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What are Small Business Loans?

Small Business Loans is a term that’s used to describe groups of loans or financial products that lenders can choose to provide to small businesses. These loans can help finance a startup, provide the money to purchase a business’s equipment and real estate, and can also provide the funds needed in order to expand an existing business.

Some examples of the financial products that are provided with small business loans are working capital, merchant cash advances, business lines of credit, small business credit cards, business term loans, short term loans, SBA loans, and startup business loans.

The decision leading to a small business loan will rely on a few things, including, but not limited to:

  • A business or individual’s credit score
  • The interest a business or individual has made
  • The amount of time the company has been in business

Startup business loans, on the other hand, rely on the personal credit history of the intended owner.

Small Business Loans are essential for growth and wealth later on into the future, for both owners and their employees. And to put it simply, more money for a business leads to more employees being hired as a business grows.

Thanks to this continuous growth and the proven results business loans online have brought for many people today, there are even more loan options available to choose from now than ever before.

How to Choose the Best Business Loan for a Business or Startup

It’s important to learn about the different types of business loans online that you can choose from when moving forward in your application process.

Fast Small Business Loans

Term Loans are the most common type and what people think of first when they’re pursuing a Small Business Loan. They both have similar characteristics. A “term” is the time period in which you’ll be making recurring payments. A typical loan term with a bank can be anywhere from four to 10 years. In some instances, it can be even longer. The purpose behind your loan may help determine the term.

Term loans are usually taken to make purchases on real estate or equipment. The goal is to expand a business. That can be in the amount of land or the inventory a company occupies. The goal is fulfilling a business’s needs and providing money so that a company may grow or so that an individual may finally be able to start a business of their very own.

These kinds of purchases are considered investments due to having an impact on the future growth of a business. This means they can also have an impact on how long the term may turn out to be.

Although it’s not the only option, many business owners will turn to a bank when they’re looking to apply for a small business loan. Maybe they already have some accounts open, or they feel a personal connection to the bank. The bank could also be well trusted when it comes to wealth management. Although pursuing a bank is common, it’s best to look at all your options and compare rates.

A term loan is also a good option for people who feel a strong connection to a bank or meet the bank’s standards and criteria as they have the likelihood to receive lower interest rates. Periodic Term Loan payments are a combo of said interest and the principal balance. More of the interest will be paid at the beginning and vice versa with your principal balance.

Applying for a term loan will be a process that will take weeks or months. In order to apply for one, you’ll need to visit a bank you trust and meet your assigned banker. You’ll then need to fill out and submit an application.

An SBA Guaranteed Loan is subsidized by the government and has become a favorite due to its appealing rates and terms for loans. The government agency it’s backed by is the Small Business Administration, known for offering support to smaller businesses. The SBA works with lenders like credit unions, banks, and charitable organizations to provide a fraction of loan payments to these businesses.

7(a) loans are the SBA’s lending program and through 7(a) loans, the SBA is able to provide 85% of loans in the $150K region and 75% of anything higher than $150K. Because of 7(a), these loans can be used towards creating new businesses, growing existing businesses, new construction, a business’s capital, and refinancing existing debt.

In addition to 7(a) loans, the SBA has a few other loan programs. Express Loans allow for a response in less than two days after completing and submitting a loan application. The SBA is able to provide 50% of a loan up to $350K. Microloans are made by single lenders instead of unions or banks. Small businesses that are new or expanding may receive up to $50K with their loans. The 504 loan gives businesses financing for a longer amount of time, with a fixed rate.

These loans are mostly beneficial for businesses that are looking to expand or evolve and are provided by Certified Development Companies. Disaster Loans are loans with low-interest rates to be used to help repair property, inventory, or equipment that have been destroyed or damaged in a disaster. They are also the only program by SBA that is not only for small businesses but for bigger ones as well.

The other two types of fast loans are Commercial Mortgage and Business Acquisition.

A Commercial Loan provides funds to purchase or renovate properties like offices, warehouses, and retail spaces. Business Acquisition Loans provide capital to buy an existing company or to start a new franchise.

Then there are loans where you can receive financing in a matter of weeks. Business Lines of Credit provide credit that is always available and has no set amount of time. They’re very much like credit cards in that you are charged interest for the money you take out. There is financial independence in this type of situation, but it’s important to keep track of how much you spend. Startup Business Loans are geared towards startup businesses that have very little business history and are based upon personal credit history instead. Equipment Financing is provided to help a business afford equipment and inventory like office supplies or warehouse equipment.

Finally, there are loans where you can receive financing in days. With a Merchant Cash Advance, you can receive the funds you need as soon as possible, as long as you agree to give the lender a fraction of your profits from commerce. Business Credit Cards are a great option if you don’t need a lot of cash. They may also build up your business’s credit history, which will help with getting loans in the future. In Accounts Receivable Financing, or Invoice Financing, receivables are sold in exchange for more money going to the operations of a company. This type of method is also known as factoring.

If none of these actions seem feasible or you feel acquiring a loan through a bank is not right for you, an alternative way to go is through online lenders with Peer-to-Peer Lending. This method offers a connection with investors who have come together to form a loan portfolio. Your provided loan is branched out among multiple investors. Another alternative is through Direct Lenders, whichare companies that fund with capital, without using a bank or a middleman.

How to Apply for Small Business Loans Online

Before applying for a loan, there are steps you should follow in order to best prepare.

1) Anticipate the amount of funding you will need. Look over your expenses and come to a conclusion over the amount of a loan payment you’re able to afford. You can determine this by going over your Debt Service Coverage Ratio. Lenders will typically prefer a 1.0 ratio.

2) Look over your credit score. Review to make sure there aren’t any errors and identify the areas where problems may arise. Any errors or problems can lower the likelihood of getting approval. They can also hurt your credit score.

3) Compose a solid business plan. This will show lenders the foundation of your business and how profitable it will prove to be. It’s very important to show a strong business venture and a business plan that is on track. A business plan should start off with a basic summary of your company. Then, it should include:

a) a description of your products or services

b) the team behind the business along with skills and backgrounds

c) your target audience and the current market

d) any plans with your sales or marketing

e) a financial breakdown of your expenses and an estimate of the ultimate cost to grow your business

f)an appendix of any documents or resources that are related to your plan

Below are the summarized steps to getting a loan for your business venture.

1) As briefly mentioned before, determine the amount of money you will require from a loan. This is where a business plan will serve you greatly because the lenders you speak to will want to see that the money they provide will be used wisely. Plus - determining the amount of money and creating a business plan for yourself will keep you on track and help your business grow.

2) Make a decision as to which of the loan types will be best for you. Once you figure out the amount of money you will need, you can determine which loan type will best suit your business venture.

3) As mentioned, review your credit score. It’s a good idea to look over both your personal and business credit scores. Keep note that if you’re just starting your business, there won’t be much credit history. If your business is a sole proprietorship, there will be a focus on your personal credit score. Once you’ve had your business for a while, your personal credit won’t matter as much, but it’s always wise to continuously review over your credit scores and make sure no errors or issues arise.

4) Gather together any documents you may need. Check with your lender to see what documents and information they will need from you for your application. Banks will typically be the most demanding of information as they will ask for financial statements and projections as well as bank statements. Other things they could ask for are your tax returns and your lease or license.

5) Estimate your collateral. Setting up collateral will help greatly with securing a loan. Collateral can include things such as equipment, property, inventory, or vehicles. If you don’t have any collateral, you can use personal assets instead. This could include things such as your home, jewelry, tools, fine art, and your savings account. It’s important to think about what you’re putting up as collateral as you don’t want to make a decision you’ll regret.

The next thing to do is apply for a business loan online. Listed below are the documents and personal information that will be asked for when you’re filling out your application and speaking with your lender.

Your Background and History. This can include:

  • any addresses you’ve lived at
  • any of the names you’ve had in the past
  • any felonies or criminal records
  • the education you’ve had

Your Resume. Here you should include the roles and positions you’ve taken on before, as well as any experience you’ve had running or managing a business.

Your Business Plan. This should be a general outline for your business and essentially presenting your business itself to your lender.

Any Tax Returns. You’ll likely be asked to bring any tax returns from over the past three years.

Your Loan History. You’ll be asked to provide a history of any loans you may have received before.

Your Bank Statements. Most lenders will ask you to bring in a year’s worth of bank statements.

Any Collateral. This applies if you’re bringing in any collateral or personal assets, as mentioned before, in preparation to get a loan.

Your Reason For a Loan. Lenders will want to know exactly how you plan on using the loan they may give you.

Your Debt Schedule. Lenders want to know about any outstanding amounts of credit or loans for your company, as well as your company’s payments every month and any interest or upcoming dates for payment.

Your Legal Documents. Your lender may ask for the following:

- Your Business’s License or Registration

- A Copy of Your Lease

- Your Certificate of Formation

- Copies of Any Contracts You Might Have

- Any Franchise Agreements You’ve Made

It is important to weigh the good with the bad before making the decision to apply for a business loan online.

Advantages

  • Allows you to invest in assets that may bring value to your business for a long time. Assets will also help with increasing revenue. Examples of these assets are new equipment or property.
  • Loans may help grow your business without rapidly losing capital.
  • You’ll have a better time managing your cash flow. Accounts Receivable Financing and Business Lines of Credit can help with meeting your capital needs.
  • Getting a loan for your business will help with building your credit score. Business lines of credit can help build a better credit history.
  • Applying for Small Business Loans or Business Loans Online is relatively simple and straightforward to do. It’s mostly a matter of filling out forms and providing bank statements.
  • You’re not required to share your future profits with your lender. Lenders do not have any direct claims on the money you’ll make, besides what you agree to pay them in fees and interest, as outlined in the loan agreement.
  • A lender will not make any management decisions for you. The lender’s main interest is that you’re complying with all terms of your loan.
  • A loan may provide tax benefits. Any interest you’re required to pay on a business loan will generally be deductible from your taxable income.

Disadvantages

  • Maxing out any lines of credit will have a negative impact on your credit score. The lower your credit score gets, the harder it will be to get a loan.
  • There’s a possibility the terms necessary for a loan won’t fit what you need or what you are looking for. In this case, you should focus on improving your credit score and then reapplying again in the future when terms are more agreeable.
  • If your business constantly has cash flow problems, it’s not likely you’ll receive approval for a loan. Even if you receive approval, you’ll be asked to pay large interest rates, and you may struggle with repaying your loan.
  • Repayment can lower your cash flow. The money you pay back could have instead been saved for future investments.
  • It’s not likely lenders will change or amend the terms of your loan if you ask. If they did agree to it, they would likely ask for things in return like higher payments or more management in how you spend your cash.
  • Lenders are not your friends or your business partners. If you experience any trouble, their goal will be to protect the money and your repayment.

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Compare rates from trusted providers

Company name Terms Funding Amount
Fora Financial Up to 18 months Up to $500,000
Credibly Up to 17 months Up to $250,000
BlueVine Up to 12 months Up to $200,000
LendRev Varies by funding type Up to $500,000
EasyFunding Up to 24 months Up to $350,000
Imperial Advance Varies by funding type Up to $1,000,000
RapidAdvance Varies by funding type Up to $500,000
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The offers that appear on OpenLoans.com are from companies from which OpenLoans.com receives compensation. OpenLoans.com does not make loan offers, but instead pairs potential borrowers with lenders and lending partners. We are not a lender, do not make credit decisions, broker loans, or make short-term cash loans. We also do not charge fees to potential borrowers for our services and do not represent or endorse any particular participating lender or lending partner, service, or product. Submitting a request allows us to refer you to third party lenders and lending partners and does not constitute approval for a loan.