer other small business loan options such as unsecured business loans, business lines of credit, and commercial purchase loans. with Wells Fargo’s unsecured business loan, the interest rate ranges from 7.75% to 22.99%. You can access a medium term loan that ranges between $10,000 to $100,000. The repayment term is from one to five years. Wells Fargo’s unsecured business loan is fixed, hence you will make fixed monthly payments.Wells Fargo also offers unsecured business lines of credit. They can offer you a revolving credit line of $5,000 to $100,000. Since the credit line is revolving, your limit increases once you pay back the cash you drew from the line of credit.
- JPMorgan Chase
This is also a lender that offers SBA loans on good terms. If you want to apply for an SBA 7(a) or 504 loan, this lender is one of the best lenders to go to. They also offer other business loans such as term loans, a business line of credit, equipment financing, and commercial real estate financing.There is a loan option called the Chase Business Quick Capital Loan. This loan option is a partnership between Chase Bank and popular online lender, OnDeck Capital. Chase uses its resources to fund loans under this partnership. However, it employs the fast application technology process that OnDeck uses. There is also the Chase Business Credit card option. You can use this business card line a loan. It is easy to qualify for this card. You can earn reward points with this lender.
- Huntington Bank
This bank, headquartered in Columbus, Ohio, is also worth mentioning when we talk about banks that offer SBA backed loans on good terms. You can access SBA 7(a), 504, and Express loans. This bank also offers other small business loans such as term loans, real estate loans, and business lines of credit.
- TD Bank
TD Bank has over 1,300 branches in the United States and it has managed to build and maintain a good reputation over the years. This bank can offer you SBA 504, SBA 7(a), and Express loans. There are other business loan options including a commercial mortgage loan, a business line of credit, expansion loan, and equipment loans. Although their loan terms are competitive, you do not get the convenience of applying online. You will need to schedule an appointment with the bank to apply.
This list of best business loans present the best lending terms for small business. They include both conventional and SBA loans. Although there are several options it is important to review the options and choose the one that works for you. You should consider the amounts available, the APR, and the lending terms when you choose a lender. You should also look at the credit score requirement. If you do not have a collateral, choose a lender that does not request for one. However, before you apply, make sure you have your legal documents and all other requirements ready.
This will facilitate a quick application process for you. Before you engage with a lender, read the terms and conditions of the lender. Reading the terms and conditions will help you to understand the lender’s terms and conditions.