If you Google® "small business loans" you'll get over two billion results! But don't get overwhelmed. With a little research, you can determine the best way to secure funding for your business.
This simple guide outlines different types of loans available, and tips to help you navigate a small business loan application. With the right loan, you may better set your business up for
What is a business loan?
Let’s start with the basics of a business loan and the different ways they can be structured.
No matter what type of loan you apply for, your goal should be to secure the lowest-cost funds available. You may also want to strive for long terms as well since that typically leads to lower payments.
Note that if you have strong credit scores, you may be able to get a lower cost loan faster.
A business loan is a loan that is specifically intended for business purposes. In general, it's a debt to be repaid with added interest. Business loans may be structured in the following ways:
Secured loans - Secured loans are backed with collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.
Unsecured loans - An unsecured business loan — or a line of credit — is issued and supported by the owner's creditworthiness, rather than by any form of collateral. For this type of funding, a small business owner must have good personal credit to be approved.
Long-term loans - Long-term business loans are lump sums of capital paid back over a set period — typically from three to 10 years. Some loans, like SBA commercial real estate loans, have even longer terms of up to 25 years. SBA loans offered by banks in the SmartBiz® network have a 10 year term. Long-term loans are usually repaid monthly with payments that remain fairly constant over the course of the term.
Short-term loans - A short-term business loan provides a lump sum upfront to a borrower and has a repayment period ranging from three months to three years. The short repayment period means this type of financing is best to manage a pressing cash flow gap, an emergency, or immediate financing needs.
Variable-rate loans - With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can rise, your monthly payment can also go up.
Read here to learn how the monthly payment for a variable-rate SBA loan might be impacted in light of the recent rate hike.
Fixed-rate loans - Fixed-rate means the interest rate on your loan does not change over the life of your loan.
Types of business loans
Step away from Google! Here are the most popular types of loans to help spark business growth and savings.
All loans are not created equal. The stronger your business’ financial profile and your credit score, generally, the better rates and terms you’ll qualify for. Here’s a detailed list of the types of loans you may be able to secure for your business.
Bank term loans
These loans work like long-term loans, except that they need to be paid back in a shorter period of time.
They typically offer smaller amounts and may have higher annual percentage rates (APRs). Although they may be quick and convenient, short-term loans may be more costly than other options.
One reason you may want to take out a short-term loan is to build your credit. Paying back on time in full may give your credit score a boost and make it easier to qualify for longer-term loans in the future.
Another reason is to jump on a business opportunity, like buying inventory in bulk, as these loans generally take less time to fund.
Learn more about short-term (2 to 5 years), bank term loans available through the SmartBiz® bank network.
SBA 7(a) loans
If you qualify, the Small Business Administration’s low-cost loan programs may be your best option. SBA 7(a) loans have low rates, a 10-year term, and low payments to fuel stability, growth, and savings.
An SBA 7(a) loan may be used for various purposes:
Working capital can be used to purchase equipment, add marketing programs, cover operating expenses, or hire additional staff.
Learn more about working capital in small businesses.
Debt consolidation loans
To get up and running, a business owner might have relied on expensive debt.
An SBA 7(a) loan can typically be used to refinance merchant cash advances, short-term business loans, high-interest business loans, daily or weekly payment loans, or business credit cards.
Learn more about refinancing your business debt.
Commercial real estate
You may refinance an existing commercial real estate mortgage or purchase a new space for your practice.
Learn more about commercial real estate loans.
Learn more about SBA loans and the SBA 7(a) loan program.
Business lines of credit
A business line of credit allows you to borrow funds up to a limit based on your credit, typically smaller than a term loan.
You generally only pay interest on the amount you use, and you may continue borrowing as necessary until you reach the set maximum. These loans are usually unsecured, meaning that you typically won’t have to provide collateral to qualify.
Learn more about the pros and cons of small business lines of credit.
Business credit cards are revolving lines of credit. The main distinction is that they don’t terminate once the predetermined limit is reached. They work like personal credit cards, with varying spending rewards and offers depending on the lender.
Learn more about the pros and cons of business credit cards.
Merchant cash advances
A merchant cash advance (MCA) is most often used by businesses that accept credit and debit card sales.
You receive a specific sum in advance that is repaid either by a percent deduction from daily transactions or through daily or weekly payments. Keep in mind that MCAs often lead to extremely high annual percentage rates. Even the minimum within the range can be several times larger than term loan annual percentage rates and may reach up to well over 300%.
Check out this resource to learn what you need to know about an MCA.
An equipment loan is a form of small business financing that is used for equipment purchases.
If you don’t want to purchase an item upfront, you may be able to use the funds from the loan to expense the cost and then repay the principal over a longer period. This enables you to divide up the cost into more manageable payments.
Invoice factoring and financing
Invoice factoring is not a loan in the traditional sense.
Instead, you sell your customer invoices to a factoring company in exchange for a specified sum. They take care of collecting the payments, which means you may receive funds more quickly.
Invoice financing is slightly different.
You maintain control of your invoices and use them as collateral when applying for a short-term cash advance rather than selling them to a factoring company.
How can you use the funds from your small business loan?
Some lenders have restrictions on how business owners can use funds from a loan. Be sure to check with your lender to make sure you can use the funds for what you need.
Here are six ways funds may be used to support your business.
From payroll to rent to marketing, the cost of daily operations can add up. A working capital or a small business loan helps make cash available for business owners to better manage their expenses and any business fluctuations.
A working capital loan may be a great tool, especially for businesses that experience extreme changes due to seasonality.
Equipment or machinery purchases
Whether you need to purchase new equipment or replace an aging piece of machinery, a business loan may help you get what you need.
Stock up on inventory
A small business loan can be used to help small business owners buy inventory in bulk. This may help keep shelves properly stocked and allows you to potentially take advantage of discount pricing for bulk orders.
Debt refinancing is a strategy of replacing one or more loans with an entirely new loan, ideally one with better rates and terms.
The new loan will pay off the expensive loan, leaving you in a better situation. Refinancing is an excellent way to save money.
Do you need to bring on additional staff or hire outside contractors? You can use your loan to help fund your payroll.
Do you need to increase your brand’s visibility? Using loan proceeds for marketing may help.
You may be able to use allocated marketing dollars for advertisements, social media promotions, website enhancements, and more.
How to apply for a business loan
Most business loan applications are similar, but they may vary from lender to lender. Here are some tips to consider when applying for a loan to improve your chances of qualifying:
When you find a lender, several important financial documents will be required.
This may vary depending on the lender. It’s a good idea to work with an accountant or bookkeeper to help you gather paperwork. Note that if you have strong credit scores, you may be able to get a lower cost loan faster.
Here are the documents you’ll typically need when applying for a business loan:
- Business tax returns (3 years)
- Income statements (year-to-date)
- Balance sheets (year-to-date)
- Schedule of liabilities (list of all business debt)
- Personal tax returns (3 years)
- Personal financial statement
2 important loan application tips
Protect your credit score
Avoid putting in multiple applications as your credit could lower with each inquiry.
Find a lender who does an initial “soft pull,” also called a “soft inquiry” of credit. Bad credit may sink your chances of qualifying for low-cost funding.
Learn more about the differences between hard and soft pulls of credit.
Work with a lender who values transparency
Unfortunately, not all small business lenders are transparent.
Confusing language and calculations may result in paying much more than you think you signed up for. Make sure you work with a financial professional who is responsive and clearly answers all your questions.
Stellar customer service is generally key.
What you should ask when comparing financial options
How much do I want to borrow?
Look at your business plan to determine where you currently stand and where you want to go. Create financial goals and speak with your accountant to nail down an amount. Look at the cost of the loan and all fees to get the true cost.
When do I want to repay the loan?
Long-term loans generally have the lowest rates and take 10 years or more to pay off. If you’re in it for the long haul, long-term is typically best. If you plan on an early payoff, check with your lender about penalties.
Adding it all up
There are generally plenty of business loans available. The right one for your business depends on several factors. Look at your personal and business credit scores, business finances, time in business, and how you want to use the funds.
Once you’ve determined your needs, you can use SmartBiz to get a team of dedicated professionals who will guide you through every step of the loan application and qualification process.
We get to know you and your business and make sure you understand your financing options — whether that’s an SBA loan, bank term loan, or something else.
The best part? We’ll help match you with the bank most likely to approve your application.*
See if you pre-qualify today and get ready to fund your business dreams.