If you are trying to start a business and need capital, then consider getting a small business loan. Our small business loan calculator can tell you immediately what your monthly and total payments and interest will be!
Read on for our guide on small business loans by our guest poster, Veronica Baxter.
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Your Guide to Small Business Loans
These days you have numerous options to fund your small business, whether you need to borrow a relatively small amount as working capital, or you are expanding and need to borrow to purchase real estate and equipment.
This article is a comprehensive guide to available business financing options as of March 2020. Interest rates will vary depending upon the current financial market as well as the type of loan you are seeking, you and your business’ credit rating, and your business’ length of time in operation and annual revenue.
Google the type of loan you are interested in to find lenders and the currently-available terms and interest rates for which your business may be eligible.
Conventional Term Loans
The traditional way of obtaining funding for your business is to apply for a commercial term loan from a bank or other traditional lending institution. How this works, in short, is that once you are approved, you are given a lump sum, and you repay that sum in installments, plus pre-calculated interest over the life of the loan, over a set period.
These days, online services such as Paypal are offering commercial term loans, so it is prudent to shop around online as well as among the brick-and-mortar lending institutions for the most advantageous terms and interest rates for which your business qualifies.
Pros of Commercial Term Loans
- You can borrow a more significant amount compared with other currently-available borrowing vehicles
- This type of conventional business loan can be relatively inexpensive for businesses with a good credit rating and history
- You receive the funds quickly in as little as a few days or a week
Cons of Commercial Term Loans
- Banks will often require collateral to secure the loan, such as equipment, inventory, the business’ real property, or your house
- Also or in the alternative, banks can require a personal guarantee, making the business owner personally liable to pay the loan
- A commercial term loan can be expensive for new businesses or businesses with a poor credit rating because higher risk loans carry higher interest rates
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SBA Loans
These loans are a type of term loan issued by traditional lending institutions that the federal government’s Small Business Administration (SBA) then guarantees. SBA loans can be used for the following purposes:
- To obtain working capital
- To purchase equipment
- To purchase real property
The SBA imposes an additional layer of requirements regarding the length of time in business, the personal credit score of the business owner, and annual revenue. For this reason, the application process for an SBA loan is quite rigorous and takes much longer than a conventional commercial term loan.
However, if a business does qualify, an SBA loan comes with longer repayment terms and lower interest rates than a term loan without the SBA guarantee. Try our small business loan calculator above to see what you would pay each month.
Commercial Real Property Loans
If your business needs a warehouse, retail or service shop, or factory, you will need to obtain a commercial real property loan.
Real property financing for businesses differs from that of residential properties. Generally, the repayment term will be longer, and the interest rate will be lower. The amount a business can borrow to finance commercial property will depend upon the LTV or loan-to-value. Typically, a lender will provide up to 75% or 80% of LTV and the business will have to provide a down payment for the rest.
Commercial real property lenders often offer a balloon loan, which is what it sounds like – the business makes small monthly payments over a term of several years with the remainder of the loan due at the end of the term. If the business cannot afford to make that balloon payment in full, a lender will often refinance it.
Equipment Financing Loans
If in your line of business it is essential to own equipment, equipment financing is available to help you purchase it. The equipment you are buying will serve as collateral for the loan making this a “secured” loan, which means that the lender can repossess the equipment if your business defaults on the loan. Typically the term of the loan will match the expected lifespan of the equipment.
The downside of equipment financing is that you will likely have to come up with a down payment. Additionally, there is always the danger that the equipment will become obsolete sooner than expected, so you should assume that risk with open eyes.
Lines of Credit
A business line of credit provides a great deal of flexibility in that you can access funds up to your limit, you pay interest only on the funds you’ve drawn, and you repay what you’ve drawn over time. Only the interest charged on the amount you’ve drawn is payable monthly.
A business line of credit serves as a short-term, quick-fix loan to keep a business in operation despite a temporary financial setback. It is intended to support continued operations rather than purchase inventory or equipment or commercial real estate.
Every business should have a line of credit arrangement with their banking institution, to cover any shortfall in monthly revenue or any unexpected expenses. Your banking institution will look at your banking history and likely want to see your cash-flow statement, and last year’s tax return to extend a line of credit to your business.
There will likely be additional fees, such as maintenance fees or withdrawal fees. Generally, applicants must show a strong revenue history and have good credit to qualify for a business line of credit. The interest imposed on a business line of credit is generally low compared with the following types of small business financing.
Credit Cards
Business credit cards work similarly to lines of credit in that you can draw from and repay debt as your needs require. However, there is a minimum payment that is required each month that is based upon a percentage of balance and interest charged. Another difference between a business line of credit and credit cards is that the interest rate on a credit card will likely be variable and quite high compared with a line of credit.
There may also be other fees involved, like an annual fee or charges for international purchases or cash advances. Still, businesses of all types commonly use credit cards for monthly expenses such as office supplies, rent, or utilities, or recurring business expenses such as travel, lodging, and meals.
Credit cards are not meant to fund equipment or real property purchases, or for long-term financing of business operations.
Invoice Financing
Unpaid invoices serve as collateral for this type of loan, which can be quite expensive in terms of interest rate. Think of this as a payday type of loan. Plus, your business still must collect on the invoice!
Invoice financing is a short-term, quick-fix to use when there are few other options of obtaining financing, and you are relatively sure you can collect on the invoice within the term of the loan.
Invoice factoring
You sell your business’ unpaid invoices to a factoring company, which then collects on the invoices. Again, this comes with a high rate of interest, but if your business needs immediate cash, invoice factoring is available to provide it – at a price!
Merchant Cash Advances
You receive a lump sum in exchange for a percentage of your daily or weekly credit card or debit card purchases. A lump sum may be the most expensive form of business borrowing but does provide you with quick cash when necessary.
Personal Loans & Mortgages
A small business owner always has the option to take out a personal loan or mortgage to fund a start-up, or if his or her business has no credit history or a concise operating history.
Personal loans are useful if all the business needs is $25,000 or $50,000. The owner’s personal credit score will dictate approval and the terms of the loan, and the money is typically available immediately.
The downside is that the owner risks his or her credit rating if the business defaults, and of course, the lender can commence collection efforts against the owner, including a lawsuit.
Another way a business owner can personally finance his or her business is to take a second mortgage out on their home. Again, this comes with a certain degree of risk – if the business defaults on the loan, the owner’s home can be foreclosed.
Microloans
Microloans are what they sound like – minimal business loans, typically $50,000 or less. Non-profits and other organizations offer them to start-ups and minority-owned businesses, or businesses in a disadvantaged community, or businesses meeting the need or the mission adopted by a lending organization.
Microloans are generally low-interest, but businesses applying for a microloan must meet the eligibility requirements of the organization to which they apply. Many such organizations also offer mentoring or training to microloan borrowers.
Shop around – there very well may be an organization offering a microloan to a business owner like you, or a business like yours in your area.
TheSBA Microloan Program
The SBA works with the organizations mentioned above to make these loans available to “micro” businesses such as food trucks, freelance businesses, and seasonal start-ups. An SBA microloan currently has a maximum term of six (6) years.
While the interest rate might be slightly higher than a conventional SBA loan, it will be relatively low compared with other lending vehicles.
Crowdfunding
Crowdfunding is a relatively new way to raise money online, and it stands for conventional business financing on its head.
Traditionally businesses were funded by a few people or institutions contributing large amounts of money to the business. In crowdfunding, the business owner asks many, many people for small amounts of money to fund the business.
There are online services such as Kickstarter and Indiegogo that provide a platform for crowdfunding, and of course, they each take a percentage of what the business is given in exchange for hosting the crowdfunding campaign.
However, if you have an idea or product and have a working model, sample, or template, you can easily offer it pre-production via crowdfunding, take pre-orders during the campaign, and produce and deliver after you’ve been funded.
Peer-to-Peer Lending
Peer-to-peer lending is another relatively new borrowing vehicle. Online peer-to-peer lending services such as LendingClub match lenders with borrowers. The borrowers are categorized by risk, and lenders may choose among them, or packages of available borrowers. Interest rates vary depending upon the risk the borrower will default but can be quite low.
Today a small business owner has many options to fund a start-up, continuing business operations, equipment purchases, real estate purchases, or expansion.
Do your research and be sure you are leveraging your business type, business, and personal credit, annual revenue, and length of time in operation to your full advantage so that you get the least expensive loan possible.
Did You Use the Small Business Loan Calculator?
If you have used the small business loan calculator, then comment below! Also, comment if you are going to take out a small business loan soon or if this guide was helpful. We wish you the best with your business.
About the Author:
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busyPhiladelphia bankruptcy lawyer.
The daughter of military parents, Veronica, lived all over the world as a child growing up and collected experiences and friends throughout her travels. Having developed a taste for international cuisine, she is growing into an accomplished amateur chef – just about every weekend, you can find her in her kitchen, creating ethnic and seasonal farm-to-table meals for her family and friends.
Veronica plays soccer in a recreational league and is a rabid Philadelphia Union and Sky Blue fan. She is committed to social justice and volunteers at a local soup kitchen and as a roofer and framer with Habitat for Humanity. She lives in a renovated south Philly rowhome with her husband John, their two rescue poodles, Connor and Camelot, a full aquarium of African Cichlids, and several rescue cats (the number changes almost daily!).
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