Everything You Need to Know About Small Business Loans

If you're looking to get your dream business off the ground, there are resources to help you get there.

More than $600 billion was dispensed in small business loans last year alone according to the Small Business Administration (SBA), helping entrepreneurs from every niche and industry achieve their dreams. If you aren't sure where to start, we're here to help. Here's everything you need to know about small business loans in 2020. 

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What is a Small Business Loan?

Put simply, small business loans are sums of money paid to a business owner or group of owners by a lender for the purpose of growing a business. Terms vary widely, but this money is typically borrowed with the stipulation that it will be paid back over time with interest. Of course, small business grants differ in that they are often dispensed to business owners without any expectation that they will be paid back, although the recipient may still have to adhere to certain terms. The Small Business Administration is one of the largest dispensers of such loans and grants, although the best small business loans can be found across a variety of major and smaller providers. 

How Do Business Loans Work? 

Naturally, the amount and terms for a commercial loan can vary massively depending on the provider, your location, and the needs of your business. First and foremost, it is essential to know how to write a business plan before applying for a loan, as this is what providers will look at when deciding whether you should be eligible for the money. There are countless business plan examples you can get inspiration from online, but the main thing to know is that you will need to include:

  • your business's mission
  • objectives
  • history
  • financial reports 
  • plans for success 
  • and how exactly you plan to spend the money.

You will also need to record how much you actually want to borrow or receive from a provider. For this purpose, it is best to use a business loan calculator to determine exactly how much capital you require to meet your future goals and objectives.

Types of Small Business Loans

There are many types of small business loans, each of which has widely differing terms and conditions. They are also often tailored to different types of businesses. Read on for the lowdown on all the major types of small business loans. 

SBA Loan 

The Small Business Administration (SBA) is a government agency designed specifically to help business owners and support entrepreneurialism in the United States. They dispensed over $700 million in loans last year in addition to providing expert advice, tax breaks, and legal advice to entrepreneurs in all 50 states. The biggest draw for turning to the SBA for a loan is that SBA loan rates are among the most favorable in the country, with low interest, generous repayment terms, and a high likelihood of receiving a tax-free grant for at least a portion of your capital package.

While a full 80% of SBA recipients go on to lead successful businesses, the application process is rigorous and can feel somewhat grueling. You will need to provide an SBA business plan, which will typically be more detailed than you would need to provide for a market lender.

Your SBA business plan has to include:

  • an executive summary
  • market analysis for your industry
  • an organization and management plan
  • financial projections complete with a fully-costed strategy
  • and a marketing or sales plan. 

Secured Loans

For business owners who would rather not commit to a personal guarantee, a secured business loan offers a straightforward route to financing. Basically, it's a loan that is "secured" by your assets. To access the secured loan, you will be required to put up your personal or business assets as collateral. This can be anything of value, such as commercial property, heavy machinery, or even intellectual property. There are many types of secured loans, which mostly differ in the types of assets they allow you to put up as collateral in exchange for the loan. If you fail to meet your repayments, the lender has the power to seize those assets and sell them to recoup their loss. 

Unsecured Loans 

In most ways, unsecured business loans are simply the opposite of secured loans. These are loans used by businesses and business owners that often don't have any substantial assets to offer as a guarantee. Instead, a personal guarantee from the borrower is needed, one that makes the borrower solely liable for repayment. To access this form of funding, the lender will first have to scrutinize your trading history to estimate your chances of success and therefore your chances of successfully meeting the terms of repayment.

Short-Term Loans 

Short-term business loans are different than standard business loans that are based on debt financing. They usually have a validity of one year or less, meaning that repayment must be made in full during a very short time period. Short-term small business loans are popular with businesses that need short-term, temporary capital injections. These are often seasonal businesses such as hotels, tour groups, and agriculture operations. The process is relatively straightforward, but interest rates will be significantly higher than with longer-term loans, and the pressure to repay quickly is intense.

Line of Credit 

A business line of credit is a popular financing option for those looking to build a comprehensive, long-term capital strategy. They work by providing access to a fixed sum of cash that is to be accessed only when it is needed, often on a one-off or short-term basis. This means that a business that might be planning to, say, purchase inventory or plug a seasonal cash flow gap in the future can take out a line of credit to cover these temporary costs.

Merchant Cash Advance 

A business cash advance is often considered by financial experts to be a lending option of last resort, to be used in cashflow emergencies only. Merchant cash advances are primarily offered to businesses that receive a large portion of their revenues from debit or credit card payments, such as restaurants or retail stores. The lender will provide a large sum of instant funding in exchange for a future cut of debit or credit card revenues, often extracted immediately from your account via direct debit. They also tend to carry hefty interest fees due to the higher risk associated with lending.

Business Loans for Women 

If you're a female entrepreneur, there are countless business loans and grants for women aimed at empowering you to succeed in the world of business. Major market players include Lendio, BlueVine, and FundBox, all of which are dedicated to giving women the tools they need to follow their business dreams. Such loans exist due to the historically low participation of women in the entrepreneurial sector, which explains why the terms of repayment are often much more generous than standard small business loans.

Startup Loan

We're living in the age of the startup, where countless go-getters are hoping to turn their tiny operation into the next billion-dollar unicorn. As such, competition for startup funding is intense, but this is offset by the sheer volume of providers aimed at promoting a thriving startup ecosystem. It is also possible to access grants for small business startup ideas, which can range from anything between $1000 to $1 million. As a startup, you won't need to show your business history to qualify but you will need to sell your idea and explain why it will succeed. 

Accounts Receivable 

Accounts receivable financing, also known as accounts receivable factoring, allows a small business to receive quick injections of capital to deal with short-term needs. They are offered on the basis of accounts receivable - that is, the amount of money you have invoiced clients but have yet to be paid. The amount you receive will usually mirror the sum of these payments exactly, with the expectation that you will repay the loan upon receiving your pending payments.

Business Acquisition Loans 

If you're looking to acquire another business in order to expand your own operations, a business acquisition loan may be the best way forward. You will typically present a plan which explains why you are acquiring another business for yourself and how you expect this to increase your revenues. You will then receive a loan that is calculated based on the value of the asset or assets you wish to acquire. The SBA, banks, and microloan providers all offer access to business acquisition loans. 

Equipment Loans

As you may have already guessed, equipment loans exist to provide business owners with the capital needed to purchase specific equipment related to their business activities. This could include a company car, IT infrastructure, an industrial oven, or construction tools. You simply need to set out a plan explaining why you need equipment financing to purchase items and why doing so will benefit your company or help it to grow. Repayment is often expected to be carried out within a short time frame.

Construction Loans 

Similar to equipment loans, commercial construction loans are designed to give businesses the resources they need to construct property or infrastructure that is relevant to their business activities. Construction business loans cover many areas but are most often applied in order to cover the building of new business premises, commercial add-ons (such as an expansion of a cafe), and infrastructure such as a parking lot. 

Invoice Factoring 

Similar to accounts receivable financing, invoice factoring aims to plug cashflow gaps experienced by delayed payments via your pending invoices. Essentially, you sell your invoices to invoice factoring companies for a discount and receive an immediate cash advance that may be worth up to 90% of the expected payments from customers. This option should not be considered a business loan per se, as it is more of an option for those in need of quick cash to plug temporary gaps.

Agriculture Loans 

Agriculture loans exist exclusively for traders involved in the farming sector, which also happens to be one of America's most sizeable industries. They often take the form of agriculture farm equipment loans, which are designed to allow farmers and farm holders to purchase the vital equipment they need and pay back later, often with low-interest rates. Anyone interested in pursuing agriculture financing should approach a reputable agricultural lender such as the Farm Credit Services of America, as there are a lot of exploitative sharks in this sector.

Commercial Truck Loans 

Commercial truck loans are simply financial products that allow you to buy a truck (or a car or van) for your business. A truck finance scheme can be used if you are a sole trader looking to become a trucker, or if you require a heavy-duty vehicle for your business duties (e.g. if your business relies heavily on cross-country shipping). They can also be used to cover maintenance and day-to-day expenses for running and using a truck or fleet of trucks. Such loans come in all of the forms explained so far on this page. 

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OnDeck 

Merchant cash advances are perfect for businesses that take a high proportion of their sales through card payments but aren’t cash-rich in assets. If you need instant access to finance, OnDeck’s merchant cash advances are a great alternative to loans that provide quick payout, with the money usually in a borrower’s bank account within 24 hours of approval. OnDeck is 100% committed to only providing the best financing solutions to businesses with truthful and transparent information. The company was created to help address a problem affecting many small business owners: a lack of instant access to capital. Merchant cash advances are often one of the easiest ways of getting access to the funds that you need.  

However, because the qualifying criteria for a merchant cash advance is much lower than a traditional loan, interest rates can be much higher. Merchant cash advances will also not help build or strengthen a business profile, so it’s important to know the implications of a merchant cash advance before you proceed with taking one out. OnDeck should certainly be your choice for this type of credit, however. 

SmartBiz 

Applying for a Small Business Administration (SBA) loan can often be a long and complicated process, but not with SmartBiz. Its streamlined application process alongside support from its dedicated team makes accessing the funds you need to ensure the continued growth of your business a lot easier. One of the reasons SBA loans are so appealing is because of their low-interest rates and long-term payment terms. SmartBiz is a trusted provider of SBA loans we can recommend, starting with interest rates varying between 4.75%–7.00% for loan amounts between $30,000–$5 million with repayment terms ranging from 10–25 years. These rates will depend on your credit history. 

With a passion for helping small businesses succeed, you can trust the advice that SmartBiz offers. Taking out a SBA loan with SmartBiz means you can say goodbye to the time that you’d have traditionally wasted jumping from bank to bank for a loan application. Instead, SmartBiz can process your application in just five minutes. 

Funding Circle 

Funding Circle lends exclusively to small businesses, with affordable rates, no fees for full early repayment and loan amounts ranging from $25k–$500k. With a belief that small businesses should be protected from unfair and deceptive financial practices, Funding Circle operates as founding members of the Marketplace Lending Association (MLA) to protect borrowers. Also, the company co-wrote the Small Business Borrowers’ Bill of Rights to help small businesses benefit from the lending market. 

This level of commitment to small business owners has led to Funding Circle becoming a trusted name amongst women-owned small businesses in particular, making it easy for female entrepreneurs to grow their business with affordable loans. With research showing over 25% of women entrepreneurs don’t seek loans because they don’t think they’ll be approved, Funding Circle is going above and beyond with its commitment to helping female business owners access the finance they need.  

PayPal 

If you’ve ever sold or bought anything online through eBay or other popular seller websites, PayPal is probably a name you’re already familiar with. But did you know PayPal is also one of the best lenders out there for start-up loans? PayPal makes funding simple with a quick and easy application process that can give you access to the finance you need within just a few minutes, paid directly into your PayPal account. It’s the perfect choice for businesses that are already making an impressive number of sales through their PayPal account, as approval is based on your PayPal sales and account history. 

There are no hidden fees either – just one fixed fee with no interest or other fees whacked on top. The minimum cash amount you can receive is based on your PayPal sales volumes and projections over the coming months and years. Repayments are made through a percentage of each future PayPal sale once your loan has been granted. PayPal is the perfect choice for a start-up loan for any rapidly expanding e-commerce platform doing the majority of its sales through this platform. 

BlueVine 

When businesses secure new contracts but are invoiced upfront, finding the finance to pay for that invoice can be difficult. Thankfully, BlueVine’s invoice factoring allows you to fund what you need, when you need it, without long term contracts. Applying online for invoice factoring through BlueVine takes less than ten minutes and you can expect to hear back about a decision within 24 hours. It’ll provide between 85-90% of the money in full, with the rest of the money being lent once your invoice is paid. 

Cash advance invoice factoring through BlueVine means you’ll never have to waste your time manually filling out and scanning paper forms whenever you’re applying for invoice factoring. BlueVine streamlines the factoring so you can log into your BlueVine account and select the invoices you want for funding. With rates as low as 0.25% per week, you can get an advance of up to $5 million on your invoicing.

How to Qualify for a Small Business Loan 

If you're wondering how to qualify for a small business loan, bear in mind that there is no surefire way to do so. Qualifying for a business loan not only requires a solid business plan in most cases; it also requires a solid character. Loan providers are within their rights to do their due diligence to ensure that you are stable, responsible, and possess plenty of business acumen. You will also benefit from an existing history of successful business activity, as well as a proven ability to repay loans. Finally, qualifying for a small business loan will often require a top-notch credit score, so make sure to build this up before applying.

How to Apply for a Business Loan

If you're in the early stages of searching for financing and don't know how to apply for a small business loan, don't panic. The process may differ vastly from lender to lender, but the key steps are pretty universal. You will first need to check your eligibility before even contacting a loan provider. You likely need to apply for a business license if you haven't already, as most providers will not consider you if you don't have one. You will need to have a solid business plan, which will be attached as part of your application. Many business loan apply processes can be done online these days, which means that the process is much more straightforward than it used to be.

Business Loan with Bad Credit 

If you happen to have a poor credit score, there are bad credit business loans designed to help you out, although these are never available as SBA loans. Of the options mentioned above, accounts receivable, invoice factoring, and merchant advances are all popular small business loans bad credit options. Those wondering how to get a business loan with bad credit should know that many schemes charge very high interest rates, as your poor credit score makes you a riskier customer. If you would prefer to know how to get a small business loan with bad credit that is not as punishing, make sure to check our website to find out what options are provided by reputable lenders with a good reputation. 

Conclusion 

Small business loans are the lifeblood of the American economy, catalyzing innovation for over a century. Small loans can be accessed by all types of businesses in a huge variety of formats. Whether you're about to launch your dream startup or just need to plug your current cashflow problems, there is a wealth of financing options available to you. Browse the rest of our site to find out more about each of these options.

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