Applying for a business loan is similar to applying for a personal loan, but lenders typically set much stricter criteria. Even if you are only requesting a small amount of money, your lender will scrutinize your business.
However, there are more lenders available for businesses, and you are able to borrow much more than a personal loan. There are several different categories of business loans. Startup business loans are for new business owners, commercial real estate loans are for property and vehicle loans are for any cars or trucks your business needs.
Some small business loans are federally available through the Small Business Administration (SBA). For most businesses, these are the best type of loans because they provide more generous rates compared to a private lender. In addition to getting a loan, you can also use a line of credit to get funding.
Eligibility for Business Loans
Each business loan has different eligibility requirements, but the application process typically has the same criteria. You must present financial information about yourself and your business. This includes tax returns, income statements, balance sheets and bank statements. You must also present any licenses or leases relating to your business. Lenders also look at your personal credit score. With small business loans, it is common for your lender to ask for your business plan and examples of how you intend to use the loan.
Applying for an SBA Loan
Before you apply for an SBA loan, it is important to understand how the loan works. Despite the name, the SBA is not the lender. Instead, the SBA promises to back your loan. These government small business loans are available through private lenders or banks partnered with the SBA. Because your loan is being backed by the SBA, your lender is not taking a large risk, since he or she knows the government will cover any potential losses. Because of this, you can negotiate for much better deals, including a lower down payment and interest.
An SBA business loan can range anywhere from $50,000 to $5 million. Another advantage SBA loans have over other loans is a lack of restriction. You can spend the loan on anything you want, as long as it relates to your business.
Online Business Loans
An online business loan is the best choice if you need quick funding and have minimal collateral to offer traditional lenders. Online lenders typically consider how long you have been in business, your annual revenue and where your business is located to determine your eligibility. While online business loans are easier to get than traditional loans, there is a tradeoff. Online business loans have significantly higher interest rates, and there are often extra fees, such as origination and draw fees.
Another issue with online small business loans is the possibility of scammers. There are a few red flags to look for. The most common scam is making you pay in advance with the promise of getting a loan. Always look up the lender to see if they are legitimate. Prioritize online lenders who are already part of an established and reputable group. For example, when you apply for a PayPal business loan, you know the lender is legitimate. PayPal also offers some of the best online loans, with no hidden proceeding fees and some of the quickest application times. The money is also released a day after your loan is approved.
Secured vs. Unsecured Loans
A business loan falls into one of two categories, secured or unsecured. Secured loans require you to put up a form of collateral as part of the application process. Most owners use their home or car as collateral, but you can also use your stocks or expensive business inventory. At a minimum, the value of your collateral must match the loan, but if you are considered a risky investment, some lenders may ask for more valuable collateral.
Unsecured business loans do not have any collateral requirements. Because there are no collateral requirements, lenders set stricter eligibility requirements on unsecured loans. It is also harder to negotiate for lower interest rates with unsecured loans, since the lender is taking a larger risk compared to a secured loan. An unsecured business loan typically has a quicker application time because the lender does not have to consider the value of your collateral.
Forgivable Business Loans
A forgivable loan is a special type of loan most commonly available from either federal or state lenders. With a forgivable business loan, you are not required to pay back any of the money you borrow, as long as you meet certain conditions. The conditions vary depending on the loan, such as increasing your workforce by a certain percentage or opening your business in a specific area. Some nonprofits will also provide a forgivable loan if your business does something to actively improve the community.
Forgivable small business loans may be available in states looking to build a stronger workforce. Because of Covid-19, there is a greater emphasis on remote working. As a result, some of the smaller towns are offering forgivable loans or other benefits to new businesses with an emphasis on remote workers.
Using a Business Line of Credit
An alternative to using a business loan is to get a line of credit for your business. A business line of credit works similar to a credit card. You can borrow up to a set amount, paying interest on the amount you borrow. Every month, you must make a payment. As you make payments, you can withdraw an additional amount up to your maximum limit. Business credit is much larger than a traditional credit card, with most creditors offering a maximum of $250,000.
Small business loans are better if you need long term expenses. Using a business line of credit is not only better for smaller purchases, but it also gives you more flexibility. With a business loan, you accrue interest based on the total amount of the loan, even if you do not spend the funds right away. With a line of credit, you choose when you spend the money. Until you spend your money, you are not gathering any interest. Many business owners have an easier time planning around credit compared to a loan.
A business line of credit also comes in two categories, secured or unsecured. Because you are not borrowing as much with your credit line, secured business lines do not require as much in terms of collateral compared to a loan.