The coming of covid-19 saw many businesses struggle due to the lockdown and are yet to recover from their losses, and it is the small businesses that suffer the most due to their apparent instability even before the virus outbreak.
This gives weight to this article as lots of business owners want to take a loan but do not know how to.
You have come to the right place and I am going to be showing you the types of loans suitable for business, how to apply, and the requirements for the loan application as well as ranking these lenders. Shall we?
A loan is the lending of money by either an individual or businesses to another individual or businesses in which the borrower pays interest on the principal till repayment is complete.
A legal contract binds both party and the document could either be online or offline depending on the source of the loans. A business loan is specifically for business purposes.
Type of Small business loans
#1 Terms loans
This is a loan given to businesses over a varying time. However, its main purpose is to procure assets for the running of the business. T
his loan provides a lump sum of cash at once so that a business can buy a vehicle or open additional stores for production expansion. The loan is repaid for a year upward.
Businesses take this loan because it provides the flexibility to repay over a long period while lenders give out this money because they expect such businesses to increase profit over time, thereby enabling them to pay back the money they borrowed.
Businesses also prefer this loan because:
- Low-interest rate
- Specified payments (amortization)
- Simple application Process
- Receiving an upfront lump sum of cash
Read: Loan Amortization | Expert Guide
Types of terms loans
Short-term loans: offered to firms without a credit score and it runs for 18months at most
Intermediate-term loans: Run between 1 to 3 years and it is repaid from the firm’s cash flow
Long-term loans: span between 3 to 25years and company assets are used as collateral. It requires monthly or quarterly repayment from profit or cash flow.
#2 Small business administration loans
Small business administration (SBA) is a U.S agency established in 1953 to bolster the economy by assisting small businesses.
This agency doesn’t lend money; it serves as a bridge between lenders (community development organizations, micro-lending institutions) and small businesses.
This allows businesses to have easy access to funds. Advantages of SBA loans include:
- Good rates and fees compared to other loans
- Continued support to help run your business
- Lower down payments, flexible overhead requirements, and no collateral needed for some of the loans.
The application process is quite slow; around 3months but if you are not in urgent need of cash; it is worth the wait with its low interest rate.
#3 Business lines of credit
Small businesses face trying times and the availability of cash at that moment is crucial to their survival.
A business line of credit provides predetermined instant access to cash for businesses in which they can pay back anytime.
This is very similar to a credit card loan as there is:
- limit predetermined in each case
- ability to pay back at any time without accruing interest
- once paid, the original amount is available to be borrowed again, it is revolving
It is different from terms loans in the sense that terms loans are lump-sum loans that you use once and repay once with interest while you can always draw funds from your business line credit until you reach the limit.
There are two types of a business line of credit:
- A secured business line of credit allows the lender to ask the borrower for a pledge in form of collateral (company assets) and since this is a temporary loan (a quick fix) the borrower may accept inventory or accounts receivable.
- An unsecured business line of credit: widely preferred by businesses opting for this option as collateral or pledge is not required. This puts the lender at a huge financial risk as there is nothing to impound if the borrower defaults on payments. Though this type has a lower limit and a higher interest rate compared to the secured line of credit.
#4 Equipment loans
Business needs equipment and machinery to survive and purchasing them outright can be cost-intensive so lenders give out loans very fast and at a generous rate to finance equipment for small businesses.
Lenders give out the loans about 80% of the cost price of the equipment and the small business owner comes up with the remaining 20% in most cases.
However, the equipment in mention will be the collateral.
Read: Motorcycle Financing In 2022: 6 Best Loans To Access
#5 Invoice factoring and invoice financing
They are alternative lending solutions that help businesses get the money they deserve.
Many businesses get paid late and many face crises because of their unpaid invoices; so they secure a loan on account of the outstanding receivables.
The lender usually provides 80-90% of the amount receivables and when the business receives the payments, the loan is paid back with interest to the lender. In this case, the invoices are collected by the small business and paid to the lender in contrast to invoice factoring.
In invoice factoring, the lender purchases your outstanding invoice paying you a certain percentage upfront. They then proceed to collect the money from your debtor in which they balance you the remaining percentage after deducting the interest agreed by both parties.
A typical example is this: Company C owed your company $10,000 and you require money to pay your staff, then you factor your invoice to a lending company who gives you $8,000 to pay your staff. They proceed to get the debt from company C and paid you a balance of $1,500 where the $500 is the amount agreed by both parties as interest and service fees.
#6 Commercial real estate loans
A commercial real estate CRE is an income-generating property used for business only and not residential property; for example hotels, shopping, and office complexes, and so on.
A CRE loan might be sought by small businesses seeking to purchase, expand or renovate their sites. A real estate company can secure a loan to buy a property in which is rented out. The rent is used to finance the loans until the resale of such property.
This loan is structured differently unlike other loans. There is a loan period of let say 7years and amortization of 30years. The borrower pays back interest on the loan as if it is for a 30years period (low interest) and then makes a balloon payment at the end of the seventh year.
They usually accomplish this balloon payment by selling off the property which by now would have greatly appreciated after 7years. Just the amount of money borrowed will be paid back and the appreciated monetary value is kept by the borrower.
#7 Micro loans
They are very small loans with low interest made available to self employers, sole proprietors, and new start-ups with few employees.
They are used to start or grow a business; mentorship, training, and assistance are also provided by the lender.
Micro loans work like other loans expect microloans are not offered by banks rather by individuals, non-profit organizations, or alternative lenders.
They can be used for:
- Purchase inventories or supplies
- Payroll or training
- Recurrent expenditure
- Funding a new plan
#8 Merchant cash advances
This is alternative financing for a new start-up that is not yet qualified for the loan. It is a form of cash advances in which lenders take a part of your future profits.
It is very convenient and can be gotten in 1to 2 days. However, at a very high interest rate.
Read: USAA Career Starter Loan: Know This Before You Take Loans In 2022
What do I need to apply for loans?
Application forms: This is the form the lender uses to collect your business and personal information. Prepare answers for questions like:
- Reason for application
- How it will be used?
- What do you need to buy and from who?
- Do you have any other debt? And to who?
- Members of your management team
- Personal background
Resumes: Some lenders want to know your business experience especially for a start-up company.
Business plan: all lenders require a sound business plan that shows the financial expectation, cash flow, balance sheet among others. This will enable the lender to decide if your venture is worth lending money.
Business credit report: will be needed if you are already in business. A personal credit report will also be required as the owner will be signing an agreement on behalf of the company to pay the loan back; he/she must have a good credit record.
Income tax return: Reports that show you have been paying your tax for the past three years are required in your loan application.
Financial statements: A bank statement for the company and the owner is required for several loan applications.
Account receivable and account payable: Borrowers should make available accounts from which the loans can be received and paid.
Collateral: loans have varying requirements for collateral and it depends on the number of loans and the risk involved. A strong business plan can help you waiver collateral but just in case, prepare the document of the property that is equivalent to the loan you want to get.
Legal documents: you may need one or two of the following documents =s depending on the lender:
- Articles of incorporation
- Commercial leases
- Franchise agreements
- Business licenses and registration
How to apply for loans
- Determine if you qualify for a loan
- Decide which type of loan you need for your business
- Compare small business lenders
- Gather your documents
- Apply for the loan
What prevents you from getting a loan?
- no business plan
- bad credit history
- no collateral of cash flow
- General apathy or disorganization.
Read: What Is Super Jumbo Loan? Rate And Loan Limit
Best small business loans in 2022
- Invoice factoring and credit lines: BLUELINE
- Short term loans: ONDECK
- Quick approval: FUNDBOX
- Lower interest rates: FUNDING CIRCLE
- Borrowers with bad credit: NATIONAL FUNDING
- Healthcare professionals: TDBANKS
- Fast funding: BIZ2CREDIT
- Best marketplace: LENDO
- Best for features and resources: FUNDERS
Frequently asked questions about small business loans in 2022
Small business administration loans
Invoice financing or factoring
Commercial real estate loan
Merchant car advances
Business lines of credit
Personal and business credit score.
680 and above
Yes, a business owner who signed for a loan will be held responsible if they default.
Small loans have always been a messiah even before the virus outbreak and it is paramount now to provide useful information on how and where to get these loans.
- Wikipedia: Business Loans
- Investopedia: Types of terms loan
- SBA: Loans
- Fundbox: Lines credit
- Kabbage: Equipment loans
- Fundera: Invoice factoring vs Invoice Financing
- Money: Small business loans.
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