The 9 Best Business Lines of Credit to Consider

Having a line of credit available for your business is important for numerous reasons. As a business owner, you need to understand the business lines of credit. You also need to find the best available credit line for your growing company. Establishing business credit is important for acquiring capital when you need it.

For success as a business owner, your business needs to grow over time. Growth requires capital. Business loan companies work with business owners to help them take advantage of growth opportunities requiring capital. When you first start your company, you won’t have a business credit history. The sooner you start establishing your business credit, the better off you’ll be.

A line of credit for your business helps you do numerous things that increase revenues and grow your company. For example, a credit line for your company could allow you to purchase equipment. In many industries, expensive equipment is needed for everyday operations. A business credit line can also allow a company to hire new employees or invest in advertising.

While business credit lines are important, you need to put research into them. You need to understand how to evaluate available credit lines. You also need to know about the best available business credit lines.

Lines of Credit to Consider For Your Business

We have compiled a list of different options for those looking for a business line of credit loan. You can consider all the lines of credit mentioned below when looking for the best option for your company.

Of course, you first want to figure out what you need. Before you search available lines of credit, know what your company is looking for. This means figuring out what your credit rating is like. It also means calculating how much you want to borrow. Crunch the numbers and plan carefully. Have an idea of what interest rates your company should qualify for before you get started.

Here are the nine best business lines of credit to consider.

US Bank’s Cash Flow Manager Line of Credit

If your company is relatively established, you might want to look into the US Bank’s Cash Flow Manager Line of Credit. This line of credit has relatively strict approval requirements. However, it also offers great terms to those who are approved.

In order to be approved for this line of credit, your company needs to be at least two years old. Those who are approved can borrow as much as $250,000 for a secured line and up to $100,000 for an unsecured line. Companies can have a minimum credit line of $2,000, but anything less than $50,000 comes with a $150 annual fee.

They can take out the loan for a maximum period of 80 months. The lowest available interest rate is 6.00 percent variable. In addition to the interest rate, this credit line also typically involves an origination fee of $75.

This credit line is best suited to small or medium businesses. You have a lot of options to choose from with US Bank’s Cash Flow Manager Line of Credit. There are numerous fixed-rate options as low as 7.75 percent for those who qualify.

Fundbox

Fundbox is a business line of credit that offers a great deal of convenience. Business owners can enjoy numerous advantages with this credit line. One of the primary advantages is that the application process is automated.

Also, the Fundbox line of credit is fairly easy to qualify for. The requirements for approval with Fundbox are quite easy to achieve. Also, it’s worth noting that funding comes very quickly with this credit line.

However, there are a few disadvantages to be aware of. For one thing, the interest rate on this business line of credit can be relatively high, depending on your creditworthiness, but it can be as low as 4.66 percent.

Those who work with Fundbox are not able to borrow as much as they might be able to with other business lines of credit providers. The loan amounts are not generally very high compared to some other options. The typical maximum credit limit with Fundbox is $150,000.

You don’t have to be in business very long to qualify with Fundbox. In fact, your company may qualify despite only being six months old. However, you need at least $100,000 in annual revenue, have a business bank account, and have a personal FICO score of at least 600.

Bank of America Business Credit Lines

Another possible line of credit option is a Bank of America Business Credit Line. They offer both secured and unsecured lines. One of the biggest advantages of these credit lines is that the interest rates tend to be low. Also, you can use a credit line from Bank of America over the long term for your business.

With Bank of America, you can use multiple business financing products from the same lender. In addition to lines of credit, Bank of America also provides SBA loans, business term loans, and other commercial loans.

One possible disadvantage is that these credit lines are not always easy to qualify for. You will need to have fairly decent credit. Your business will also need to be well established – at least two years in business under current ownership. In other words, if you’ve just bought the company, you have to wait until you’ve owned it for two years.

You also have to meet some revenue requirements. If you want to take out an unsecured loan, your company’s revenue must be at least $100,000 annually. For a secured loan, you need revenue of at least $250,000 annually. You can borrow as little as $10,000. The maximum you can borrow depends on your specific application factors.

OnDeck

If you are a small business owner, you should consider business lines of credit from OnDeck. There are numerous advantages to OnDeck credit lines. For one thing, you can get the funds you need quickly if you are approved. In fact, you can get funds on the same day that you are approved in some cases.

Credit score requirements are not particularly stringent. You need a credit score of only 600 to qualify using your personal credit. You’ll also need to be in business for at least one year and have an annual business revenue of $100,000.

Another advantage to consider is that there is not a great deal of paperwork involved. The process of applying for and taking out the loan is streamlined and simplified.

Some disadvantages to OnDeck credit lines include the fixed-fee structure. This means that you won’t save any money if you pay off the loan early. Another thing to keep in mind is that you have to make payments back on the line of credit on a daily or weekly basis.

Also, you need to provide a personal guarantee in order to use a line of credit from OnDeck. And the average interest rate is about 47.14 percent, which is high in comparison to many other options.

You can borrow as little as $6,000 and up to $100,000. There is a 12-month rolling repayment term. In short, this means that if you use $1,000 of your $6,000 credit line in the first month, you have 12 months to repay that amount. If you use another $1,000 the following month, you’ll have 12 months to repay that amount. Each withdrawal has its own repayment date.

Wells Fargo Business Line

Regardless of the size of your company, Wells Faro Business Line could suit you as a line of credit. This credit line is appropriate for startup companies. It can also be appropriate for large, established companies.

Many business owners choose Wells Fargo Business Line because the interest rates tend to be low – as low as Prime + 1.75 percent. You can be approved for a revolving credit line of anywhere from $10,000 to $100,000.

Also, this credit line does not include a lot of additional fees. There is an annual fee, which is waived the first year. After that, it’s $95 for lines of up to $25,000 and $175 for lines over $25,000. Other than that, the only fee you’ll pay is if you choose to use your line of credit for a cash advance.

You will need to meet some fairly demanding requirements to be approved for BusinessLine from Wells Fargo. This includes being in operation for at least two years and having established business credit. If you are a newer business, the Wells Fargo Small Business Advantage Line of Credit has lower requirements with many of the same benefits.

Fundera

Fundera is a business line of credit provider with a great reputation. This is a newer lender. The company was founded in 2013. When you do business with Fundera, you’ll know exactly what you’re getting into. Fundera is devoted to providing transport financial products to business owners. However, you may have to deal with high- interest rates and relatively expensive fees with Fundera.

Fundera isn’t only a great source of credit lines for business owners. The company also offers financial products like cash advances, short-term loans, and SBA loans. You can also take out a loan with Fundera to finance a commercial equipment purchase.

Working with Fundera is ideal if you’re feeling overwhelmed in your search for a business line of credit. With exceptional customer service, Fundera will provide you with the advice and answers you need to optimize business finances.

Fundera doesn’t offer the loans itself but is a platform for helping businesses connect with lenders. Typically, customers approved on Fundera are typically in business for over one year, have at least $250,000 in annual revenue, and have a credit score of at least 650. Lines of credit range from $10,000 to more than $1 million with interest rates of anywhere from 7 percent to 25 percent. Loan terms are usually three months to 18 months.

Kabbage

One huge advantage of business lines of credit from Kabbage is that they tend to be easy to qualify for. You only need a minimum credit score of 560 to qualify for a line of credit for your business with Kabbage.

Another advantage is that the application and qualification process is so quick. In fact, you can qualify in only 10 minutes. You can also borrow as much as $250,000. Once you are approved, you get the funds quickly. And you have easy access to your credit line funds any time and anywhere that you want it.

A Kabbage line of credit is generally designed for shorter terms, ranging from six to 18 months. One possible drawback that business owners have to be aware of is that the interest rate can be high. The APR for these loans will typically range between 24 and 99 percent.

And there are fees that range from 2 percent to 27 percent, depending on the repayment term. However, this could be a good option if you absolutely must borrow capital and your company doesn’t yet have strong credit established.

PNC Bank Secured Business Line of Credit

You have a lot of options with business lines of credit from PNC Bank. You can take out either a secured or unsecured credit line with PNC Bank. Secured credit lines are a great idea if you are looking to establish your company’s business credit. These credit lines are especially recommended over the short term to cover revenue gaps. Credit lines are secured by any business assets other than real estate assets.

Because these credit lines are secured, they typically feature lower interest rates. There is a lot of convenience in a PNC line of credit. It’s easy to access the funds. They can be accessed via checks and online. They can also be linked to a company’s business checking account. This makes it quick and convenient to make payments.

The lines of credit offered by PNC Bank range from $20,000 to $100,000 for unsecured and $100,001 to $3 million for secured. The secured line of credit will entail a yearly fee of 0.25 percent of the credit line amount or $175 for the unsecured line of credit. Interest rates are variable.

BlueVine

BlueVine is another good line of credit provider for companies without strong, established credit. Perhaps the biggest advantage of a line of credit with BlueVine is that the requirements for approval are low.

However, this is not the only advantage. BlueVine also offers fairly low-interest rates for those who qualify. The lowest possible interest rate available is only 4.8 percent. Also, BlueVine gets funds out to companies fast. Those who are approved can get their funds on the same day.

Unfortunately, BlueVine lines of credit are not available everywhere. BlueVine cannot offer funds to companies located in certain states, including Nevada, North Dakota, and South Dakota. There are also certain industries that are restricted from borrowing. Also, those who cannot qualify for lower interest rates may have to pay high fees with BlueVine.

You can borrow up to $250,000 with a revolving credit line with a repayment term of six months to one year. Business owners typically need to bring in at least $10,000 monthly in revenue and be in business for at least six months to qualify for a BlueVine credit line. Also, business owners need to have credit scores of at least 625 to borrow with BlueVine.

Considerations in Evaluating Business Credit Lines

There are key considerations to take into account when evaluating various lines of credit. You need to know how to evaluate options to find the credit line that will optimize your company finances.

The first step to evaluating credit lines is to identify the most important considerations. Make a list of what you need in your company’s line of credit. The following are the many factors to think about.

One of the biggest limiting factors regarding business lines of credit is approval requirements. You can only take out lines of credit that you can be approved for. If your company is new, its credit may not yet be established. This could make it difficult to meet the approval requirements for a business line of credit.

You need to pursue credit lines that you can qualify for. If your business credit is not yet established, your personal credit could help you to qualify. That’s why it’s good to build your personal credit in addition to your business credit as a business owner.

You need to calculate how much capital you need. Lenders always put some limits on the business lines of credit they make available. You won’t be able to borrow as much as you want. You’ll be able to borrow as much as you qualify for.

When you’re getting ready to find a line of credit, you need to know how much you need. Figure out how much capital is necessary for your envisioned project. Then, check out the various borrowing limits for different lenders. Pinpoint the lenders who are offering credit amounts that are adequate for your needs.

You need to be aware of how repayment is made on the lines of credit you’re considering. When you borrow money, it has to be paid back. You need to factor repayment into your company’s budget. Be aware of how quickly borrowed money needs to be paid back according to the line of credit terms. This will help you with your budgeting.

Repayment convenience is also important. It’s essential that you make all your payments on time to avoid damage to your business credit. That’s why it’s ideal to have automatic payment capabilities available. This way, payments automatically come out of your company account so that they’re on time.

The costs of your company’s credit need to be carefully considered. Borrowing money from a lender is never free. You’ll need to pay interest on the money you borrow. This is not necessarily the only expense when you borrow. You may also have to pay a variety of additional fees.

A lot of lenders require fees for taking out a line of credit. They also may charge an annual fee for every year this line of credit is open. You’ll also probably have to pay fees if any of your payments are made late. You can, also, explore the benefits of personal loans for your business and how much they can cost you.

Your goal regarding costs is to find the line of credit that is least expensive for your company.

Cost is not the only important factor in evaluating business lines of credit. Customer service also needs to be considered. You may need to contact your lender with questions. You want to work with a lender that will be easy to communicate with. It’s important that you can get someone on the phone to answer your questions as necessary.

Even if everything sounds great on paper regarding a lender, you need to research customer service. You could end up with a lot of frustrations and regrets if you borrow from a lender with poor customer service.

Final Thoughts

As a business owner, you need to explore the above-mentioned business lines of credit. Learn as much as you can about each credit line option. Also, make a list of what credit line characteristics are most important for your company. This will help you to get the capital you need. It will also help you to establish a company credit history.

Once you have established a strong credit history, your company will be able to get needed capital. This simplifies many of the challenges of excelling as a company. Acquiring capital is among the biggest challenges that business owners face.

Established business credit assists your company in more ways than simply acquiring capital. Strong company credit can be helpful when you’re partnering with other companies or devising contract agreements with business partners or clients. A strong credit history shows that your company is dependable and established.

Get started establishing your company’s credit by opening up one of the above-mentioned business credit lines.

Loanry

Merchant Cash Advance When Money Today Matters Most

Owning your own business can be a tricky thing. It takes a special kind of business owner to be able to make sound financial and administrative decisions. Even if you have made the best decisions for your business, you may find yourself in need of funds quickly. There could be a wide range of reasons why you may need funds. Your reasons for needing money could dictate how quickly you need to obtain the money. It is helpful if you know all of the options that are available to you before you actually need the money. This article outlines everything you need to know about merchant cash advance (MCA). In this way, you can inform yourself before you have to make a decision.

What is a Merchant Cash Advance?

While a merchant cash advance can give you money quickly, it is not truly a loan. It is a cash advance based upon the credit card sales of your business. As a small business, you could apply for a merchant cash advance and have money in your account fast. There are specific providers of merchant cash advances. They evaluate risk and credit in a different way than a typical banker. In this case, the provider is not called a lender and they look at your daily receipts from your credit card sales to figure out how much you are able to pay back. You are essentially selling a percentage of your credit card sales in the future to get money today.

You make an agreement with the provider that addresses the payback amount, the amount that is advanced, and all the terms of the agreements. Once you sign the agreement, they put the money into your bank account. After that, each day a certain percentage of your daily credit card sales is withheld to pay back the agreement. This percentage is called a holdback and happens every day until the amount is repaid. The higher the amount of money that you earn in credit card sales means the higher the amount of money you can borrow and the faster you can repay the money.

The Benefits to This Type of Cash Advance

There are a wide variety of benefits to a merchant cash advance when you are looking for how to finance a business. Some of the benefits that you will get from taking advantage of a merchant cash advance include your ability to have fast access to the money you need when you need it. The approval process for this type of lending is easy and quick. You do not have to have any type of collateral to obtain approval for a merchant cash advance.

One of the great aspects of this type of lending is that your credit does not make a huge impact and even the worst credit is accepted. You can use this option for a large range of business needs. You can choose to make your repayment schedule on a daily or weekly basis. This can allow you to repay the money much faster. You have direct access to the merchant account which gives you an extra layer of advanced security.

You do not have to make an actual payment to repay this cash advance because it is automatically taken from your credit card receipts. Most providers offer online access. You can apply for this type of lending quickly over the internet.

The Negatives To This Type Of Cash Advance

When you are considering a merchant cash advance, there are also some negative aspects that you should consider. It is important that you have a complete understanding of all the good and bad aspects of a merchant cash advance before you make the decision to move forward with this type of transaction. This type of cash advance usually charges higher fees than what you would typically find with traditional loans. You do not have as much flexibility when looking for a merchant service provider. There are limited options available and as a result, you may not be able to change providers.

You are repaying the cash advance with a daily deduction to your credit card receipts. This means that you are reducing the amount of cash that is coming into the business because it is going towards paying back your cash advance.

How Can I Qualify For A Merchant Cash Advance?

This is a fairly easy job, which you don’t hear often in the financial world. However, there are some minimum requirements for your business to be able to qualify for a merchant cash advance. Fortunately for you, the minimum requirements are fairly easy for most businesses to achieve. While this type of lending is great for a business that has a limited history of existence, your business does have to be operating for at least two years. Some businesses have low credit scores because it is hard for them to keep their finances in order while running a business. A low credit score typically will not prevent you from qualifying for this type of cash advance, however, you do need a credit score of at least 550.

Keep in mind, you are repaying the cash advance with your daily credit card receipts. So this means, you are paying back the money you borrowed with a portion of the money you make each day. Therefore, the more money you make, the more you are able to repay and the more willing the merchant may be to let you borrow money. As a result, you should expect that you must generate an annual revenue of at least $180,000. This type of lending is intended to be a short term financing tool to assist you with purchasing inventory, paying debt, or some other unexpected payment that you need to make.

What Documents Do I Need?

While applying for a merchant cash advance is a simple process, there are some documents that you need to provide to the merchant along with your application. Remember, you pay back a merchant cash advance with your credit card transactions on a daily basis. Since that is the case, the merchant wants to look at your credit card statements to see how much you earn through credit card transactions. They want to make sure you have enough volume to repay the cash advance. Many merchants also want to see bank statements and will put your credit report to see your credit score.

Typically, you can apply for this type of cash advance online and the application is often approved the same day that you apply for the cash advance. You should keep in mind that you pay the price for fast money. Also, you need to provide proof of identity when you apply for a merchant cash advance. You must present a valid picture ID, such as a driver’s license. A merchant may also ask you to provide your business taxes as well as a voided business check.

Some vendors may ask you to provide additional documentation, such as proof of citizenship and any leases that you have on the building in which your business operates. The merchant may ask for other information, too. You want to provide whatever documentation they request as quickly as you can. Failure to provide this information could result in the merchant denying your request. You do not want to be denied simply because you did not respond timely.

How Difficult is it to Repay?

It is not that difficult to repay a merchant cash advance because they automatically deduct the money from your credit card sales. However, there are some repayment details which you should be aware of. They typically use a factor rate and not an interest rate, like more standard loans. The factor rate runs anywhere from 1.14 to 1.48. You then multiply the amount you borrow by this number and that gives you the full amount that you owe. It may seem like a low number when interest rates typically start around 8 percent, but not so fast. When you translate this number to a percent, it ends up being around 15 percent but can go much higher. However, the typical borrower ends up paying 20 to 40 percent more than the amount borrowed.

The merchant understands that when you are wanting a cash advance, you are probably more of a risk. Naturally, they want to make sure they protect themselves from that risk. It usually takes about 8 to 9 months to fully pay off your merchant cash advance. However, you may be able to get a term as short as 4 months and as long as 18 months depending on how much you earn. You should also keep in mind that this limits the amount of cash that you have coming into the business while you are repaying this cash advance.

The amount you pay back daily is called the holdback amount. This is a daily percentage of the credit card sales receipts. This is not the same percentage as your repayment amount, or factor rate. The holdback amount is based on the amount of money you are advanced, the amount of your credit card sales, and the amount of time you take to repay the advance.

I will give you an example to highlight what I said above.

You have an advance of $5,000 and you are paying back $6,500. That means your factor rate is 30 percent. However, your holdback rate is 15 percent until you have paid back the $6,500. The amount of time it takes you to repay the $6,500 depends of your credit card sales. If you have consistent sales of $10,000 per month, that means you are paying $1,500 per month and it would take you a little more than 4 months to repay the money.

Are There Other Types of Business Loans?

As a business, you have some options other than a merchant cash advance available to you. Before making a final decision, you should shop around to business loan companies to find out what you may obtain. Small Business Administration (SBA) loans are a great option for many small businesses and offer a wide range of benefits. The SBA does not give out the loans, however, they work with lenders that will provide the loans to small businesses. They are a federal agency that sets the rules and parameters for the loans by combining with lenders, institutions, and community organizations. They make it easier for many small businesses to obtain loans.

These loans are for long term planning, which is different from merchant cash advances. You may need collateral for this type of loan. However, these loans have fixed and variable rate options. The SBA backs the loan up to 90 percent so the lender feels secure in allowing you to borrow the money. If you default on the loan, the SBA covers up to 90 percent of it. The repayment terms can be for an extended period of time, up to as long as 25 years.

You should be aware that the application can take a considerable amount of time and you may need to provide a large amount of documentation, such as background checks, financial reports, and tax documents.

Can I Get a Personal Loan Instead?

When you are considering a merchant cash advance, it may seem odd to also consider a personal loan, but it is an option that is available to you. While a personal loan is not technically for business purposes, you can use it for anything for which you want to use it. You are taking personal responsibility for it. So if you are willing to do so and spend it for a business need, you can do that. This could be a good option if your business is fairly new and does not have a good amount of credit built up on its own.

Your credit score is a large factor in determining your interest rate. The lower your credit score means your interest rate will be higher. When you apply for a personal loan, your income matters. So if you are not taking a salary from the business and you are not showing any type of income, you may have a difficult time getting a personal loan. It’s important to find a credible lender.

Is a Line Of Credit Loan a Better Idea?

One other option you may want to consider when you are thinking about a merchant cash advance is a line of credit. In this case, a lender extends you a certain amount as a line of credit over a certain period of time and you can use those funds however you wish. Once you reach the end of the time frame, you are no longer able to use the line of credit. You can use as much or as little as you wish of the amount the lender gives you.

You pay interest on the amount you use, not the full amount of the line of credit, unless, of course, you use the full amount. The lender and you agree to the repayment amount before the line of credit is extended to you. When you pay off the amount you have used, you can usually use that amount again until the term is up. Most of the time, you can renew the line of credit for another term.

The interest rate for a line of credit is usually in the mid-range as they tend to be much less risky for lenders. This may be a good way to establish credit for your business, especially if you have a new business or are trying to repair your credit.

Conclusion

A merchant cash advance may be a new term for you. But now that you know a little more about it, you may be considering it. If you are seriously considering this as an option, be sure that you understand how it is going to impact your day to day cash flow coming in from your credit card sales. You may consider it as an option because it does not take from any money you have saved. However, as we already stated multiple times, it does impact that money coming into your business from your credit card sales. If you have that money projected and in your budget, you must consider how that impacts you moving forward.

Loanry

Construction Business Loans to Help Build Your Company

Many of us envision our business going from our imagination to an actual brick and mortar building. We may be very aware of what we want the finished product to look like. Coming up with the funds to build our dream construction can be daunting, however. We may wonder where we will get the funding to bring the physical manifestation of our business into a reality. This is where construction loans come into play. These loans give us funding to physically realize the construction of our business. So, if you are interested in business finance, read on.

What are Construction Business Loans and Why Do I Need One?

A construction business loan is a loan to fund the construction or renovation of a physical property meant to house your business. You can take out this loan to develop the land as well as other forms of construction on business property. You can compare a business construction loan to a mortgage in some ways. However, it for paying for the construction or renovation of a commercial property instead of a personal or residential property. A residential mortgage is there to pay for a pre-existing home or the construction of a home.

If you’re a business owner who wants to renovate your business space or build a new location for your business from the ground up, you may need a construction business loan. Most business owners can afford to fund the renovation of their business space or the construction of it out of pocket. A business construction loan takes away the need to have money for a renovation or construction upfront. From a practical standpoint, you’ll more than likely seek a business construction loan if you want to build a new space for your business or renovate your existing space.

Requirements For A Construction Loan

Lenders don’t take business construction loans lightly. They understand how risky this type of loan can be. As a result, they require a lot of information upfront. Business owners seeking this type of loan will be required to furnish intricate details regarding your construction plan. These details are called the “blue book”. This includes a timeline for the construction project,  floor plans, materials inventory, and suppliers and contractors. Besides, you’ll also need to supply information about the builder. This information will need to show lenders that you have found a reputable licensed builder.

As proof of a builder’s merit, you will need to supply the past and present projects of your chosen builder. Also, as stated above, you will need to provide a profit and loss report. Some lenders will ask for as much as a twenty-five percent downpayment. This works similar to a good faith payment and acts as insurance that you’ll be able to carry out the cost of construction, worst-case scenario. A property appraisal is also a key factor when it comes to lenders. They will determine the value of the property as a finished project. The property value is both location-based and market-based. Lenders focus on five key areas:

  1. Specific details about the construction
  2. A qualified builder
  3. Twenty to twenty-five percent Down Payment
  4. Your ability to repay a Loan
  5. Property value appraisal

How Do Business Construction Loans Work?

Lenders understand that the one size fits all approach can’t apply to business owners. Especially when it comes to business construction loans. Businesses are as unique as a fingerprint. Each has its unique wants, needs, and preferences. As a result, there are business construction loans to meet the wide and varied needs and preferences of different businesses. Business construction loans are unique in that they are funded differently from other loans. Conventional loans give the borrower access to the full loan amount immediately. You pay back the loan in pre-set installments over time.

Construction Loans are Funded in Increments

As you finish each phase of the construction, you can access the funds for the next phase. The borrower works with the lender to create a draw schedule based on the smaller projects that make up the construction of the commercial property. Typically, an inspection is required after each construction phase is completed. This ensures that the work has been done and has been completed correctly. This continues until all the funds have been released and the project is finished.

One key difference between construction loans and conventional loans is how the interest rate is factored into the loan. Borrowers will only pay interest on the loans that have been funded.  For example, if a business/borrower receives a construction loan for $250,000 but has only received $100,000, they will only pay interest on $100,000. As they receive more money from the loan, the interest will be based on how much they have received. Borrowers will never pay interest on funds they haven’t received yet. In a nutshell, a commercial construction loan is set up to have the borrower pay only the interest until the loan has been fully funded.

The Mechanics of Construction Business Loans

Construction loans follow a particular format. You can use the first part of the loan to cover the building, renovation, or reconstruction of a property. However, once the construction is complete, you use an end loan or permanent loan to pay off the short term initial loan. These loans are designed to complement the construction process and can run anywhere from six months to a few years. This type of loan is designed to be paid off once the construction has finished or it has been refinanced or sold.

Interest Rates and Fees

As with any kind of credit or loan, your interest will be based on your credit. Typically, business construction loans range from four to twelve percent. Of course, the smaller interest rates go to people with better credit. However, interest rates can be affected by more than just your credit score. The type of lender you choose will also play a role in the interest you pay. Typically banks have lower interest rates whereas hard money lenders typically have higher interest rates. So you should carefully shop business loans.

Business construction loans come with fees. However, the type of fees and the amount you will be required to pay will vary from lender to lender. The fee types and amounts vary by lender. However, some fees are common for most business construction loans:

  • Documentation Fees
  • Processing Fees
  • Project review Fees
  • Fund control Fees
  • Guarantee Fees

How Do Lenders Determine Eligibility?

Lenders understand the risk factors involved with business construction loans. As a result, they pay attention to a few key areas. They will look at your credit score. Lenders tend to favor business owners who have a credit score in the high six hundred and seven hundred. However, each lender will vary in their eligibility requirements as well as what they’re looking for. However, the evaluation doesn’t stop there. Lenders will look at business credit as well.

Lenders will also take into consideration your business’s debt to income ratio as well. Most lenders are looking for potential business owners who have a DTI of forty-three percent our less. Logically speaking, the lower your DTI, the better.

What’s Next?

After the construction of the commercial property is complete, the loan doesn’t become due in one lump sum. Instead, the borrower can now get a commercial mortgage. As with any form of real estate, the newly constructed or renovated commercial building serves as collateral. You can use the funds from the commercial mortgage to pay off the commercial loan. The payments should be more affordable for the commercial mortgage.

Type of Loans To Research

Since we are talking about business construction loans, naturally, we will take a look at certain types of SBA loans you should know about. Besides that, let’s also look at other types of lenders you can go to.

SBA CDC/504 Loan Program

Businesses who are interested in this type of loan must meet the following requirements. The company must be comprised of fifty-one percent American owners or aliens with a green card. The business must be for-profit and NOT publicly traded. The company must operate within the US or US territories. And the business must operate in at least fifty one percent of the space. Also, the net worth of the company can’t exceed $15 million. Plus, profits for two fiscal years before applying for the loan can’t exceed five million dollars. It should also be noted that businesses that participate in real estate ventures aren’t eligible for this loan. This loan is geared for businesses that are:

  • Sole proprietorships
  • Partnerships
  • Limited liability companies
  • Corporations

 

SBA U.S. Small Business Administration
Program

504 Loans Provided through Certified Development Companies (CDCs) which are licensed by SBA

Maximum Loan Amount

504 CDC maximum amount ranges from $5 million to $5.5 million, depending on type of business or project

Percent of Guaranty

Project costs financed as follows:

  • CDC: up to 40%
  • Lender: 50% (Non-guaranteed)
  • Equity: 10% plus additional 5% if new business and/ or 5% if special use property

Use of Proceeds

Long-term, fixed-asset loans; Lender (non-guaranteed) financing secured by first lien on project assets. CDS loan provided from SBA 100% guaranteed debenture sold to investors at fixed rate secured by 2nd lien.

Maturity

CDC Loan: 10-or 20-year term fixed interest rate.
Lender Loan: Unguaranteed financing may have a shorter term. May be fixed or adjustable interest rate.

Maximum Interest Rates

Fixed rate on SBA Grow (504) Loan established when the debenture backing loan is sold. Declining prepayment penalty for 1/2 of term.

Guaranty Fees

SBA guaranty fee on debenture is 0.0%. A participation fee of 0.5% is on lender share, plus CDC may charge up to 1.5% on their share.
CDC charges a monthly servicing fee of 0.625%-2.0% on unpaid balance. Ongoing guaranty fee is 0.642% of principal outstanding. Ongoing fee % doesn't change during term.

Who Qualifies

Alternative Size Standard:
For profit businesses that do not exceed $15 million in tangible net worth, and do not have an average two full fiscal year net income over $5 million.

Owner Occupied 51% for existing or 60% for new construction.

Benefits to Borrowers

Low down payment - equity (10,15 or 20 percent) (The equity contribution may be borrowed as long as it is not from an SBA loan) ;
Fees can be financed;
SBA/CDC Portion:

  • Long-term fixed rate
  • Full amortization and
  • No balloons

SBA 7(a) Loan Program

This type of loan can be used to acquire working capital. These loans can be funded for as much as five million dollars. These loans generally require a few months to be approved, the interest is fixed, and no collateral is required. However, if you work with one of SBA’s preferred lenders your loan could be approved sooner. However, the time for approval can vary from lender to lender. The average amount of this type of loan was $425,500 in 2018.

SBA U.S. Small Business Administration
Program

7(a) Loans

Maximum Loan Amount

$5 million

Percent of Guaranty

85% guaranty for loans of $150,000 or less;
75% guaranty for loans greater than $150,000 (up to $3.75 million maximum guaranty)

Use of Proceeds

Term Loan. Expansion/renovation;
new construction, purchase land or buildings;
purchase equipment, fixtures, lease-hold improvements;
working capital;
refinance debt for compelling reasons;
seasonal line of credit, inventory or starting a business

Maturity

Depends on ability to repay. Generally, working capital & machinery & equipment (not to exceed life of equipment) is 5-10 years;
real estate is 25 years.

Maximum Interest Rates

Loans less than 7 years:

  • $0 - $25,000 Prime + 4.25%
  • $25,001 - $50,000 P + 3.25%
  • Over $50,000 Prime + 2.25%

Loans 7 years or longer:

  • 0 - $25,000 Prime + 4.75%
  • $25,001 - $50,000 P + 3.75%
  • Over $50,000 Prime + 2.75%
Guaranty Fees

(No SBA quaranty fees on loans of $125,000 or less approved in FY 2018.)
Fee charged on guarantied portion of loan only.
$125,001 - $150,000 = 2.0%
$150,001 - $700,000 = 3.0%
above $700,000 = 3.5% up to 1st million;
plus 3.75% on guaranty portion over $1 million,
12 months or less .25%
Ongoing fee of 0.55%.

Who Qualifies

Must be a for-profit business & meet SBA size standards; show good character, credit, management, and ability to repay. Must be an eligible type of business.

Prepayment penalty for loans with maturities of 15 years or more if prepaid during first 3 years. ( 5% year 1, 3% year 2 and 1% year 3)

Benefits to Borrowers
  • Long-term financing
  • Improved cash flow
  • Fixed maturity
  • No ballons
  • No prepayment penalty (under 15 years)

Other Details Regarding SBA Loans…

SBA loans require a large amount of information and supporting documents for approval. These loans have enviable benefits but the approval process can be quite extensive. SBA loans will likely require you to furnish:

  • A resume
  • Business plan
  • Business credit report
  • Income tax returns
  • Financial statements: Balance Sheets, Income Statements, Cash Flow, Bank Statements
  • Accounts Receivable and Accounts Payable
  • Collateral
  • Legal Documents: Business licenses and registrations required for you to conduct business. Articles of Incorporation, Copies of contracts you have with any third parties
  • Earnings Requirements
  • Working Capital

SBA lenders want to ensure that they are funding business owners who will have the ability to pay back the loan. However, if they approve you for an SBA loan there are many benefits. SBA loans aren’t underwritten by the US Government. Lenders, community development organizations, and micro-lending institutions underwrite them and the average loan amount is near $371,000.

Bank Loans

Bank loans may be an attractive option for businesses seeking a construction loan. Although the terms will vary from bank to bank, it is possible to make a down payment for as little as ten percent. You can get fixed or variable interest rates and the repayment terms and down payment can vary. Businesses often have up to twenty-five years to repay bank-funded loans.

Mezzanine Loans

Mezzanine loans are for situations when the loan to cost ratio is lower. As a result, the business owner has to come up with more money. The loan to cost ratio is an issue. This situation occurs when building costs exceed the funds available for the project. You can use a mezzanine loan to cover the part of the construction project for which you do not have enough funds. This type of loan is secured through stock which can be converted to an equity stake. Mezzanine loans make it possible for a business owner to fund up to ninety-five percent of a construction project.

What Type of Loan is Best for Your Business?

This question is highly specific and dependent on the goals as well as the current financial situation of your company. However, banks, credit unions, and private lenders are SBA approved intermediary lenders. These lenders offer 7(a) loans, which may be a good option for your company. SBA-approved non-profit CDC provides funds for CDC/504 loans.

Banks and credit unions are a good place to shop for business construction loans.  They offer SBA loans, traditional loans, and mezzanine loans. You can also seek funding through hard money lenders. However, the interest rates for these types of loans will probably be higher. These lenders are private and usually offer short term funding. These loans usually don’t require much money upfront and usually issue funds much quicker than more conventional lenders.

The Application Process

Once you’ve decided on the lender, you will need to prepare your documents for the loan application process. Plus, you will also need to provide specific information regarding your construction project. This information includes a building plan with specs and designs. You’ll also need to provide projected expected project cost sand estimates for contractors, materials, and any other miscellaneous expenses.  They will more than likely ask for personal AND business tax returns, profit and loss statements, balance sheets, bank statements, income statements, and debt schedules.

Your credit score will also be considered.  Keep in mind that negative like bankruptcies, foreclosures, defaults on loans, and other credit blemishes will be scrutinized. Some of these negative blemishes may automatically disqualify you. As a result, it’s a good idea to provide and explanation for the negative information. This can be a lengthy process for the lender and more documentation may be required. The final steps include the underwriting process and approval.

Can I Get a Construction Loan with No Money Down?

Most commercial construction loans will require at least a ten to thirty percent down payment. However, an SBA Microloan doesn’t, although you will have to come up with collateral. The SBA offers various no money down loans that require some form of comparable collateral. If you meet the eligibility requirements, you may be able to secure a no money down loan if the amount you want to fund fits within the SBA’s microloan funding amounts and criteria.

How Much Will Poor Credit Affect Business Construction Loan Approval?

The short answer to this question is “a lot.” Bad credit is a FICO credit score of 629 or less. Business owners with poor credit are a greater risk than their business counterparts with good or fair credit. This is because they are more likely to default on a loan. This is why business owners with poor credit may find it difficult to secure a traditional loan. However, some alternative lenders may give you a shot. Keep in mind that they will probably offer you high interest rates. Also, some of these alternative lenders may look at other things besides credit when determining your creditworthiness. Those areas could include including business revenue or length of time in business. There are five alternative lenders well known for funding business owners with less than spotless credit. They are:

  • BlueVine: FICO Credit Scores As Low As 530
  • Kabbage: Alternative Qualification Requirements
  • RapidAdvance: New Businesses
  • LoanBuilder: Large Loan Amounts
  • Fundbox: Short Loan Terms

These alternative lenders stood out because they were rated highly in three areas. They include customer service, qualification requirements and loan options. These areas may be beneficial in helping businesses with bad credit narrow their search and find a loan that will meet their unique circumstances Also, it should be noted that most lenders will look at your credit as well as your business credit. Furthermore, if you haven’t established business credit your credit will be the only gauge of your creditworthiness.

Closing Words

Building a commercial structure for your business is exciting. The new space your business will occupy will house the hopes and dreams of your company. As a result, it’s a good idea to know where you stand when it comes to securing funding for your company. Most Business construction loans require a down payment., as well as other constraints. Understand your why as well as the various other reasons why a construction loan is a necessity for you.

Have you outgrown your space? Has your business location suffered from some form of damage or loss? Is it time to perform renovations on your old commercial space? Regardless of the reasons, understand them and zero in on the best types of business construction loans for your company. A new commercial space is a common goal for many businesses.  However, to secure the right funding for your situation, it’s necessary to dig deep. And take an honest look at what type of funding would be best for you to pursue. Loanry can always help you connect with online lenders, if this is the road you decide to take.

Loanry

A Guide to Understanding Different Types of Business Loans

Everyone has heard about personal loans, but not everyone knows the difference between business loans and personal loans. To make it even more complicated, there are many different types of business loans out there to choose from. If your business is a startup, needs new equipment, or is looking to expand, then you might benefit from getting a business loan. Before you make such a big commitment, though, you should learn about the different types of business loans out there. Business loan shopping doesn’t have to be difficult if you have a great understanding of what is offered.

What Are the Different Types of Business Loans?

As a small business owner, you will need to find funding from outside sources every now and then. It is important to understand the different types of business loans available to you. There are several kinds of business loans, and you may or may not qualify for all of them depending on factors such as how old your business is, what your credit is like, and what you want to use the money for. There is also a big difference between traditional business loans and some more nontraditional ones, and knowing how to seek out the kind of loan you want can save your business money and help build your credit.

One important thing to keep in mind is that most loans go to individuals, but business loans go to the business itself. A business is a separate entity, with its own credit history and creditworthiness. Any effect of not paying will only affect you in relation to how you are tied to the business. The liability you carry depends on what kind of business you have, such as whether it is a sole proprietorship, partnership, limited liability company (LLC), or corporation.

Traditional Small Business Loans

SBA Loans

SBA Loans can be one of the best options because they can offer great benefits. This isn’t the kind of loan to take out for most last minute or emergency needs. U.S. Small Business Loans are for big decisions, like acquiring a company or refinancing a mortgage. Among the benefits:

  • You can choose between fixed rate and variable rate loans.
  • The financing from the SBA is good for up to 90%.
  • There are various loan terms, up to 25 years.

Part of the loan is guaranteed by the SBA, even in cases of default, making this one of the safer options. However, there are some drawbacks, such as:

  • The application can be time-consuming and will include everything from financial reports to background checks and possibly even owner information.
  • Because of the stringent requirements, not everyone will qualify.
  • You may be required to put down collateral to guarantee the loan.

There are different kinds of SBA loans, such as the SBA 7(a) which is specifically designed for very large decisions; the SBA 504 which focuses on real estate, including construction projects; and the SBA Express, a smaller class of loan with a $350,000 cap that is designed more for sudden needs like business equipment, working capital, and other needs. The SBA Express is also different in that once approved, the funds can be available in as soon as 48 hours. The SBA guarantees 50% of SBA Express loans.

Roadmap to SBA loan

Term Loans

Term loans are a more traditional kind of loan and are probably the most common kind of small business loan. Business term loans help with any kind of business needs that can’t be paid with cash, such as new equipment, working capital, or large expansions. Term loans are flexible and have flexible terms, and you can get one from a regular bank or a nontraditional lender.  More established companies like term loans because of the flexible terms, but companies with less history might have a harder time qualifying. The advantages to business term loans are:

  • Term loans have flexibility, such as the amount borrowed, the repayment terms, and the kind of lender used.
  • You can use a term loan for almost any kind of need or situation.
  • Using a term loan can help to improve your business credit ratings.

Drawbacks, on the other hand, can include:

  • Term loans may require at least some collateral to guarantee the loan.
  • There is a lot of documentation required in order to apply for a term loan, including business statements.

The interest rate is often easier to predict on a term loan because it will carry standard fixed rate interest or flat fees. The actual rate may vary widely and can be anywhere from 6 to 30 percent. If your company has been operating for at least 2 years and you can show a high enough level of solvency, a business term loan might be the best one for you.

Equipment Financing Loans

An equipment financing loan is a loan or lease used to purchase or borrow hard assets, like equipment, vehicles, machinery, or computers needed for your business. Unlike the loans already mentioned, an equipment financing loan is a secured loan, in the sense that the equipment itself can act as collateral for the loan.

Because it is a secured loan, your equipment financing loan may have better terms, such as a lower interest rate. Not every lender offers equipment financing loans, and your credit will need to be good to qualify. This may also be a good time to consider the advantages and disadvantages involved in buying versus leasing your company’s equipment.

Reasong to Finance Equipment to Your Business

Lease vs Buy Equipment

When it comes to equipment buying versus leasing, you have to take into account your own short term and long term needs and assets. While buying seems like a good idea because it means you can keep the equipment forever and give you more flexibility in dealing with it, leasing could end up saving you money.

When you lease equipment, you don’t have to come up with as much money to start. Unlike the major expenditure when you buy expensive equipment, leasing will probably not affect your cash flow much if at all. Also unlike when buying, lease payments can be written off on your taxes as business expenses. You may be able to get better terms when leasing, especially if your credit isn’t stellar. It is also easier to upgrade to better and more modern equipment as soon as your lease expires.

On the other hand, if you buy equipment, you will own it forever. With some kinds of equipment that lasts a long time, like office furniture, it makes more sense to buy it. If you decide you don’t need it anymore, it’s yours to sell. You may be able to get a tax break during the first year after a big purchase by using Section 179 of the Internal Revenue Code to deduct up to $500,000 of equipment. There are also potential tax incentives for depreciation, so you may be able to deduct money off your taxes because your assets have gone down in value.

Commercial Real Estate Loans

Other traditional loan possibilities are commercial real estate loans. These are secured loans like the equipment loans, and the collateral is the real estate itself. If you have ever been involved in buying your own home, you understand what a long and complicated process it can be, with many players working together to provide the financing, appraise the property, and clear the title, among other tasks.

Because of the strict rules around selling property, the lenders can feel assured that the property really does belong to the person taking out the money. Like property loans, real estate loans are also secured loans. With that security and the fact that the loan is secured, you can get some great rates when it comes to buying real estate. You also get longer to pay off a real estate loan, usually 30 years, although you can usually get a better interest rate with a shorter repayment period.

Business Line of Credit

If you just want to have the funds available if you need them, you may want to look into applying for a business line of credit. You would basically apply for a certain limit but only take out as much as you needed at one time. Lines of credit are a lot like credit cards, in that you have a maximum limit but you can use them to purchase whatever you need at any time. You would need a strong credit rating to apply for this kind of loan, as it is an unsecured loan with a lot of flexibility. It offers some great benefits, including:

  • You can take out funds whenever you need them, up to your limit, without going through another application process.
  • You will only ever pay interest on funds you have actually withdrawn.
  • This kind of credit can help with all kinds of both short term and longer term business needs.

The disadvantages of using a business line of credit include:

  • If you do have poor credit and they offer you a line of credit, you will likely pay a higher interest rate.
  • A line of credit isn’t for big purchases that you would normally take out in one lump sum.
  • They may ask you to provide collateral to back up your loan, turning it into at least a partially secured loan.

Before you consider getting this kind of loan, think about what you need the money for. Some businesses use a line of credit to meet ongoing needs. To purchase supplies they need, or to make up for income they lose when business is slow, such as in the off season. Interest rates tend to be between as little as 8% and as much as 24%.

Nontraditional Small Business Loans

If you’re just starting out, you may not have much credit history yet, so you may not qualify for the traditional business loans. And if you do qualify, the rates might not be as good as you can get with a more nontraditional business loan.

If you are committed enough to your business, you may take it a step further and take out a personal loan to get what you need for your business. If you take out a personal loan to start a business, the rates and terms will depend on what kind of credit you have personally.

Pink color thumbs up.

The Pros of Using a Personal Loan for Business

The positive reasons that you should use a personal loan for business include:

  • It’s easier. When you apply for a personal loan, the lender will only consider your personal trustworthiness, so you only need to provide information about your own income and credit trustworthiness. When you apply for a business loan, you will need to provide all the information about the business, including business tax returns and other information that can be difficult to get together. You may even be able to apply for a personal loan online.
  • Your interest rate may be lower. Especially if your business is new, you probably have a much longer history of borrowing money and paying it back. That means you may personally be able to get better terms than your business can.
  • It’s usually faster. Because of the larger amount of information that needs to be processed for a business loan, it usually takes much longer to be processed. A Small Business Administration Loan can take months to approve because it is a government loan. You could get your funds with a personal loan in just a few days.

Pink color thumbs down.

The Cons of Using a Personal Loan for Business

The downsides of using a personal loan for your business include:

  • You’re on the hook. If your business isn’t able to pay back the money, you are the one responsible for paying back all the money. Even if the business closes because it doesn’t succeed, you will have to pay back the entire loan or your personal credit will suffer.
  • Your income to debt ratio suffers. Even if you plan on using all the money for the business, the amount of money will show up as personal debt when you use a personal loan. That means that you may be turned down if you try to take out another loan, like for a house or car, or you may not be offered good terms because of your high amount of debt.
  • It may not be big enough. Even if you have great credit, you probably won’t be able to borrow as much as a typical business loan. An unsecured personal loan might be for thousands of dollars, while business loans can be millions. Unfortunately, the amount you borrow will depend on your own personal salary and ability to pay the money back.

Reasons for Taking Out a Business Loan

Taking out a business loan is a big commitment. You need to carefully consider whether a loan is the best idea and what the effects will be if your company borrows money. The basic premise is the same as with any other type of loan, as far as that you will need to fill out an application and try to get money. But there is a lot to consider.

The first question you should be asking yourself is: why does the business need this loan? Here are some legitimate reasons for business loans:

  • Do you need more space? Are you doing so well your supply can’t keep up with demand? Do you need to hire more employees but don’t have space for them? Business growth is a great reason to take out a business loan.
  • Do you need new equipment? Is your old equipment outdated, or do you just need new equipment to keep up with your current demand? If you really need new equipment, it’s better to get it than to let your business suffer without it.
  • Does your business have seasonal needs? You might need to get supplies for an upcoming rush, or you might need to pay for expenses during a break. A business loan can help you get through those kinds of periods.
  • Does your business need to build its credit? Just like with your personal credit, your business also needs to build its credit. Your business builds credit the same way you do, by taking out a loan and making regular payments on time every time. If you work on building the credit for your business, your business will qualify for better loans with more favorable terms in the future.

When it comes to business finance, you want to make the best choices every time if possible. In order to grow your business, you have to make some tough decisions, but you can make better decisions if you have more knowledge. To make money, you often have to have money, and shopping for business loans is a way to find a good deal that will give you the cash you need to make an investment in your business.

Warning Signs

You don’t want to take out a business loan for the wrong reason. Using loans to meet everyday expenses or overextending your business will only hurt you financially in the long run. There are many pros and cons of small business loans, so it is important to make sure that you are making the right decision for your business. Here are some warning signs to look out for:

  • Are you regularly falling behind when it comes to meeting your responsibilities?
  • Is your business just not producing the kind of income you expected?
  • Have the original circumstances changed? You made your original business plans based on a particular set of circumstances. But the only thing you can really count on is change. Take a good look at the current situation and be honest with yourself.
  • Are you trying to bite off more than you can chew? Everyone has big plans, but you need to be realistic if you are going to be successful. Don’t take on more than you can handle.

Long Term and Short Term Business Loans

Another important distinction between types of business loans is between long term and short term business loans. Long term business loans are paid back over an extended amount of time, but there are more differences than that.

Short Term Business Loans

These types of business loans need to be paid back on a daily, weekly, or monthly basis. Normally the entire period for paying back a short term loan is only 3 to 18 months. When it comes to short term business loans, they are usually for emergencies, for immediate financing needs, or to take advantage of an opportunity. Short term loans may have a higher interest rate than longer term loans, and they need to be repaid quickly. The interest rate can vary from 9% to 80%, which is very expensive.

Some people make the mistake of turning to short term loans to fill regular needs, keeping them in an endless debt cycle. Unfortunately, if your business doesn’t have good credit, your business may only qualify for a short term loan.

Long Term Business Loans

You can use a long term business loan for almost any kind of purpose. You don’t have to use these types of business loans in a certain way. So you can use them for everything from purchasing new equipment to opening a new branch of your business. There is no limit to how much you can borrow with a long term business loan, as long as the lender is willing. Traditional lenders like banks don’t offer small long term loans, so if you are trying to borrow a smaller amount over an extended repayment period, it is better to use a service that can help you find a loan online.

It is important to do your research when looking for a lender for a long term business loan. Because different lenders offer different amounts, different interest rates, and different terms. Longer term business loans tend to have lower interest rates than short term business loans, with rates ranging from 4% to 30%. While the terms are better for longer term loans, these types of business loans are harder to get.

Humans head silhouette, light bulb idea.

Keep In Mind

The longer term is a longer commitment. And the lenders want to make sure they can trust you that you will pay off the loan over an extended period of time. Competition is also very high to receive a long term business loan, and there is a lot of paperwork involved. The bank may collect personal information from you before approving the loan, and some lenders will require collateral for at least part of the loan. On the other hand, online loans aren’t as cumbersome and don’t require as much paperwork.

Where Get a Business Loan?

But where to find a business loan shop? There are many places where you might look, but make sure you are dealing with reputable companies. Not every company is legitimate, and some offer deals that are legal but barely so.

Luckily, there are ways to recognize and avoid personal loan scams. Plus, there are a lot of legitimate business loan companies that want to lend companies money. Because they know it will help their business. There are so many ways to finance your business. Once you have looked at all of your options and have decided to get a business loan, then it is time to find the right lender. Credit unions, banks, online lenders, and the Small Business Administration (SBA) are all great places to start. The process of applying for a small business loan is pretty simple from there.

The Process Explained

First, you need to select the right loan amount for your business loan. Then you should pull your credit history and score, to see what kind of options you have. For instance, a better credit score could mean a better interest rate. Once you know what your credit is like, you should create a business plan and gather all of your pertinent financial information. Evaluate a variety of lenders, so that you are sure that you have found the best option for you and your business. Then all you have to do it fill out the application and hope that the lender approves it!

Don’t worry if your loan application is rejected, it just means you need to try again. Once you find out the reason or reasons that they rejected your application, you can fix any of the issues that you have control over. Once you have fixed any issues that you possibly can, you should wait for a better time to reapply. Maybe waiting for different market trends is best for your business, or maybe you just need a year or so to improve your credit and build up your business profile. Sometimes you think you found a perfect fit, but it turns out differently.

Conclusion

Regardless of the reason your business needs financing, there is a way to get help with financing. There are many different types of business loans to choose from. And there should be one out there that is just right for you and your business. There are traditional and nontraditional types of business loans. As well as short term types of business loans and long term types of business loans. One of these will be the right one for you.

Loanry

Small Business Loan Statistical Overview: By the Numbers

According to the U.S. Small Business Administration (SBA), a small business is a business with fewer than 500 employees. Well, sort of. Most of the time. Maybe, under certain circumstances.

Small Business Loan Statistics & Definitions

I’ll bet you thought basic definitions would be the easy part, didn’t you?

As it turns out, what counts as a “Small Business” often depends on the type of business being discussed and not always what’s in your accounts receivable (AR) or payable (AP). Sometimes the number of employees involved goes well beyond 500; in other cases it’s as low as 250. In some industries the number of employees isn’t the issue so much as the dollar value of the business in terms of annual income OR annual employment costs (again – sort of, mostly, in general).

The SBA document breaking this all down is 49 pages long. I kid you not. Then again, considering that the SBA, however useful, is still a function of the U.S. Government, I suppose we should be thankful it’s not 4,900 pages.

An Example

If you do Construction Sand and Gravel Mining, Industrial Sand Mining, or Ceramic and Refractory Mining, and have fewer than 500 employees, you’re a small business. If you do Kaolin and Ball Clay Mining or Potash, Soda, and Borate Mining, you can have up to 750 employees and still be a small business. For Phosphate Rock Mining you’re allowed up to 1,000 people without losing your “small business” designation.

Crude Petroleum Extraction or Natural Gas Extraction can go up to 1,250 warm bodies and still be considered a “small business,” while in Bituminous Coal Underground Mining or Gold Ore mining you can retain your “small business” status with anything fewer than 1,500 employees.

You get the idea.

Dollar-based Industries

If your business is Men’s Clothing, you can make or hire up to $11 million annually and still be “small.” For Women’s Clothing, however, that range goes up to $27.5 million. Children and Infants’ Clothing, $32.5 million, which you should not confuse with a Family Clothing Store, which is still small up to $38.5 million. “Other Clothing Stores” cap out at $20.5 million, unless they’re a Shoe Store, which is still a small business until it consistently passes $27.5 million.

The point is, it’s different depending on what you do. This matters when we get to specific business loan statistics. The needs of large “small businesses” aren’t the same as those of smaller versions, just like the needs of one industry aren’t always the same as those of others. Business loan companies certainly don’t think so, and I want to be clear that we’re talking about a pretty wide range here.

Wait, but Small Means Small

Still, if you’re like me, none of these are what you first think of when you’re talking about “small business.” And you’re not wrong.

About 80% of small businesses have ZERO employees. Of those who do, most have only 5 – 6 in their early years. The overall average number of employees for ALL small businesses hovers at around 25.

Nothing against those Bituminous Underground Coal Miners, but most of the time when we’re talking about “small businesses,” we’re talking about SMALL businesses.

At the same time, when we’re talking about “small business loans” or “small business loan statistics,” we mean all of them. Welcome back, Potash, Soda, and Borate Miners! We weren’t trying to make you feel left out or anything.

Over the past decade, small businesses have been responsible for the vast majority of new jobs and increased employment. If you’re looking for meaningful job growth, small business is where it’s at.

Who’s Starting These Small Businesses?

Entrepreneurship is about three things: the “good idea,” the perseverance to make it work, and the willingness to take risks with absolutely no guarantee of reward. The first two aren’t easy by any stretch, but it’s that last one that bewilders those who aren’t entrepreneurs. They simply can’t imagine why you’d do what you do or give up what you give up, knowing full well that even if you do everything right, it might not work.

Of course for entrepreneurs the answer is simple: because it might.

Here are some highlights from the extensive statistics compiled by the U.S. Small Business Administration regarding who makes up the thirty million plus small business owners in the U.S. at the moment:

  • Just over a THIRD (36.3%) are women.
  • Almost a THIRD are (29.3%) minority-owned. About 12.2% are Hispanic-owned and another 9.5% are African American.
  • A little under a ONE in TEN (9.3%) are veterans.
  • Nearly 15% are started and owned by immigrants.
  • Only about 4% are under the age of 30. Another 14% are 30 – 39.
  • Things really start cooking at 40, it seems. Roughly 25%, or ONE QUARTER small business owners are between 40 – 49, and 35%, over a THIRD, are 50 – 59.
  • Not that their elders are slacking. The remaining 22%, still more than ONE in FIVE are over the age of 60.
  • Almost exactly a THIRD have a High School Diploma or GED as their highest academic achievements, at least in terms of traditional education.
  • Nearly HALF have an Associate’s or Bachelor’s Degree, leaving about One in FIVE with a Masters or Doctorate.

What Types of Businesses Are They Starting With These Loans?

There are two ways to respond to such a question – one is to discuss the nature of the business itself, the other to address organizational choices. We’ll start with the latter.

Sole Proprietorship

This is by far the most common structure for a beginning business, and it’s one of the easiest to establish. Essentially, if you start doing any sort of work for which you receive payment or hope to receive payment, but you’re not technically an employee of someone else, then you’re a sole proprietor. Local entertainers, business consultants, or freelance writers are common examples of sole proprietorship. In fact, of businesses considered “non-employers” – that is, they don’t involve hiring anyone outside of the owner or owners – around 86% are sole proprietorships.

It might not always be obvious from the name. Sole Proprietors sometimes do business as themselves (“Bob Frankenfurter, Magician”) or file for a DBA – “doing business as” (“Magic-In-A-Jiffy Entertainment”). Either way, you are the business and the business is you. That makes the paperwork a little easier. Although you’ll file an additional page or two with your personal income taxes to include any business expenses or income.

Decisions are Yours

All business-related decision-making is entirely yours as well. Whether you work twenty hours a week or sixty, whether you re-invest every dollar or give yourself some flexibility through a business funding loan, it’s all entirely up to you. One hundred percent.

Finally, of course, any profits or benefits are 100% yours – as are losses and liabilities. You’re taking all the risk, so you get all the rewards as well as any failures. That includes any consequences from employee behavior as well. While most businesses with no employees are sole proprietorships, many sole proprietorships have several employees. If one of them screws up and damage is done, a lawsuit is filed, or money is lost, the owner is responsible just as if he or she did it themselves.

A recent survey of members of the National Small Business Association (NSBA) indicated that around 12% of members were a sole proprietorship.

Partnership

You think marriage requires communication and compatibility? Try going into business together.

As the name suggests, a partnership is the combined ownership of two or more people. It is otherwise similar to a sole proprietorship, other than in how liability is distributed.

In a Limited Partnership (LP), one partner carries unlimited liability for any negatives which may occur while the other partner’s (or partners’) liability is legally limited. As you might suspect, this changes the power structure as well. Partners with limited liability also have limited direct control, the details of which are spelled out in their collective partnership agreement.

The alternative is a Limited Liability Partnership (LLP), in which all partners have limited liability and – unless otherwise specified in their agreement – share equal control over the business. LLPs protect partners from debts or other liabilities of either the business itself OR the other partner(s). The advantages of such protection are obvious.

Only about 2% of NSBA members indicated their business was a either an Limited Partnership or Limited Liability Partnership. That doesn’t make it a bad idea – just less common than other forms.

Limited Liability Company (LLC)

The Limited Liability Company structure allows business owners to retain the liability protection of a corporation while being taxed as a sole proprietor or partnership. Even if the business goes south, faces legal assaults, or otherwise ends up on the dark side of business loan statistics, the powers-that-be cannot come take your car, your house, or your personal financial resources to satisfy the debts of your business or any claims against it. It’s a whole separate entity, at least legally.

LLCs dissolve easily upon the death or other removal of any of the owners or partners, or after a set amount of time – usually thirty years. They are very popular for mid-sized and growing businesses. However, for the nice compromise they offer between operating as a sole proprietorship vs. a large corporation.

Just over a third of NSBA members (35%) reported their business as an LLC.

Corporate Structure LLC

Corporations

Corporations (sometimes called “C-Corps”) are, legally speaking, entirely separate from their owners. They profit as legal entities, pay taxes as legal entities, may sue or be sued as legal entities, and since 2010, they have many of the same Bill of Rights protections as individuals do – at least according to the U.S. Supreme Court.

The major advantage of a corporation is that separateness. While the business may suffer, the individual cannot be held personal responsible for the company’s losses, actions, or other liabilities. On the flip side, there’s all the paperwork associated with incorporation. Just hearing or reading the term “corporation” conjures images of large rooms full of desks with people filing folders and filling out forms and delivering reports or requests up and down the hierarchy. What we see all the time in corporate environments from movies or TV shows may be a bit clichéd, but it’s not entirely unfounded.

Corporations pay taxes on their profits (assuming they make them) and again when shareholders receive dividends. This is sometimes referred to as “double taxation.” Individual shareholders are required to report profit from stocks on their personal tax returns, which brings up another feature of corporations – they can sell stock to generate capital.

Slightly under one in five NSBA members (19%) indicated their business is a corporation. This is impressively high, given that NSBA members are, by definition, “small business” owners (although that definition can be deceptive – see above) and incorporation is generally associated with larger businesses.

S Corps

An S Corp is not an entirely distinct form of business organization so much as a tax structure. The name comes, in fact, from Chapter 1, Subchapter S of the Internal Revenue Code, which addresses corporate taxation.

Plus, it’s catchy. “S Corp” kinda rolls off the tongue, doesn’t it?

The central feature of an S Corp is that it allows your business to avoid that “double taxation” issue mentioned above for C Corps. The corporation does not pay corporate taxes; all profits (or losses) are passed along directly to shareholders, who include them on their personal tax returns. At the same time, ownership maintains limited liability as they would with an LLC or Corporation.

In exchange for these benefits, S Corps have limits in terms of the number of investors the law allow and the types stockholders they can have. S Corps may have no more than 100 shareholders and only one type of stock, and shareholders must be U.S. citizens or legal residents. (With corporations, investors can be virtually anyone, including other corporations or partnerships.)

S Corps are still a very popular with small businesses. One in three NSBA members (33%) reported their business includes the S Corp designation.

To summarize, if we assume the membership of the NSBA more or less reflects small business in the U.S. as a whole, roughly a third of small businesses are LLCs, another third are S Corps, and the rest are divided among corporations (19%), partnerships (2%), and sole proprietorships (12%). There are actually numerous other variations, but they’re the sort of thing you take up with your lawyer to address your very specific circumstances.

Where Is The Money Coming From?

The most recent NSBA survey found that about a third of small businesses who responded reported no need to borrow money or expend extra capital during the previous year (2017). Another third reported using revenue from the business to expand or do whatever else they needed to do, and similar numbers indicated the use of a business credit card in the mix. (Respondents could indicate more than one source of financing during the year.)

Roughly a third indicated a bank or credit union loan of some sort. 13% borrowed from friends or family, 12% received some sort of extended credit from vendors, and 3% managed to secure “Angel Investors.” There were miscellaneous variations if you’d like to read the rest of it – it’s quite interesting for a table of numbers.

By the Numbers:

That’s business success.  The numbers when it comes to business failures are much more consistent. 82 percent of businesses that fail do so because of cash flow problems. That’s a big deal, my friend. That offsets a whole lot of other business loan statistics.

Why Do Entrepreneurs Take Out Business Loans?

We’ve talked before about different sorts of business loans and what requirements various business financing lenders are most likely to have. Both are worth revisiting if you’re considering a small business loan. For now, we’ll recap a few general things, then talk about where you go from here.

Most small businesses take out loans for one of four general reasons:

This one makes plenty of sense. If your business is brand new, you probably haven’t made much money with it yet. Duh.
If you use traditional lenders, you’ll most likely need to either establish a long, solid personal credit history or be able to offer up sufficient collateral, as well as provide a fully documented business plan. Online business lenders have specific requirements as well, but tend to be somewhat more flexible and eager to earn your business – although interest rates may reflect the increased risk they’re willing to take on you.

What a great problem to have. You need more space and more equipment. You need more people. Growth is great, but remember that it has to be the right growth at the right time in the right way. Work with the lender of your choice to discuss manageable debt – low enough that you’re confident about timely repayment, but high enough to finance the meaningful growth you need.

Another good problem, although this one can reflect the seasonal nature of your business as much as actual sustained growth. Maybe your business includes a retail or rental element, or maybe your service requires a ready supply of parts or equipment. Either way, flexible financing can help you meet customer needs quickly and effectively, which in turn means you keep needing more.

This can mean a range of things. From bill consolidation at the business level to ensuring the underlying structure of the business and your business plan are solid. It might also include, however, your long-term goal to have established credit down the road should you ever require substantial financing for growth, updates, or any other major need.

If you’ve started your own business, you’re clearly not afraid of hard work. You’re apparently not adverse to risk, either. It’s possible, therefore, that in previous years you’ve taken risks which haven’t worked out, despite your best efforts. Or, maybe you haven’t always been the person you are now, and your credit history reflects that. Sometimes we can do EVERYTHING right and life still hits us with unexpected expenses and challenges which impact our credit rating and our cash flow. That can make it tricky when it’s time to figure out how to finance a business.

Small Business Loans

Small business loans now, which you consistently and intentionally repay according to whatever agreement you’ve worked out with your lender, can be useful for current practical needs while helping you build or rebuild your credit – individually or as a business – towards the future.

I’ve spoken with numerous entrepreneurs whose local banks or credit unions were entirely sympathetic, but simply unwilling to work with them on a small business loan without co-signers, collateral, or other impracticality in place to protect the institution’s interest. That’s fair. They’re businesses, too, and businesses have to minimize risk in hopes of making a profit.

It’s because of circumstances like yours, however, that organizations like Loanry exist. It’s the 21st century, and we have more options than ever before when it comes to the music we choose to listen to, the way we access movies, TV shows, or other forms of episodic programming, the cell phones we buy, the electronic devices we use, the social media platforms we prefer… we can even pick and choose from potential mates through and endless array of dating apps and services.

If you wouldn’t take the very first match that comes up on DearGodPleaseDateMe.com, why would you not look at all of your options to learn which small business loans might be right for you? That would be unnecessarily careless and a tad irresponsible, don’t you think?

All Types of Business Loans

I’m not suggesting you simply Google all business loans and then take your chances with the top search result or highest-paid banner ad which appears. That would be even worse than not looking online at all, in my humble opinion. But, as it turns out, we can help in that department. (I know – what a coincidence!) See, we’ll ask you for some basic information about yourself and what you’re looking for, then connect you with verified lenders we think best match your needs.

Then, you talk to them. They talk to you. See if you hit it off. See if the vibe feels right. Maybe some magic happens and you decide to borrow and they decide to lend and a long-term relationship develops. Or maybe it doesn’t – no worries, there are plenty more out there. That’s the great thing about the freedom such a variety of lenders give you. Instead of you going around, hat in hand, trying to persuade guys in suits or tense blondes in pencil skirts that you really do have a great business idea, you become the customer. Lenders compete for your business by trying to offer you the best terms they can manage. All we do is help you connect with the right people to get started.

How Well Do Businesses Do After They’ve Borrowed All That Money?

If you’re looking for business loan statistics related to the success and failure rates of different sorts of businesses, we can only really talk about these in general terms. Like so many things related to small business or economics, the terminology and methods of measuring success or failure vary so widely from source to source that it’s difficult to speak in great detail without jumping the proverbial rails a bit. There’s also no central federal source tracking each and every small business broken down by what I’d consider the most convenient definitions. We could go state-by-state, but of course they don’t all classify things the same way.

How Rude, But We do Know Typical What Types of Companies Succeed…

Nevertheless, generally speaking, the most successful new small businesses in recent years are small-print-and-lots-of-paperwork driven:

  • accounting and bookkeeping,
  • payroll services, tax preparation,
  • real estate lessors (owners who lease their property),
  • real estate sales and services,
  • various management services, etc.

A close second are those related to medical care:

  • dental offices,
  • medical or diagnostic laboratories, and
  • range of health practitioners above and beyond traditional family medicine

Home care is particularly hot right now, presumably in part due to the rapidly growing population of those at retirement age and beyond.

Not doing as well are new oil and gas extraction companies, other petroleum parts and sales, software publishers, beverage manufacturing or wholesalers of alcoholic beverages, electronic component makers, and new grocery stores. You probably noticed one thing many of these have in common – LOTS of people are trying them in recent years. I can’t speak to the petroleum industry, but everyone knows someone who thinks they’ve written the next great app, game, business program, or extension. Everyone knows a half-dozen guys who think they’re the next Sam Adams or have home-brewed the next MmmHops.

I’m not saying you shouldn’t pursue any of these fields if one of them is your calling and your passion. That’s not my call. Just be aware that if your product or service is something many, many other people offer and think they do better than anyone else, it’s going to be a tough gig even by the standards of small business ownership.

Should I Worry?

Despite what you may have heard, most small businesses DO make it past the first year. Four out of five establishments which started in 2016 were still around in 2017. A comparable 78.6% of businesses begun since 2005 survived at least a year.

The tricky part seems to be passing the five-year mark. About half of all businesses fail before they reach this one. Making it longer than five years is by no means a guarantee of anything, but your odds improve dramatically the longer you’re in operation. It may be a steep learning curve. But if you can juggle and adapt for the first few years, your chances get better and better of being around in twenty.

Both Forbes and CB Insights have straightforward, useful pieces on why small businesses fail. I won’t dive into them here since we’re mostly focused on small business loan statistics, but I will mention one of the biggest discussed in both articles…

Lack of cash flow. Insufficient funding. Not enough money to work with in order to become self-sustaining.

Hmmm… THAT sounds like it involves business loan statistics, doesn’t it? (Hint: Yes, it does.)

Don’t let any of this scare you off. If it were easy, everyone would do it. But do go forward with your eyes open. And if there’s anything we can answer, reach out to us anytime.

Loanry

Business Loan Basics Spelled Out: Loans 101

In many ways, business loans are very similar to any other sort of loan you might consider. You evaluate your needs, prepare your financial information, and shop for a lender willing to offer terms you consider acceptable. As with any other loan, the better your credit history, the better the terms you’re likely to be offered.

How Do Business Loans Work?

That doesn’t mean, however, that newer or smaller businesses can’t secure reasonable loans to meet their needs. Nor does bad credit in your past automatically disqualify you for all loans. Sometimes, the unique nature of a growing business actually makes it easier to find attractive interest rates or willing lenders. It all comes down to doing your research ahead of time and opening yourself to a variety of business loan options based on your particular business needs.

Let’s look at some business loan basics and talk about the realities of business loan shopping.

Are Business Loans A Good Idea?

Some of them are. Others might be a horrible idea – at least right now. Perhaps a better question would be,

Is a business loan a good idea for me right now?

Do you consistently have more orders than you can fill in a reasonable time? Are there opportunities you should be seizing but which require capital up front beyond what you can immediately access? Be honest with yourself – the line between taking initiative and taking a bath can be a bit blurry in the heat of the moment. If your eyes are open, however, growth is often a very good reason for the right business loan.

Is it time to update technology or add other hardware in order to maintain or increase productivity? It’s usually a bad idea to buy new toys just because they’re shiny and no one else has them yet, but if your business relies on machinery or computing power to succeed, it’s an even worse idea to let your workplace become obsolete.

Can you say with great certainty that the rush is coming and you need to be prepared with the right items or ready to offer the right services when it does? There are plenty of lenders ready to work with you in these sorts of circumstances. It’s a great problem to have!

Even if you could probably “make do” with less for now, sometimes a few small loans you pay back in a timely manner lay the groundwork for larger loans down the road when you really need them. You shouldn’t borrow just to borrow, but when an opportunity arises to build your business and your credit at the same time, it’s certainly worth looking at your options.

If you decide to shop business loans now in order to build business credit, consider starting small. Explore your options through several business loan companies and choose the one which seems right for you. Then, if you’re happy with them (and if they’re happy with you because you make your payments in a timely manner like the awesome business owner you are), you have a relationship established for next time.

On the Other Hand

Taking out loans to make ends meet month after month is not a sound business strategy. If anything, it usually delays the inevitable while making things worse. Chasing the “next big thing” or over-extending yourself or your business for a “sure thing” that your most trusted friends and colleagues warn you not to trust might be a once-in-a-lifetime stroke of entrepreneurial genius. It’s far more likely, however, that it’s simply what it appears to be – a really bad idea of the sort which are usually available if we look for them.

In short, if we’re talking business loan basics, you should start your  business loan search if it will help your business prosper. You should generally not shop business loans as an act of desperation to keep the doors open. Hard truths from hard knocks, my friend.

What Kind of Business Loans Are There?

There are as many varieties of business loans as there are businesses, which is great news for you. Here are some business loan basics about some of the more common types you should recognize as you begin your business loan shopping:

Installment Loans

These come in many varieties under several different names, but essentially these are the most straightforward sorts of loans the average person imagines when first confronting the realities of business financing. Once approved for a specific amount, usually specified for a specific business purpose, you receive the full amount from your choice of business loan companies. Payment amounts and dates are established in advance and interest calculated over the life of the loan.

Installment loans are easy to understand and expectations are clear for both parties. Usually there’s no penalty for early payment, so you can repay part or all of the loan early without penalty. Interest rates vary, but tend to be more favorable the shorter the payback period – and of course you save even more on interest if you’re able to pay ahead of schedule.

Line-of-Credit Loans

A line-of-credit loan is one of the most common and most useful for small business owners. It can be a short-term or long-term business loan  (depending on if you keep paying it off and reusing it) that allows you to access additional funds as needed up to a predetermined limit. You only pay interest on the amount you use according to terms specified beforehand. (Usually this means monthly payments until paid in full.) At the end of the contract year, the line-of-credit is re-evaluated and – if all has gone well – usually renewed for another year.

Interest rates tend to be modest for these sorts of loans, as they’re relatively low-risk for lenders. If you’re just starting out, or looking to establish or rebuild credit for your business, a small line-of-credit loan might be a great place to start.

Revolving Credit

These are similar to line-of-credit loans, but are more easily compared to credit cards. Your business may access funds as needed up to a predetermined limit, but as you pay back borrowed funds, your available balance essentially “refills”. Interest rates tend to be a bit higher than with line-of-credit loans, but revolving credit provides greater flexibility over time.

Equipment Loans

This is a specific type of short-term business loan. Equipment loans are similar to installment loans or term loans. As the name suggests, however, they’re intended to be used primarily to purchase essential equipment for your business. If you’re still establishing your business credit, these can be a useful type of loan because the equipment you purchase is natural collateral.

I know I don’t need to say it, but entrepreneurs are risk-takers by nature and sometimes our temptations are different than other folk’s. If you take out an equipment loan, you should use it to buy the equipment. Let’s stick to business loan basics and use the money for its intended purpose, yes?

Commercial Real Estate Loans

These are the same basic thing as an equipment loan, only they’re not used for new equipment. You’ll never guess what they are used for. What’s that? You guessed? Hmph. Moving on…

One advantage to commercial real estate loans is that lenders are sometimes more willing to work with new businesses and may even offer better rates. You’re unlikely to sneak off with three acres and a giant metal building in the middle of the night, making this a better risk for business loan companies.

Interim Loans

These are another form of short-term business loan. Typically, an interim loan is used to pay off suppliers or contractors and then repaid once funds become available as a result.

Other Loan Terminology

While they’re not necessarily distinct types of loans, here are some terms with which you should be familiar as you begin shopping for a business loan:

SBA Loans

An SBA loan is any type of borrowing backed up by the Small Business Administration. They’re harder to qualify for than loans from direct lenders, but the terms and interest rates are generally good. Many consider starting with the SBA to be an essential (and obvious) part of business loan basics. You’ve got nothing to lose and you don’t want to have to explain why you didn’t try, right?

Balloon Loans

Picture a large cartoon thermometer laying horizontal instead of vertical. (Put the bubble-butt part to the right.) When you borrow money with a balloon loan, you pay mostly or only on the interest during the life of the loan. That’s the long thin part. Instead of temperature, the numbers are the amounts you’re paying according to whatever schedule you worked out with your lender. At the end of the loan, you pay back the principal in full – as in, one lump sum. That’s the bubble part.

These only make sense if your business expects substantial revenue at some specific point in the future. They offer great leeway in delaying that lump-sum payment at the end. On the other hand, you’re staking a great deal on the arrival of plenty of income before the “balloon payment” is due. Lenders may require some sort of verification as to what that surge of resources might look like before advancing credit for this one.

Secured vs. Unsecured Loans

If your business is relatively new or your credit less than stellar, lenders may require some form of collateral before advancing you a loan. That collateral “secures” the loan. If for some reason you’re unable to make your payments, the lender may at some point take control of your collateral in order to regain some or all of the balance. Here’s a business loan basics tip: make your payments so you don’t lose your collateral.

Once established with a specific lender, it’s much easier to qualify without collateral – an “unsecured” loan. Your reputation and history with the lender are the guarantee, not your house, car, or children.

There are numerous other varieties which your preferred lender will no doubt be happy to discuss with you.

How Do I Qualify For A Business Loan?

The details of qualifying for a business loan will vary widely from lender to lender, but there is one qualification almost every business owner who has successfully borrowed money has in common. They’ve asked to borrow money. (Hey, it’s called “Business Loan Basics” for a reason, kids.)

There are several factors which will determine how easy it will be to get a business loan and which may shape what type of loan you can get at what terms. But whatever your circumstances in relation to each of these factors, none disqualify you from asking. That said, here are the most common factors lenders will consider:

  • Your personal credit history and credit score
  • Your business’s debt-to-income ratio (income vs. “out-go”). This includes current business debt.
  • How long you’ve been in business (2+ years is ideal)
  • The type of business you’re in. (Lenders like industries they understand or which they’ve found to be reliably profitable in the past.)
  • Collateral or other risk-minimizers

Remember: Deciding in advance you don’t qualify and giving up before you’ve started is the only real way to be certain you won’t be getting that loan. Business Loan Basics: Loans 101 – Apply. For. The. Loan.

What Documents Are Required For A Business Loan

This one also varies with the type of lender and the type of loan. Generally speaking, traditional banks will require more documentation than online lenders, but both want to make sure there’s a reasonable chance you’ll be able to repay the loan as scheduled. In many ways, this part of business loan basics is the same as it would be for any sort of loan. Here are a few things you should have ready before you apply:

Name(s) and Address(es)

This one seems obvious, but if you or your business have had multiple addresses over the past decade, it’s a good idea to go ahead and organize those for ready reference. I’m often shocked (and a little embarrassed) at how quickly I forget past ZIP codes or even what year I lived where. Save yourself some stress and record this info somewhere now so that you can easily access it as needed.

You should also be prepared with identification for both yourself and your business. In the same way we’re often asked to present a driver’s license or other ID to confirm we’re who we think we are, lenders usually want to confirm that your business is documented as well. This can be done through your Articles of Incorporation, franchise agreements, or contracts with suppliers or others with whom you do business.

Background Info

How long has your business been in operation? Unless you’re well-established and can document several profitable years, what’s your background and what are your qualifications? In short, why should the lender think you can make this work?

Your Personal Credit Report

Unless you’re a well-established business, this will be essential. Bad credit is not necessarily a deal-breaker, but avoid surprises. Check your credit report and know your credit score going in; don’t wait to be asked about it by a potential lender.

At the same time, don’t let bad credit in the past prevent you from moving forward in the present. Spend a little extra time on your business plan (we’ll look at that in a moment) and look at other ways you might present yourself in the best possible light, then go for it. And remember, there’s no need to fudge the truth here – you and your business acumen are good enough as you are. Your ideas are strong. You just need a little working capital to make it all happen. Be your best you, but still you.

Your Business Plan

You should have one of these anyway, but if not, don’t panic. This is the perfect time to create one. A good business plan isn’t just part of business loan basics, it’s part of business basics, period.

In general most lenders will be looking for:

  • The Executive Summary. This is your business plan in the most concise and clear terms. Who are you, where are you, what do you do, and how do you plan on making a reasonable profit by doing it?
  • The Company Description. A more technical breakdown of your logistics and operations. How is your organization structured? What do you produce or provide? What can you document in terms of growth or profits, current or anticipated?
  • Your Products and Services. This zooms in a bit more on what you actual make or do and why you think customers will pay you to make or do it.
  • Organization and Management Team. Who’s responsible for what? What are their qualifications or experiences? What’s the leadership structure? (In other words, who answers to who?
  • Market Research. Now that we know what you make or do, what makes you believe people will pay you to make or do it? Don’t count on anecdotes or your personal impressions; it’s time to bust out some actual charts, tables, and projections. These are even better if they’re based on something legit.
  • Strategy and Implementation. How are you going to make it all happen? This includes location, marketing, pricing, hiring, etc. There aren’t always right or wrong answers, but you should sound like you’ve researched a bit and have a plan. Ideally, you actually do.
  • Financial Projections. This should start with any existing financial statistics. What’s your forecast for the upcoming six months? Twelve months? Thirty-six months? On what are these projections based?

This is not the most fun or exciting part of owning your own business, but it’s one of the most important whether you business loan shop or not. Entrepreneurs are valuable because we reach and dream and risk; that makes it all the more important than we discipline ourselves to remain anchored in reason and reality. A detailed business plan is one critical way to do that.

Other Financial Paperwork for Your Business

If you’re not just starting up, your business has a credit report separate from your personal credit report. You can check this through various online services such as Experian or FICO.

Some lenders will also ask questions about or require copies of your personal and business tax returns for the previous three years. They may ask for documentation supporting your financial projections or going into more detail about the information in your business plan. They may even request your bank statements. The details vary from lender to lender, but it wouldn’t hurt to have this information available and organized ahead of time.

Have I mentioned that being prepared and organized ahead of time are absolute business loan basics? I have? OK, just checking. Because they are.

What Can A Business Loan Be Used For?

There are no set rules on how you use your loan, although some lenders may require you to share this information as part of their business loan application process. Some types of loans, as we covered above, are intended for specific purposes, and you shouldn’t be surprised if the lender requires some evidence they’ve been used appropriately.

Generally, though, business loans can be used for whatever your business requires.

  • Expansion – Maybe you need more room or storage. That’s a good problem to have.
  • Upgrades – It might be time for better equipment or new technology. You might even replace that dot matrix printer that requires that special paper with the tear-off strips down the side. *shudder*
  • Inventory – You can’t sell what you don’t have, and you can’t use what you haven’t ordered. This is classic “you gotta spend money to make money” territory.
  • Salaries or Bonuses – Human resources are often the largest expense of any business, especially when it’s growing. Be careful with this one, though. You should only borrow money to pay people if you have a clear plan forward. If you’re borrowing to meet payroll every few months, something is seriously wrong.
  • Special Events – Congratulations on a great year! Great work, team! Drinks for everybody! Again, it’s up to you how you spend your borrowed funds, but only do this if you know the funds are coming soon and reliably. It’s only a great party if it doesn’t bankrupt the company, kids.

Small Business Loan Shopping

Now that you know your business loan basics and have an idea of what sorts of loans are out there, let’s talk about taking action, shall we?

How Can I Get A First-Time Business Loan?

Start by revisiting the requirements above. No matter where you’re seeking your startup business loan, you should begin the process by gathering and organizing your information. Update your business plan and revisit your plans for using a new loan effectively. Take a moment and talk yourself through anything which might come up. There’s simply no substitute for being prepared.

It might not hurt to remind yourself of why you’re doing this in the first place. You’re an entrepreneur. You offer products and services no one else does, or at least offer them differently or better. Confidence matters. It’s nice when it overflows without effort, but sometimes we have to choose it and embrace it for a while until the flow kicks in again. Don’t get cocky, of course – but believe in what you’re doing.

Otherwise, why should anyone else?

Where To Business Loan Shop

It never hurts to start with traditional sources – local banks, credit unions, etc. In the 21st century, however, more and more people are working with online lenders. The best approach is to explore your options. Visit some brick-and-mortar financial institutions in your area, then spend some time looking into online alternatives.

As you may have suspected by now, we can help you with that part. Loanry simply gathers some guiding business loan finder information from you, then connects you with lenders who work with you to discuss business loan options.

Please understand that we’re not selling anything. There’s no surprise on Step 17 asking for your credit card and no ‘free trial period’ that suddenly turns expensive once you’ve forgotten all about it in a few months. In short, we’re not asking for anything from you on this one. We connect potential customers with experienced lenders – the rest is between you and them.

Obviously we want for you end up happy and tell everyone about it. Not to brag, but we’re pretty good at this sort of thing, so that happens a lot. We’re all about business loan basics, auto loan basics, medical loan basics, and a variety of other services as well. Because in the end, it’s not just about the money. It’s not even just about the business. It’s about helping people get from where they are to where they believe they can be.

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