A Business Loan Terms and Definitions Handy Guide

Side view of young businessman sitting on chair in interior with business sketch.

You might have come into contact with certain loan terms. That is if you ever tried obtaining an auto loan, student loan or a mortgage. But when you business loan shop, you need to understand business loan terms and definitions. Because this type of loan includes a lot of specialized languages, this is our topic today.

A business loan can contain collateral requirements. Because of this, avoid signing any document you do not completely understand. Most importantly, you need to understand the basics of business loans. Remember, you need to understand every word. Because you could be signing away your business if you default on the loan. Therefore, it is a good idea to keep a copy of this business loan terms and definitions guide with you. Especially while you read over the loan application and the loan documents.

Article Warning: This will not be the humor infused feature article to which you have become accustomed. This is a glossary.

Business Loan Terms and Definitions: Glossary of Terms

This mini-dictionary provides you a quick, efficient method of finding the term you need. It will help you understand it and its related or similar terms. Also, you can keep this open for finding terms using control plus “F”. Do this especially while you read the loan documents from your financial institution. These documents will include the information and documents you need to include with your loan application. Also, you’ll be given explanations of the terms used on applications and the terms used in loan documents. When it comes to your financial education, knowing this stuff is the basics. You simply cannot do anything in the bank or when communicating with the lender if you don’t know what they are talking about.

Because of this, it’s always important to get to know the basic terminology, whether you are getting a loan, a mortgage, a credit card, or something else. This is the only way to avoid being tricked into accepting something you would not normally accept. And by normally, I mean had you known what it actually means. So make sure you check your knowledge before entering any kind of financial talk. This blog encompasses all relevant business loan terms. Maybe you know some of them, so it’s great to revise. And maybe you’ll learn something new. I hope you will.

So, let’s jump right in and start because you definitely need to know this awesome stuff.

Financial Statement Terms

Firstly, when applying for a business loan, you will need to place with the loan application numerous supporting documents. As you maybe know, these documents include financial statements. These statements describe the current state of your business and forecast its potential. We’re not going to go into each individual document, what it shows and why the lender needs it. But we’ll try to cover as many terms as possible which you may come across when you start applying. Remember, the internet is full of useful information. Loanry is a credible source you can use to research various topics about business loans, so use it!

Assets and Balance Sheet

The first two terms we are going to discuss are assets and balance sheets. Assets are any item of value or ownership or interest in personal or real property. It can be leveraged as collateral for obtaining a loan or to pay off a debt. On the other hand, a balance sheet is a financial statement typically calculated monthly. It defines the assets, liabilities, equity and net worth of an organization as of a specific moment in time. You can see how relevant these are when you’re applying for a loan.

Business Plan

Secondly, we have a detailed document that defines your business framework, strategy, and development plan. These are typically professionally researched, written, printed and bound. The contents of this document include an executive summary, industry or sector overview and how your business fits within the sector. Also, it includes market analysis, competition analysis, your marketing plan including your Unique Selling Proposition, management plan including your specific legal structure.

Moreover, it consists of a complete accounting of management resources, operating plan, financial plan with detailed financial statements, balance sheet, income statement. Also, it includes the cash flow statement or cash flow projection if yours is a new business. The business plan’s appendices and exhibits include marketing studies, product photographs or mockups and relevant legal documents. Businesses often hire a consultant to lead the research and development of a business plan.

While we’re here, let me just take a short detour. A business plan is something you should definitely have, regardless of whether you’re planning to get a business loan or not. This is literally your way to success. Without a carefully constructed plan to guide you as a new entrepreneur, you have no chance. I mean, maybe you do, but it’s much slimmer. A business plan means that you invested time in the route which you are going to take so you would succeed. And lenders like to see that.

Business Revenues

Thirdly, we have business revenues. This is the amount of money a business receives in a definite time period such as the first quarter. This figure includes deductions for returned merchandise and discounts. Your business revenue, also called gross income, is the figure you subtracted from when calculating net income. When you apply for a loan, the financial institution will require full disclosure of the business revenue, typically for the past three years, and your Debt Service Coverage Ratio (DSCR). You do not have this information when founding a new business, so you forecast projections based on anticipated product sales.

Capacity

Onto the next one: capacity. This refers to the repayment ability of an organization. Part of a loan application consists of the capacity documentation which includes a repayment schedule accompanied by an explanation of the sources of the repayment funds. An organization’s capacity includes its revenues, expenses, credit history, cash flow and timing of cash flow.

Capital

This term refers to the cash, assets and the organization utilized in transacting its business; also, the owner’s investment in the organization. The loan officer will consider both the capital’s amount and quality.

Collateral

The next term we’re going to talk about is collateral. This refers to the sum total of assets personally owned by the applicant that will be offered as loan security. Banks require collateral, but alternative lending platforms typically require little to no collateral. Therefore, you must provide documentation of your collateral.

Current Ratio

Next we have the current ratio. This is a measure of liquidity calculated by dividing the current assets by the current liabilities. The greater the ratio, the more significant the cushion between an organization’s current obligations and the organization’s ability to meet them.

Equity and Equity Participation

The next two terms are equity and equity participation. Equity refers to the value of an organization’s property greater than the total debt held on it. This can be an owner’s share or percentage of a business that earns them a return of the profits. This type of investment carries a greater risk than a loan, but also provides greater returns, if successful. On the other hand, equity participation refers to an owner of an organization or partner in a business venture. Importantly, the equity participant provides an investment in exchange for a potential return on investment (ROI). ROI depends on how profitable the organization becomes.

Fund Balance and Limited Recourse

The next two are pretty short and easy to remember. On one hand there is fund balance. This refers to a calculation of total assets minus total liabilities. Also called net worth in a nonprofit organization. On the other, we have limited recourse which are rights only to specifically stipulated assets to satisfy an unpaid debt.

Loss Reserves

Next, are loss reserves. This is a permanent capital or a part of the fund’s earnings that the board of directors has designated as a reserve against a potential loan loss. The loan reserve remains unavailable for lending purposes. Loan loss expense must be reflected as an annual expense deduction on an accrual basis. The loan loss reserve is shown as a contra asset that reduces loan assets. On a balance sheet, the loan loss reserve is shown as a loan portfolio deduction.

Net Working Capital and Net Worth

Finally, we have two terms that are known to you. Net working capital in business refers to a calculation including in the loan application of current assets minus current liabilities. Lastly, when it comes to financial statement terms is net worth. This refers to a calculation achieved by subtracting the total liabilities from the total assets. The aggregate net value of the organization. This is called fund balance in a non-profit organization

Business Loan Terms and Definitions: Real Estate Terms

In business, real estate loans have a few terms of their own. These apply to types of business loans offered only in this specific industry.

Firstly, there is a bridge loan is a short-term loan generally used in real estate that provides temporary financing until the buyer obtains permanent financing. Another important term is interim financing. Similar to a bridge loan, this provides a short-term loan to in effect until the debtor obtains permanent financing

General Business Loan Terms

Some business loan terms do spill over into other types of loans. And ome you will hear in investment circles or in discussions of economic theory and practice. Let’s cover those as well, so you have a complete glossary of all the basic terms you could come across.

Bad Debt, Capitalization, Capital Markets, and Cash Flow Financing

  • Bad Debt. A debt the creditor cannot collect which becomes worthless
  • Capitalization. A term used in long-term debt which refers to the amount borrowed, what is repayable to third parties and the permanent capital
  • Capital Markets. Those financial markets, including institutions and individuals, that exchange security, especially long-term debt instruments
  • Cash Flow Financing. A short-term financing option to cover cash shortfalls when revenue is forthcoming such as payment of receivables

Conditions

Refers to an economic climate term that encompasses externalities such as general economic particulars. And the financial situation of the lending institution and the borrower. The term also includes reference to the loan’s purpose. So when filing the loan application, the applicant must include details on the money’s use. I’m going to quickly mention something that’s maybe obvious. You can always ask about any terminology that you may not understand clearly. Or you can go online (like you’re doing right now) and research yourself. Just don’t let it go and hope for the bast.

Covenant

A formal agreement or contract that agrees to do or not do a set of items. It can be a part of a deed. The covenant includes full disclosure, preservation of net worth, asset quality maintenance, adequate cash flow maintenance, control of management. Also, it includes control of growth, assurance of legal existence and concept of going concern and provision for lender profit or program goals.

Credit Score

Refers to the business’ FICO score. Yes, businesses have them, too. There are several kinds of business loans. But for all of them, this remains the single most important factor when attempting to obtain a business loan. When looking for a loan to establish a business, the applicant must use their personal FICO score to obtain the loan. This applies to both bank loans and Small Business Administration loans.

Current Asset and Current Liability

  • Asset. An asset that typically converts to cash within a year
  • Liability. Liability that will normally be repaid within a year

Debt, Debt Service, Debt Service Coverage Ratio, Debt Service Reserve

  • Debt. The amount owed on a loan. This includes the loan amount and its interest. Plus fees that are secured by a bond, note, mortgage or another instrument. The note includes the repayment and interest provisions
  • Debt Service. Refers to the regular due payment required to meet the debt agreement. It typically comes due on a monthly, quarterly or annual basis
  • Debt Service Coverage Ratio. Refers to your debt relative to your income. Banks prefer a DSCR of 1.25 or greater
  • Debt Service Reserve. Refers to cash reserves the borrower sets aside to repay the debt in case the business operations generate insufficient funds. This may be required by the covenant

Default, Delinquent, and Due Diligence

  • Default. Refers to a failure to repay the loan or comply with the covenants
  • Delinquent. This refers to late, overdue, past due or unpaid bill or loan
  • Due Diligence. Refers to the practice of fact-checking the materials and critical assumptions the borrower presents. It includes confirming the accuracy of financial statements, verifying income sources, the value of collateral assets, borrower tax status and other material facts

Endowment or Trust, General Recourse, and Guaranteed Loan

  • Endowment or Trust. A fund containing assets that earn income and restricting income withdrawn from the fund to that earned by the assets
  • General Recourse. Lender’s right to demand payment from the debtor, accessing their general assets without seniority in access to specific assets
  • Guaranteed Loan. Refers to a third-party’s pledge to cover the debt payments. Or perform an obligation if the debtor fails to make payment

Intermediaries

Refers to institutions with special lending capacities that obtain capital through equity and low-interest loans. They typically obtain capital from other funders such as foundations. This creates a lending pool from which the intermediary processes many small loans or investments. This includes some banks, credit unions, loan funds, and venture capitalists. Don’t let the fancy terminology scare you or confuse you. By now you saw that almost all terms have pretty simple explanations.

Lender-Agnostic Market and Leverage

  • Lender-Agnostic Market. Refers to brokers or loan marketplaces that connect borrowers with alternative and traditional lenders.
  • Leverage. Refers to the practice of utilizing long-term debt to secure organizational funds. It can also refer to financial participation by other sources in social investment.

Liabilities

  • Total Liabilities. The total value of financial claims on a firm’s assets. Equals total assets minus net worth
  • Limited Liability. Limitation of shareholders’ losses to the amount invested

Line of Credit, Linked Deposit, and Loan Agreement

  • Line of Credit. Agreement by a bank that a company may borrow at any time up to an established limit.
  • Linked Deposit. A deposit in an account with a financial institution to induce that institution’s support for one or more projects. By accruing no interest or low interest on its deposit, a foundation subsidizes the interest rate of the project borrowers.
  • Loan Agreement. A written contract between a lender and a borrower that sets out the rights and obligations of each party.

Market Rate, Negative Covenants, and Opportunity Cost

  • Market Rate. The interest rate at which a company receives its loan funds. Businesses can receive a zero-interest rate or below market rate interest rate on program-related investments.
  • Negative Covenants. Refers to an agreement or contract that stipulates actions or events the borrower must prevent.
  • Opportunity Cost. This refers to an economic principle related to the Pareto optimal. It describes the missed potential benefit from not following the financially optimal methods.

Personal Guarantee

You probably know this term from auto loans or student loans. It refers to a document that the borrower signs stating a legal promise to re-pay. In a business loan, this guarantee typically includes specific methods including liquidating collateral to pay the remaining balance. As you can see, there are some terms which appear in different context. Make sure you pay attention to these. And even if you are absolutely sure you know a term because of your past experience, it isn’t a bad idea to double-check the meaning in the context of business loans. Moreover, you maybe learn something new. And you also may save yourself from making a huge mistake.

Portfolio

This refers to an investment term describing the total sum of assets held by an individual or group. This includes those that provide both financial and non-financial returns. Typically, a portfolio includes a variety of assets vis a vis type and size. They are referred to as the asset mix or portfolio balance which maintains an appropriate risk and return level.

Principal and Program-Related Enterprise

  • Principal. Refers to the amount of the loan. Importantly, you pay interest based upon the principle of the loan
  • Program-Related Enterprise. A revenue-generating enterprise that promotes the organization’s social purpose goals. It can be a product or a service that charges a range of prices from fee-for-service to a full-scale commercial venture

Program-Related Investment, Promissory Note, and Receivables

  • Program-Related Investment. Refers to a fiscal term including all asset purchases, conversion of asset(s) to charitable use, equity investments. Also, it includes linked deposits, loans, loan guarantees, and some recoverable grants.
  • Promissory Note. Similar to the personal guarantee, the promissory note is a legal document which the borrower and the lender sign
  • . In this note, the borrower promises to repay the loan. And that provides an evidentiary document of the borrower’s indebtedness
  • Receivables. It refers to the accounts receivable of an organization which refers to the amount owed to the business typically due to an extension of credit

In Conclusion

You probably did not guess that borrowing money for your business would use so many different business loan terms and definitions. If all your loan experience consists of auto loans or educational loans, you probably had a few surprises. However, you now know many of the terms specific to business loans which can help you in business loan shopping. As with any part of your finances, you need to be up to date. It’s important that you understand everything about loans, credit cards, mortgages when you read about them.

Without proper education, you will not be able to understand your rights and your obligations. You’ll certainly get into financial troubles if you don’t understand terminology and definitions. New ones pop up every day as the lending community changes and grow. As recently as two decades ago, there was no online banking. But today, we bank online and apply for loans on the Web. Check back with us here at Loanry. You’ll learn new business loan terms and definitions as online banking and investing develop. And you can also find a lender who may give you a loan.

Business Line of Credit That Helps Toe the Expense Line

A business line of credit is a small business loan that gives the flexibility that a regular business loan doesn’t. With this type of loan, you can borrow up to a certain amount and then pay interest on the portion of money you borrow. You draw and repay the funds as you need, as long as you aren’t exceeding your credit limit. This works similarly to a credit card.

There are three main types of business lines of credit. You can choose unsecured, secured, or an equity line of credit. The main difference is whether or not there is collateral. You can use equity line of credit for businesses that have equity in residential or commercial real estate. The equity in the business or home is used as collateral for the line of credit. Business lines of credit can be inexpensive to maintain, especially when you consider other forms of financing. Keeping one open costs virtually nothing and you are only responsible for paying the interest on the amount that you use each month.

How a Business Line of Credit Works

Business lines of credit differ from a regular business loan since you don’t get a one-time lump payment. With a line of credit, you keep using and repaying the money as long as you like. You do need to make your payments on time and you can’t exceed the credit limit. Many lenders will allow you to repay the full balance early to help you save on credit costs. A business line of credit ranges from $1,000 to $150,000, which is usually smaller than a term loan. A line of credit with a lower limit is usually not secured, which means that you don’t need to put up collateral, such as inventory or real estate.

Qualifying for a Business Line of Credit

There best way to figure out if your business qualifies for a line of credit is to apply. Don’t apply to too many lenders in case you don’t qualify. This is because you don’t want to be rejected and have it hurt your credit multiple times. Many traditional lenders, such as a bank, will require you to have strong revenue and a few years of history in order to get a line of credit. A larger line of credit may require some collateral, which can be taken by the lender if you fail to make your payments. In order to apply for a business line of credit, you will be required to have some documentation, such as bank account information, financial statements that include a balance sheet and profit and loss statement, and personal and business tax returns.

If you choose to go with an online lender, you may find that these lenders have looser qualification standards than banks. However, these lenders may have lower credit limits and could charge higher rates than a bank. You will need to have been in business for at least six months and have a certain amount in annual revenue in order to get a business line of credit. Some lenders don’t have a minimum credit score but usually, you would need to have a score of 500 or higher in order to qualify.

Where to Get a Business Line of Credit?

There are a number of financial institutions that give you a line of credit. With a business loan shop local. Local banks and credit unions can be great options. These financial opportunities actually exist to serve the community and may be more flexible with your credit application than big banks. You may have more success.

There are also plenty of alternative lenders online. Since the qualification process uses an algorithm, with an online lender the approval process is quick. However, keep in mind that there may be some downsides to a quick approval process. Since it doesn’t have the same level of due diligence the lenders build the risk into the cost of the loan so the interest can be on the higher side. However, you may be able to accept the rate for access to instant necessary funds. You can also get business lines of credit from the Small Business Administration. These lines are usually for specific purposes, such as contract needs or seasonal expenses.

Benefits of Getting an Unsecured Business Line of Credit

There are a number of benefits of an unsecured business line of credit, making this a popular choice for every business.

Quick Access to Money

Lines of credit allow a business owner to use whatever amount of credit they would like when they would like. Any company may face a financial situation they didn’t expect and need cash quickly. A business line of credit can give you cash at these unexpected times when you need it quickly.

Easy Money Transfer

With an unsecured line of credit, you can transfer cash for business expenses in different ways. You can do this over the phone, through a check written, or online.

Helps Even Out Cash Flow during the Slow Season

For many businesses, a line of credit can be the perfect tool for balancing cash flow through slower seasons. This may be applicable for some businesses more than others and it will depend on your business. For example, a retail store that will make most of their sales during the holiday rush can be short on cash during the rest of the year, which makes it hard to make payroll. You aren’t able to use a credit card to pay for employees but a business line of credit can be helpful in this situation.

Improves Business Adaptability

There are times when you have a limited window in order to take advantage of opportunities. For example, if you are a manufacturer and your supply costs are reduced, you want to take advantage of this but may not have the cash on hand to do so. With a business line of credit, you won’t miss out on opportunities that will allow you to save money in the long run.

Generous Credit Limits

When a small business owner needs to make a larger purchase, he or she can usually do so with a business credit line that has a high limit.

Flexible Payments

Business loans typically require fixed monthly payments but unsecured lines of credit come with some more flexible payment options. Each borrower can choose to pay the minimum monthly payment, more than the monthly payment, or the full amount that they owe. This gives businesses a chance to repay the debt on a schedule that works for their financial situation.

Separation of Business and Personal

Since a business line of credit is issued to a company and not the individual business owner, the company begins to build its own credit history separate from the owner.

Develop a Good Credit History

When you make payments on time with a business line of credit, it can help your business build a strong credit score. This can allow you to apply for bank lines of credit in the future and could help with better terms for any future loans.

The Cons of A Business Line of Credit

The main drawback is that owners need to have discipline when it comes to tapping into the credit line. Debt can build up very quickly if owners are only making the minimum payment each month when there isn’t a fixed monthly payment. Interest can grow and become substantial and it leaves the business in a hard financial situation. There are also some other drawbacks.

Extra Fees and Charges: The business line of credit’s pay-as-you-go format may seem easy but the extra fees and charges can add up quickly if you aren’t careful. The additional costs do vary by lender so be sure to research this when choosing. You shouldn’t be drawn in by a low interest rate and then get slapped with other fees. Be sure to compare annual fees and other costs to find the right line of credit that suits your business or another financing product that could be more affordable for you.

Hard to Qualify: In order to apply for a business line of credit, you do need to provide a lot of documents. You may also need to have a yearly review to maintain your credit line. While some of the information is standard for any type of loan, it may be easier to get other types of financing with fewer requirements and a shorter application process.

Low Borrowing Limits: When compared to some other financing options, credit lines can sometimes come with lower borrowing amounts. If you need money for new equipment, an expansion project, or another expensive project, other financing options may suit you better.

Using a Business Line of Credit

Once you have a business line of credit it’s helpful to use the funds wisely. There are plenty of smart applications for a business line of credit. Examples include paying out seasonal bills, meeting payroll, buying products at a discount, and purchasing equipment. Business expansion is one of the most common reasons why a business owner would want to seek sources of capital.

Before you tap into your line of credit, it’s best to run the numbers first. Are you going to sell the items before you have to pay the debt back? If not, it could get you in trouble The only time you should be using funds from your line of credit is when you are confident you are able to handle the payments and then keep your debt at zero. With this long-term approach to your short-term capital, it sets the stage for positive opportunities in the future. When you make payments on time, you are also building your business’ credit rating and this helps you in the future.

Difference Between Business Line of Credit and Credit Cards

There are many similarities between a credit card and a business line of credit. The credit card company or lender will set the maximum amount you can borrow at a given time and you have the flexibility to use the money as you need.

Pros

Line of Credit: With a line of credit, you have a higher credit limit and access to money on demand.

Credit Card: With a credit card, you are able to have rewards programs and fraud protection and it’s more convenient to use.

Cons

Line of Credit: There needs to be a personal guarantee, there could be a possible misuse of funds, and there are strict eligibility requirements.

Credit Card: With a credit card, the risks include overspending, high interest rates, credit damage for missed or late payments, and not all vendors will accept credit cards.

Both a credit card and line of credit can be short-term financial options for business owners. It’s necessary for businesses to have access to cash in order to pay payroll, invoices, and day-to-day expenses, as well as for emergency situations. It can be easy to fall into debt with both options.

A business line of credit also has some similarities with term loans but there are some differences. With a loan, you are borrowing all the money at once and the repayment terms are usually five, 10, or 20 years. A loan will be the preferred product for things you want to finance over a long period of time.

Is a Business Line of Credit Right for You?

If your company has decent credit and has been in business a while then it’s possible to get a business line of credit at an affordable rate. There are a number of reasons a business line of credit can be a good idea.

1. A business line of credit can be useful for your business to access cash to take advantage of opportunities or cover unexpected business expenses.

2. Opening a business line of credit in advance of when you need it can help you prepare your business for the future, even if you don’t need access to any capital right now.

3. A business line of credit can help you get better business credit, especially if the lender is reporting the information to the business credit bureaus.

A business line of credit may not be helpful to you if you haven’t been in business long. If you don’t have an established credit history, a business line of credit may not be the right option for you. Not every business will meet the eligibility requirements.

Mistakes You Could Make When Applying for a Business Line of Credit

When small business loan shopping, you want to make sure you are avoiding these common mistakes. Before you apply, it’s important to consider your business’ financial health, understand your options, and know your rates.

Not Having a Clear Idea of Why You Need Funds

You should always have a clear idea for what you need the funds for, whether it’s a line of credit or other types of business financing. If you obtain financing without a long-term strategy, you could have trouble getting financing in the future.

Rushing through the Application

As a business owner, it’s expected that you will be busy and work long hours. If you are in a desperate situation and need cash quickly, you can be tempted to rush through the application as fast as possible. This can hurt your chances of getting financing. Simple errors can cause problems, such as an incorrect business address or typo in your employer identification number.

You should set aside some time to really focus on the application and make sure everything is correct so there are no delays in your financing. Be sure to put your contact information and number. There are times when business owners put down the main business line, even though they typically won’t answer calls on that line. Then the lender won’t be able to get a hold of you and you will be left wondering why you haven’t gotten a response yet.

Being Dishonest in the Application

You can be tempted to overstate your financial situation on your application, especially if you need cash. This is a bad idea. Don’t try to fudge the numbers since this can get exposed through the underwriting process. If a lender finds out, it can hurt your chances of getting a line of credit. You don’t want to compromise the integrity of your business.

Misunderstanding Lender Requirements

Don’t apply unless you fully understand the requirements. Make sure you meet the minimum eligibility requirements which are on the website. This will increase your chances of getting approval and prevent any unnecessary credit pulls if you don’t meet stated eligibility requirements.

Final Thoughts

A business line of credit can be a useful financing tool for many reasons and there are a lot of benefits of having one. In order to qualify for a business line of credit, there may be a stringent application process. However, there are different lenders you can seek out that you may be better qualified for in the end. You can use a business line of credit different ways but it helps to have a strategy for paying it off so that you aren’t creating more debt for yourself and getting your business into financial trouble. When applying for lines of credit, make sure you don’t make any common mistakes. So you have a better chance of getting your application approved.

PS: Line of credit can be a good option for you. But you should consider other options as well.

Top Reasons An SBA Loan is a Great Way to Fund a Company

The Small Business Administration works with financial institutions and specialized lenders to offer business loans. These loans are typically easier to qualify for. At least compared to traditional business financing. And you can use them for many aspects of your business. The amount of time you have to pay back these loans depends on the purchases that you make. Working capital is tied to a seven-year repayment term. You can pay back equipment purchases over 10 years, and real estate has up to a 25-year repayment term. In most cases, you can use this funding for practically any expense that has to do with your business. And it’s especially good for gathering the resources for rolling out new locations, equipment, and other improvements in operations.

A Quick Summary of SBA Loans Types

Before we get into why you should choose an SBA loan to fund your company, let’s take a quick look at the various types of SBA loans. It’s extremely important that you are familiar with them. This is the only way you can actually choose the right type for you. And also figure out all the benefits that come with the right SBA loan.

7(a) SBA Loans

SBA loans come in several forms. The 7(a) is the one that typically comes to mind when someone refers to this loan program. The 7(a) loan is intended for working capital, as well as business expansion and major equipment expenses. You can borrow up to $5 million under this program.

CDC/504

Your company needs to purchase real estate, buildings, or machinery. And you don’t have a need for other types of working capital. Then the CDC/504 loan may be the better option than the 7(a). It has a higher maximum of $25 million. This provides more flexibility on getting the high-cost real estate and equipment needed to invest in your company’s success.

Microloans

Typically, these loans are issued through nonprofit organizations and specialty lenders, rather than your typical bank or credit union. This program is geared towards very small businesses and those at the beginning stages. Much like the 7(a) loans, you can use microloans as a source for working capital. The maximum loan available under this program is $50,000.

Disaster Loans

It’s very easy for unexpected disasters to ruin a small business and cause it to become bankrupt. The SBA offers assistance during these situations. The aim is to help companies avoid going out of business. This loan program provides funding for needs that arise during an emergency. Typically, the SBA handles these loans directly.

Do SBA loans require a personal guarantee?

The SBA requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.

Reasons to Get a Loan for Your Business

Secure working capital:

One of the primary reasons that small businesses get loans is to secure working capital for their companies. When you have more working capital available, you can make investments and purchases that lead to a higher revenue stream over time. You’re setting up a foundation for long-term gain. Doing so by financing these purchases. As the upfront cost may be significantly more than your small business can cover from its current cash flow. Either it is for real estate, equipment, inventory, technology, or other expenses.

Expand new locations:

Another reason to get a loan for your business is to expand to new locations. If you’re doing great at your current venue, but you want to expand, then a loan will give you the funding you need. It will allow you to establish your business in the new market until the revenue starts flowing for that location.

Small business loans help these companies compete against larger organizations, which already have substantial resources available to fund their operations. You may want to use the money to bring in new employees, invest in time-saving software, or fund product development.

A healthy mix of small business financing combined with your current and projected cash flow is a valuable resource for steadily and sustainably growing your company. You don’t have to pass up profit-generating opportunities because of a lack of capital when you have access to this type of funding loan.

Give you more options:

Ultimately, a loan gives you more options. That is excellent for a savvy business owner that knows the company isn’t living up to its full potential yet. In the long run, it helps the company’s health that there is another funding source outside of investors and the existing cash flow. This diversity means that if something happens with one of the other sources, it creates a lower risk of the company going into bankruptcy.

List of major benefits of an SBA loanMajor Benefits of an SBA Loan

SBA loans have many benefits that they bring to small businesses. Here are a few reasons to consider applying for an SBA loan.

Low Interest Rate Compared to Other Business Loan Options

Commercial loan rates can be significantly higher than what you’re used to with consumer rates. This can make it difficult to get the necessary financing to establish or grow your business. An SBA loan has significantly lower rates, with many in the single digits. The exact rate depends on the type of loan that you’re getting, as well as the repayment terms and your company’s creditworthiness.

Multiple Types of Loan Options

There are three primary categories of SBA loans: 7(a), microloans, and CDC/504. Each has a specific financing use that they cover, which allows businesses to choose the one that makes the most sense for their needs. In most cases, the 7(a) ends up being the loan option that covers most typical business use cases, while microloans are suitable for smaller businesses, and CDC/504 are intended for large fixed asset purchases.

Both Established and New Businesses Benefit

Businesses of all sizes can take advantage of the opportunities that SBA loans provide. Through this program, you have access to more resources when you’re first starting out or as part of your ongoing expansion. This flexibility makes it accessible to more business owners and allows for people to realize their vision for their companies.

Government Backed

One of the biggest advantages of the SBA program is that the loans are federally backed by this agency. They guarantee the loans up to 85 percent of their value, reducing the risk for banks and other financial institutions that participate in this program. The biggest impact to businesses is that companies that wouldn’t normally be able to access financing, are willing to reduce their qualification criteria because they have less concerns if someone defaults on their SBA loan.

Relatively Low Qualification Requirements

Many commercial loan qualification requirements can be onerous, requiring extensive time in the industry, large cash flows, significant assets, well-established business credit lines, and countless other factors. The SBA loans have lower requirements, both on the business side and the personal guarantee side of things, which make it much easier to qualify for these products. It can be difficult to become a great loan applicant on paper when you need to expand your business so you can show its true potential, which makes SBA loan options particularly useful in this kind of situation. The three primary factors they look at are credit scores (both business and personal), how long you’ve been in business, and your cash flow.

It’s Often the Only Loan Option for Many Businesses

Since the SBA loan offers lenders more flexibility in their selection criteria, it’s frequently the only option available for business owners who have limited experience with business credit, or who have poor personal credit. After businesses get denied financing through other channels, they can turn to the SBA as a source for the funds they need to invest in their operations.

Long Loan Repayment Terms

Depending on the type of SBA loan you take up, you could have up to 25 years to repay it. Your payments are also billed on a monthly basis, rather than a shorter schedule. The typical SBA loan has at least a 7-year repayment term, which provides plenty of time to make payments while your business begins expanding thanks to the influx of capital.

Support Through Educational Resources

Many business owners looking at SBA loans are relatively new to running a company. There are many factors that go into the success or failure of a company, and the SBA has a vested interest in helping you succeed. The educational resources available on the SBA site and through the agency’s partners help you learn from your mistakes, avoid other issues, and set your company on the path to long-term growth.

Gain Mentorships

Another way the SBA helps you succeed is through connecting you with mentorships. An experienced mentor can be a significant asset as you face business challenges during your growth. Being able to get input from your mentor can make a world of difference in the way that you set up your business goals and move forward.

Preparing for the SBA Loan Application Process

If a SBA loan is right for your business, then it’s time to start preparing for the application process. The first thing to do is look at your personal credit. As part of the SBA application, if you have a 20 percent or more ownership interest in the company, you’ll need to put a personal guarantee on the application.

Having strong personal credit can help reduce your rates on this loan product. Although there are many other factors that also go into the APR that you’re given. Your business credit is also considered. So it’s important to build up that type of credit through business credit cards, lines of credit, and charge accounts with your vendors and suppliers.

Gather documentation such as your business plan, profit and loss statement, business debt schedule, bank account statements, asset documentation, cash flow projections, and other information that shows the financial health of your organization. You want to show the SBA lender that you have an established business that has a strong plan for future growth. The SBA helpfully includes a complete checklist of documents that you’ll put together as part of your application.

Choosing an SBA Lender

For most SBA loan products, you’ll deal with a bank or credit union as your SBA lender. Some specialty lenders and nonprofit organizations are also involved in the process. And the SBA works with loans directly for disaster funding. You can check a business loan shop to compare your rate options among banks and other lenders.

Experience Matters

The most important aspect of your potential lender to look for is how much experience they have with issuing SBA loans. If the SBA program is a small part of their overall lending business, then they may not have the expertise required to give you the best option that’s available to your business. If possible, reach out to other business owners in your market or your location. See which lender they prefer, and their overall experience.

When you interact with the lender, are they readily available? Is it difficult to use their online services or is everything laid out in a straightforward and easy to navigate fashion? Do they answer your questions in full and have a good reputation in your community? Are there lenders that come up again and again in your industry as great choices to work with?

Consider all of these factors when you begin evaluating the financial institutions for your business. You don’t want to pay more in interest rates than is necessary, nor would you want to miss out on important lending opportunities simply because the bank doesn’t have enough of an understanding of the SBA loan program.

The SBA loan application process, from start to finish, may take several months. It depends on the state of your business and personal finances. Your industry, the length that you’ve been in business, the lender’s familiarity with these programs, and other factors. While it may be frustrating at first to wait, that patience is rewarded through generous loan limits and low interest rates.

Reasons Why Your Application May Be Rejected

Rejection can be difficult to deal with. Especially if you’ve applied through other lenders before approaching the SBA program and you got denied. However, each denial will give you useful information to better prepare for the next application. And you will learn ways to position your company to get the investment loans that you need to fuel your growth.

Not established enough

Outside of the microloan program, you need to have a well-established business before the SBA lender will feel comfortable issuing a loan to you. The exact definition of “well-established” will vary between each financial institution. But they will generally want to see several years in business with an overall positive flow of revenue. If a microloan is too small for your needs, you may need to wait another year or two before you try to apply for the loan again.

Poor personal or business credit

Bad credit on either the personal or business side of the equation can lead to denials. The bank may not feel confident that you’ll be able to pay the loan back as agreed. While you can get around poor personal credit by not providing a personal guarantee, you won’t be able to do the same thing if you are not paying your business credit accounts on time.

SBA loans don’t cover your industry

Some industries are excluded from coverage by SBA loans. So you would not be eligible for this program at all. The denial would detail this information so that you aren’t wasting time trying to apply for a loan that wouldn’t be available to you.

You don’t have enough collateral to make the bank feel comfortable issuing the loan

The maximum percentage that the SBA guarantees for their loans is 85 percent. When you have a larger loan, that 15+ percent can represent a significant amount of money for the bank to put on the line. In these cases, you’ll need to offer up collateral so that the bank covers their risk to an acceptable level when issuing the loan. The exact type of collateral depends on the lender that you’re working with and the loan that you need covered.

You want to maintain a divide between your business and personal assets

Refusing to give a personal guarantee frequently leads to denials. Even if you’re only doing it to stop your personal and business finances from mingling together. You may need to look at loan options outside of the SBA loan program to secure financing for your company.

Final Thoughts

The SBA loan program is a valuable resource for small businesses looking to expand their operations. And to secure funding to invest back into their business. Lenders working with the SBA are able to offer a variety of loan products that have more relaxed credit requirements than other commercial loans. And there are many benefits for companies deciding to go this route. If you can qualify for an SBA loan, you can really benefit from one. If not, there are other small business funding options out there.

There are other options other than SBA loans to consider. You can find all about them in our finance education section. We have dozens of blogs on the topic of business loans and there is not a piece of information we left out. If you decide on another option for you, for example online lenders, Loanry has your back as well. We can connect you to reputable lenders and make the process of getting a loan a bit quicker and easier for you.

Restaurant Loans to Get Your Business Cooking

Many of us have dreamed of owning a restaurant. However, the startup cost alone is enough to make many of us intimidated. After all, most of us don’t have the money to fund our dreams of owning a restaurant out of pocket. But it’s not impossible. It just requires a fundamental understanding of the process and the types of restaurant loans available for this type of venture. As a future restaurant owner who needs funding, you need to familiarize yourself with how to position yourself to get a loan as well as the different types of loans available to you.

You Need A Loan for Your Restaurant…What Should You Do?

Any restaurant owner in search of restaurant loans starts by asking themselves what’s the best way to go about getting funding and how they can make themselves look more attractive to lenders. This is a smart question. Before you’re approved for a loan there will be many things a lender will need to look at to determine if you’re a good candidate for a loan. They will be trying to determine if you’ll have the means to pay back the loan. They will also take a look at your past financial situations and evaluate how well you honored previous loans or financial obligations.

And they will assess how much of a risk funding you might be. As a result, it will be in your best interest to have and be able to prove a history of financial responsibility. Have you paid your creditors on time? Have you defaulted on any other loans previously? These are all valid considerations that most lenders explore. This is why you’ll need to prepare before you run off and apply for a loan for your business. You’ll want to know how good your credit is and clean up any areas that need it before you apply.  Restaurant owners need to learn the nuts and bolts of how to finance a business to prepare to apply for restaurant loans.

What Type of Loan Do I Need?

As a restaurant owner, you need to understand why you are seeking a loan. Do you need new equipment? Are you unable to purchase supplies for your business? The reasons you need funding can be wide and varied. However, you need to be clear on why you’re borrowing money and where you intend to use it before you apply for it. If you don’t have a clear intention for why you’re borrowing money, your use of the finds will probably be misdirected.

You identified the need and were clear about what the money would be used for. This prior knowledge of how you will use the funds is helpful and will prevent you from spending. Business owners have a wide variety of needs. The loans you seek should be a direct reflection of what you truly need to run your restaurant. This is why you need to consider why you’re seeking a loan for your restaurant before you start small business loan shopping. Determining your why will help you decide what type of loan will be best for your restaurant before you business loan shop.

The Steps of Getting a Restaurant Loan

Once you’ve determined your why you’ll need to take very specific steps to prepare to apply for a business loan. First, you’ll need to determine how much you need to borrow. Once you’ve determined that, you’ll need to put together a business plan. Most lenders will want to see this. A business plan should consist of your tax returns, both business and personal, for the past three years. You’ll also need to provide balance sheets that show cash flow.

Profit and loss statements should also be included. Financial statements and projected revenue as well. All of this information should be gathered and submitted along with the application. Your application, along with the information and documents you submit, will paint a clear picture of your business. This will help lenders determine your risk factors as well as how likely you are to pay the restaurant loans back and follow the terms of the loan without defaulting.

Don’t Forget About Your Credit Score

Lenders will look at your credit score in conjunction with everything else. This means that the day before you apply for a restaurant loan should not be the first time you look at your score. In a practical and functional sense, you need to look at your credit and score well in advance to fix any errors that you may find. This is primarily because any errors that you find may take time to correct.

Also, you want to start looking at your credit score well in advance because there may be things you can do to improve it before you apply for your business loan. Give your credit as much TLC as possible. Your credit score may determine whether or not you need collateral to be approved for a loan as well as the type of loan you’re approved for and the interest rate. However, there are a variety of different loans you can choose from to get your restaurant off the ground or to get whatever you may need for your restaurant.


SBA Loans

You may want to consider applying for a Small Business Association or SBA loan if you need substantial things for your business. These loans can be expansive enough to include construction, which means that you might be able to finance the construction of your restaurant. SBA loans shouldn’t be considered to meet the smaller needs of your restaurant. These loans are usually pursued when you have major things to accomplish and need a sizeable loan to get your restaurant running and off the ground.

The eligibility requirements can be quite difficult to meet and you may be required to provide a lot of information to qualify. However, if you are approved for this type of loan the benefits can be extremely beneficial. SBA loans allow the loan holder to choose between both fixed and variable rates. Plus, SBA loans will fund up to ninety percent and the loan terms can be up to twenty-five years long. The benefits don’t end here, however. An SBA loan is guaranteed by the SBA which makes it a safer loan if you default on the terms. Plus, there are different types of SBA loans.

  • SBA 7(a): Large expensive business needs
  • Then, SBA 504: Real estate and construction projects
  • SBA Express: A smaller loan that can be used for emergency funding that can be delivered within forty-eight hours and has a fifty percent SBA guarantee

The application process is involved in that you may be required to provide proof of ownership and financial reports. Background information may also be a requirement for an SBA loan. Collateral may be required as well. However, an SBA loan may be one of the more beneficial restaurant loans to apply for.

Equipment Financing Loans

Fortunately, there are many different types of restaurant loans you can apply for. You may have a physical location for your restaurant already secured and funded but lack the equipment you will need to operate your business. This means that there are specific things that your business will need. As a restaurant owner, you may want to get an equipment financing loan to lease the equipment you’re going to need to operate your business. For example, you may need commercial kitchen equipment, amongst other forms of restaurant equipment. In this situation, an equipment loan could be really helpful. One clear benefit of these loans is that the equipment you lease acts as collateral.

This usually translates into lower interest rates. These loans can be used to lease a wide variety of different types of equipment, from heavy machinery to computers. Keep in mind, however, approval for this type of loan usually requires good credit. However, if you are creditworthy it may be a good idea to apply for this type of loan because you’ll get current equipment and up to date. You’ll also pay a lot less than you would if you were buying the equipment outright. Leasing provides flexibility to the restaurant owner by allowing him or her to stay up to date with the latest equipment without worrying about upgrades. Plus, it allows you to use a piece of equipment for as long as you need it without being stuck with it.

Term Loans As a Resource for Your Restaurant

As a restaurant owner, you may benefit from a term loan. These loans are helpful when it comes to funding a wide variety of your needs. These loans are traditional and can be used to meet many different needs. They are coveted because they usually come with flexible terms and fixed or predictable interest rates. These terms may be difficult to qualify for if you don’t have good credit, however. You may also be required to provide collateral for this type of loan. The required documentation may be extensive as well. You may be required to provide many documents, including financial documentation.

However, if you can qualify for this type of loan, they generally have lenient repayment terms, leniency when it comes to the amount of the loan, the repayment terms, and the type of lender. These loans can be acquired through traditional lenders as well as unique or alternative lenders. These loans may be a good option for you if you’ve been in business for a few years. They can also help your credit rating. Loans can be beneficial in providing you with the funds you need and improving your credit when you follow the terms of your loan.

Commercial Real Estate Loans for Your Restaurant

If you’re looking to build, rebuild, or buy a commercial building for your restaurant, you may want to consider this type of loan. These are traditional loans where the real estate is used as collateral which makes them secured loans. These types of loans can be used as restaurant loans and often come with attractive interest rates. Similar to financing a home, the terms often allow you as long as thirty years to pay them off. However, you can often get a better interest rate if you opt for a shorter repayment period.  Regardless of what you decide, this type of loan will fund shelter for your restaurant business, should it be leasing a space or building your storefront.

A Line of Credit for Your Restaurant Needs

You may have different things that come up that you need funds to take care of. In situations like this, a line of credit may be attractive. This type of funding allows you to purchase whatever you need, as you need it, up to your credit limit. A business line of credit is similar to a conventional credit card. You only pay interest on the amount you spend. This is a form of unsecured business credit that provides lots of flexibility.

You can withdraw funds as often as you need, repeatedly, up top your limit, and you don’t have to go through a lengthy application process repeatedly. You simply withdraw funds as you need them. Although good credit makes it easier to secure a business line of credit with a good interest rate, you may still be able to get one without perfect credit. However, the interest rate may be significantly higher and you may be required to secure the loan with collateral. A line of credit can still fall under restaurant loans because it’s funding you borrow to meet the needs of your restaurant business and restaurant loans can come in many different forms.

A Different Approach to Secure Funding

If you’re just starting out and don’t have much business credit, you may have to take an alternative route to get the funding you need for your restaurant business. A personal loan may be your best bet if you want to secure funding for your business at a decent interest rate. Of course, a personal loan will be dependent on your personal credit in terms of your chances of approval and your interest rate. However, if this is the only way to secure funding for your business, this may be a good route to take.  These loans are attractive because you don’t need to provide financial material regarding your business.

Lenders will only be looking at your personal credit and your income. Forget having to come up with tax returns for your business, six months of profit and loss, and other financial data a business lender may request. Plus, it may be quicker and easier to secure a personal loan for your restaurant business instead of a business loan. However, buyers beware. A personal loan may be easier to acquire but if you default on the terms it can affect your personal credit.

Even if your business fails the money you owe will continue to impact your personal credit. A personal loan will also inflate your debt to income ratio. Plus the money you borrow may fall short of the funding that you’d get for typical restaurant loans. A business loan can be for millions of dollars.  Most lenders won’t fund a personal loan for millions of dollars.

What are the Best Terms for Restaurant Loans

It may be difficult to determine how long you should take to pay back restaurant loans. Typically, short term loans are used to cover an emergency. You usually have no longer than eighteen months to pay them off and the interest rates are typically higher. Conversely, long term loans typically have better interest rates and can be funded for much larger sums of money.

Typically, that amount can be negotiated between you and the lender. Lenders who offer long term loans usually won’t fund a loan for a small amount of money. Unfortunately, if your credit is less than good, a short term loan may be all you qualify for. The interest rate for short term loans can be as much as eighty percent depending on the terms and your credit. Nevertheless, if this is one of the only ways to secure a restaurant loan, it may be well worth it to apply for this type of funding. You will need to repay short much sooner. And the amount you can finance will be typically less than the amount of a long term loan.

What Do I Do to Secure Funding for My Restaurant Business

Understanding the needs of your business as well as your financial status and standing are pieces to the big puzzle that you need to put together to apply for a business loan. If you are familiar with all the puzzle pieces that make up your situation, you have the information needed to apply for a business loan. You should start by understanding clearly why you feel you need a business loan for your restaurant. Do you need equipment? Are you trying to establish business credit? Do you need to lease space for your restaurant?

The reasons may be many. Your only job is to be clear about why you need the funding and what you will use it for. This clear understanding of the needs of your business serves as guidance and a roadmap when it comes to determining the best kind of funding or restaurant loans for your business. If you are clear on your why it should be easy to determine how much you need to borrow. With these two pieces of information in place, you can create a business plan. Check your credit early, know your score, and clean up any errors.

You’ll also need to gather all your financial information for the application process as well. These are all fairly universal steps for applying for a business loan. Make sure you’ve taken all the necessary steps to prepare yourself for the application process and have considered what type of loan would be best for you.

Know the Benefits and Risk Factors for Different Types of Loans

There are many different types of restaurant loans. The type of loan you choose should be dependent on the needs of your restaurant business as well as your specific situation. However, regardless of the type of loan you choose, you need to be familiar with the benefits as well as the possible pitfalls of each type of loan. For example, if your greatest need for your business is equipment, it’s probably best to apply for an equipment loan.

The equipment you lease will serve as collateral and you will pay a lot less by leasing instead of buying. However, if you default on the payments, you may find yourself without the vital equipment you need to run your business. This is why it’s a good idea to become familiar with the worst-case scenarios of any business loan you choose to pursue. This knowledge will help you to honor the terms and conditions of the particular loan you are trying to acquire. The terms of each type of loan will depend on the specific loan.

Some loans will require you to come up with collateral. This means you could risk losing something is you default on the terms of the loan. Other loans may not require collateral, however, defaulting on the terms may hurt your business credit immensely. Regardless of the type of restaurant loan you apply for, you should be aware of the pros and cons. Full awareness should be part of the preparation and application process. Use your knowledge about the various types of loans to make an educated choice regarding the best loan for your restaurant.

Closing Words

You must have a fundamental understanding of your financial situation as well as the needs of your restaurant business. Although there are a variety of different restaurant loans you can apply for, you must first understand what your restaurant needs. And how much funding it will take to meet those needs, in order to choose the most appropriate loan for your business. This type of awareness will act as a guide when it comes to selecting a loan that will adequately meet the needs of our restaurant business and help it to grow.

You should also familiarize your self with the pros and cons of different restaurant loans. This will also help to narrow your choices until you decide on one that best suited for you. The preparation process will be similar regardless of the type of loan you apply for unless you’re applying for a personal loan. Personal loans require less and are usually based on your personal credit and your income. Unlike business loans, they are usually much easier to apply for. However, the damage they can do to your credit can be substantial, should you default on your payments. Know the needs of your business, familiarize yourself with your credit, and determine why you need a loan and how much you should borrow.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

What Documents Do Lenders Require For A Business Loan?

If you are a business owner, you will most likely have a moment when you consider a business loan. There are many reasons why you may consider a business loan. You may be just starting your business and need some money as your disposal. Perhaps you have a long standing business, but you are growing quickly and you need to expand. Just like there may be many reasons why you need a loan, there are many details to consider. This may be the first time you have considered taking out a loan for your business. Just like with a personal loan, you should carefully consider your options. You should not enter into a loan agreement without making sure it is the right solution for you. In this article, I share all the details you need to know about a business loan, including all the documentation you need.

What Is A Business Loan?

I always like to start with basic information. It is a mistake to think everyone knows about the business loan process. Really, unless you are some heavy duty business person, chances are, you are not up on the details of business loans. In the most basic definition, a business loan is when a lender allows you to borrow money to help you run your business. The lender charges a fee, also known as interest, for giving you the money. You promise to repay the money by making monthly payments for the length of the repayment period.

Business loans can be secured or unsecured. They may also be a line of credit. Similar to a personal loan, an unsecured loan has no collateral or anything backing it. These loans are riskier for lenders. As a result, they have higher interest rates. A secured loan has collateral attached to it. That means you have offered something of value, such as your business or pieces of it, to ensure you repay the money. If you default, or do not pay, on the loan, the lender can take your collateral. A line of credit works similarly to a credit card. You can borrow any amount up to the line of credit. You do not have to use the full amount of the line of credit.

How Do I Get A Business Loan?

The first thing you must do is understand why you want or need a business loan. You must have a purpose for the money. Thinking about this can help you decide if you really need the money, or if you are putting your business at risk. After you decide that, yes, a business loan is right for your business at this time, be realistic in how much money you need. Most importantly, determine if you can repay the loan. A loan is not a gift. It must be repaid every month.

Now that you are sure you want to pursue a loan and you know the amount you need. You are also sure you can repay the loan, it is time to find a lender. There are many lenders out there and it is important to find the one that fits your needs best. Lenders offer different types of loans with varying interest rates. That interest rate impacts your monthly payment amount. Lenders may have different loan terms, also. It is important to find a lender that matches those requirements for you. You may have to do some research. Do not pick the first lender upon which you stumble. Look around and do some research to find the right one for you.

Once you have taken all of those steps and found the perfect lender for you, it is time to fill out an application. You are almost finished with the process at this point. Depending on the lender you choose, you may have to go into the bank and fill out a paper form. If you choose an online lender, you can fill it out on your computer. It is important that the information you provide is accurate. If anything is off it could impact the decision. It make take a couple of weeks before you receive a response from the lender.

What Documents Do I Need?

One thing I did not mention above is the documentation you need when applying for a business loan. As with any type of loan, you must provide documentation when applying for a business loan. I am sure it makes sense to you that potential lenders like to see that your business is profitable. Lenders want to make sure you are investing wisely into your business. Usually a lender will not just take your word for it. They would like to see documentation to prove it.

Some information a lender may ask to see is your business license and resume. They may want your financial statements and the financial statements for the business and any principals that you have. They want to gather the credit history for you and all your partners, in addition to the credit history for your business. Lenders also want to see a guarantee of repayment from all the business owners. Lenders also want to see tax returns for you and the business for the past three years. They are especially interested in profit and loss statements. Also, they want to see your balance sheets and all projections on cash flow. They also want to see financial statements and any projected financial statements.

How Can I Use A Business Loan?

Business face unique challenges. One of the biggest struggles is getting others to believe in your vision the way you do. Not only do you want them to believe in it, but you typically would like some financial backing. In the event, you are not able to persuade people to just give you money, you may need to consider a business loan. The good news to this is you can use a business loan for just about anything for your business. Depending on the type of business loan, you may need to use it for specific pieces of your business. However, that is only if you opt for a specific type of loan, such as an equipment loan. You can use a business loan for upgrading your software or computer equipment. Or you can purchase real estate or a larger building. You may even need it to hire more employees.

No matter what type of loan you consider, you should have a business plan. Many lenders ask to see your business plan because they want to ensure you have a plan. They want to make sure their money is going to grow your business. It is possible that a lender does not require you to have a business plan, but it always a good practice to have one. This helps you understand your goals and provides you steps to move forward.

What Are Small Business Administration (SBA) Loans?

Резултат слика за sba loans infographic

There many types and variations of a business loan in which you could apply. One of those types is a small business administration (SBA) loan. It is a loan that is backed partially by the Small Business Administration branch of the government. These loans are less risky for the lender because it is partially guaranteed.  The loan is still being issued by a lender. It is not issued by the SBA, even though the name of it makes you think it might be. If you cannot repay the loan, the SBA covers the part of the loan that they backed. It is almost like insurance for the lender.

The terms of this type of business loan varies based on the loan. There are no additional limitations on this type of loan because of its backing by the SBA. They range in amount from as low as $500 to as much as over $1 million. They also can offer an interest rate as low as just below 7 percent. The repayment terms for a SBA range from 5 years to 25 years. The typical length of a loan is around 10 years.

There are four different types of small business administration loans. There are micro loans, which are typically available to childcare organizations and small businesses. These loans are usually up to $50,000. Disaster loans fall into this category and they are reserved for damage sustained from natural disasters, such as, but not limited to hurricanes and flooding. There are real estate and equipment loans covering those items that are needed for the business to operate. Also, there is an all purpose small business loan that is the most common loan and that is the 7(a) loan. There are many business loan companies available to provide these various loans.

What Are Equipment Loans?

An equipment loan is a special type of business loan that helps businesses purchase heavy machinery or large equipment. When your business uses an equipment loan to make large purchases, it allows you to save cash. Instead of using large amounts of money now, you can make a monthly payment. Typically, you can only get an equipment loan for a piece of equipment that you are purchasing. You cannot use it on existing equipment. You are using the equipment that you plan to purchase as collateral. That means if you default on your loan, the lender can take possession of the equipment. This gives the lender a little more security in lending you money.

Typically, lenders prefer that you invest in equipment that retains value. Equipment such as semi trucks, tractors, and cranes fall into this category. You may also be able to use this type of loan on ovens and other kitchen equipment for a restaurant. You may also consider equipment such as computer printers and servers, or equipment for manufacturing. There are many benefits to an equipment loan. Lenders often require less documentation than with other loans. You typically get an answer in less than a week, so you can have money quickly.

What Are Term Loans?

Another type of business loan is a term loan. It is the most popular loan of all the business loan types. This type of loan helps business owners procure items that are a large expense that they may not have the cash to pay. These loan covers a large amount of items. These loans can also help improve the credit rating for a business. Whenever you may regular and timely payments, it helps increase your credit score. It may be difficult for a business to have a good credit score. In some cases, a term loan may help.

Nontraditional and traditional lenders provide term loans. These loans are similar to personal loans in that they are for a set term. They are not revolving lines of credit. The length of these loans are usually from one year to five years. You make regular payments on these loans. They can be monthly, or possibly weekly payments. These loans are flexible and easier for a well established business to obtain.

Lenders prefer to give these types of loans to businesses that have been operational for two years. Lenders like to see that the business is solvent with a sound debt to income ratio and continues to have a steady flow of revenue. New startup businesses may find it difficult get an approval for this type of loan. Interest rates vary widely, as they can be as low as 6 percent and as high as 30 percent. Lenders tend to require a large amount of documentation before approving businesses for this type of loan.

What Is Revolving Credit?

Revolving credit is a term with which you should be familiar if you use credit cards. This type of business loan closely resembles credit cards and works in a similar way. A line of credit is a preferred way for businesses to obtain credit. It gives your business much more flexibility. This allows your business to have the money you need when you need it. You are given a set amount of money and you are able to only take as much money as you need. You can continue to borrow money against your line of credit until you reach your limit, or for a set amount of time. Those terms are decided at the time you agree to the loan.

The interest rates for these types of loans are higher than other loans. However, you only have to pay interest on the amount of money you are using. You do not have to pay interest for money that you are not using. Lenders tend to approve these loans for business with good credit.

Why Should I Get A Business Loan?

You and your business associates are the best ones to decide if a business loan is right for you. There are some points to consider when deciding if a business loan is right for you. First, let us look at the reasons why you might want to go to a business loan shop. Are you in a position where you need to expand, but your current space cannot handle anymore people or equipment? If you can show that you have had steady growth for several years, it can help your chances for an approval. Perhaps you need more equipment or you need to upgrade your existing technology.

If upgrading your existing system helps improve your productivity, which can in turn bring in more income. Do you have a seasonal business and you need to stock up on items you need for the next season? If you do not have a steady flow of income at this moment, a loan may help you obtain the items you need. Perhaps you need to build up your credit. You may not have any credit because you are a new business, or your business do not have the best credit. Obtaining a loan may help you build positive credit. Any of these reasons may be a valid reason for obtaining a loan.

There many be just as many reasons why you should not obtain a personal loan. Are you already behind on all of your bills? Or are you in danger of falling behind? Perhaps you do not have a good business plan. You may need to revisit is and make adjustments to your business plan before you consider taking out a loan. It is important to have an understanding of the position of your business. You should realistic about the circumstances of your business. It is great to be ambitious about your business plan and know how much you are able to achieve.

Can I Be Denied For A Business Loan?

Yes, you can be denied for a business loan. It is probably more common that you realize. You could be denied because you may currently have too much debt. You may also be denied because you have limited cash or you may not have enough collateral to put towards the loan. It could also be that a lender does not want to take a risk in the current market. If the market is in too much turmoil, a lender may not take the risk. You may have poor to bad credit history or a terrible business plan.

If you want to ensure that you are approved for a business loan, you should make sure you have better cash flow and work to improve your credit. You may also want to consider non traditional lenders. You may have better luck with a lender that is willing to lend money to a business that has less than perfect credit. If you know that the market is not in a good place, you might want to wait until the market is in a better place. You can watch the market for when there is a better market in which you can apply for a loan. If you are denied a loan, find out why. Pay attention to what the lender tells you. Make corrections where you can and apply for a loan when your business is in a better place.

Are There Downsides To A Business Loan?

There can always be a downside to a business loan, but it depends on your position when you obtain the loan. One of the major downsides is your business is taking on more debt with a loan. You could put your business is a bad financial position if you enter into a loan that you cannot afford. Remember, you should always have a realistic picture of your financial position before you obtain a loan. You should have a clear picture of the budget for your business. This means you need to know how much money you are spending on expenses.

This also means knowing how much money you really make, not how much money you think you should make. Now, is the time for you to look at the cold hard facts and numbers. If you do not have a budget for your business, you should create one now. Do not hesitate with creating a budget. There are many websites available to you to help you create a budget. Before you even start to shop business loans, you need to understand how much you can afford to pay per month.

The last thing you want to do is risk losing your business. This is your dream and you have worked hard to create it. Do not let a bad financial decision ruin that for you. Do not be your own worst nightmare, either. If you remain realistic about your current position and where you can go, you have a chance to survive. If you begin to believe your business brings in more money than it actually does, you might set yourself up for ruin.

Pros and Cons of Small Business Loans: Steady Growth

What is the Major Difference To Long And Short Term Loans, Besides The Obvious?

When you are considering a business loan, you have some choices available to you. Among those choices is the short term versus long term loan decision. I am going to make an obvious statement, here, so forgive me. A short term loan means you have a short term in which to repay the loan. You may have to repay those types of loans in days, weeks, and possibly months.

Short term loans put a large amount of pressure on you as the business owner as you try to repay the loan. You may have to dig into your cash reserves to pay back a short term loan. The original purpose of the loan was probably to keep your cash in place. A short term loan must be repaid in three months to eighteen months. If you need money for a short period of time and can repay the loan quickly, then a short term loan may be the right one for you.

Long term business loans are repaid in monthly payments over the term of the loan. This relieves the pressure on business owners because they tend to have one to twenty-five years to repay the loan. The lender you choose determines the terms of the loan. While the long term loan accrues more interest than a short term one, it also spreads out the interest over a longer period of time so you are not scrambling to repay the loan. If you would like to spread the repayment plan over a longer period of time and you do not mind paying more interest, the long term loan may be a better option for you.

Conclusion

When you are looking for a business loan, it is important to understand the position of your current financial outlook. You want to make sure that you are in a position to repay the loan. Before you start looking at a business loan shop, take a look at your business plan and your expansion plan and ensure that it makes sense. If your business has positive revenue and it continues to grow each year for at least the past five years, you might be in a good position to obtain a business loan.

If you are behind in your bills, or in danger of becoming behind in your bills, you might want to reconsider obtaining a business loan. The intention of a business loan is to put your business in a better position so you can expand your business by obtaining a large space or upgrading equipment. You must keep in mind that you are not just putting yourself at risk, but you are also putting your business and any partners at risk, as well.