Set an appointment with a potential lender to determine how to get a small business loan in New York. Ask about requirements and assess your qualifications.

If you make it in the Big Apple, you can make it anywhere. Perhaps it is because one of the biggest economies in the US is New York, bringing in nearly 2 trillion dollars in gross state product in 2021.

According to the Small Business Administration, 99 percent of businesses in the state, or over 2 million businesses, are small businesses. Over 200,000 across the five boroughs employ more than half of New York city’s total workforce.

But in this very large scale of economic activity, you might wonder, what would qualify as a small business? For the state of New York, it is a company with a maximum of 100 employees. At the same time, the Small Business Administration considers those with a workforce of 500 or less under the small business category. It is important to note this criterion because you may or may not have access to small business funding based on how a particular lender will categorize your business.

Small businesses in New York

While operating a New York small business may seem like a good position, it is not without challenges. You have the high rent, strict regulations, a dizzying number of fines and taxes, and rising employee wages. Hence, small business owners will have to resort to business financing tools at some point, which usually comes in the early stages, to deal with such hurdles.

The state shows its support with the availability of small business loan options and federal programs to help New York businesses succeed. Securing a small business loan in NYC can supplement your working capital to pay bills, cover business expenses, purchase equipment, carry out leasehold improvements, or invest in advancement tools. These things are possible without employing cost-cutting measures that may impact your small business services.

Look for small business funding near you

So you want to know how small business owners can get loans in New York. Let’s begin with discovering what funding options are out there. There are several small business loan types available to you like the following.

Term loans

When you need straight-up funds, you can get them from term loans offered by traditional banks and alternative lenders. They are released in a lump sum and repaid with interest in monthly installments within a specified period. Lenders will require collateral for more substantial amounts.

Small Business Administration SBA loans

SBA loans come in different variants, such as term loans, available in accredited banks and lending organizations. The beauty of their loans is that SBA itself guarantees up to 85 percent of the unpaid loan balance if the borrower defaults. Most of these loan offerings will entail a longer processing time and submission of business documents and financial statements. However, their small business loans usually offer the most competitive rates.

Lines of credit

A business line of credit is a pool of set funds on standby that small business owners can draw at any time. Interest charges are based on the drawn amount, with a minimum payment due. Like a credit card, you replenish this pool depending on your repayments; hence, it has no specific loan term. However, you have to be conscious of how long it takes you to repay as it charges a higher interest.

Equipment loans

While other loan types may be used for various purposes, equipment financing is obvious; it is targeted for equipment purchases. This equipment, either heavy-duty machinery or industrial apparatus, automatically becomes the collateral for the transaction. The lender may cover up to 100 percent of the purchase price, while others would require a downpayment between 15% and 20%.

Invoice financing

An NYC business can loan against their outstanding invoices through invoice financing. It is where the lender will essentially provide you the total invoice amount and expects to be repaid once your customer settles the invoice. You can get approval in 24 hours but come at a higher interest rate. As such, this loan is ideal for the short term only.

On the other hand, invoice factoring works similarly, but this time, the lender or the factoring company takes over the payment collection. Since they are now responsible for this task, they would also charge you higher interest than invoice financing.

Merchant cash advance

This small business funding works by advancing your future sales and repaying them using a percentage on your credit card sales transactions or deposits to your business bank account. Although it can be useful during those lean months, it is not a practical solution given its notoriously high interest. It uses a factor rate when computing the interest charge. Hence, you might only want to resort to this loan if you need quick cash that you intend to pay off in a short period.

Best small business loans in New York

Now that you are familiar with the types of small business loans, we’ll provide you with some of the specific small business loan options you can avail in NYC.

Brooklyn Fund

This small business loan program targets businesses based in Brooklyn, administered by the New York Business Development Corporation. It offers interest rates ranging from 6 to 8 percent and funds up to 350,000 dollars, with a maximum term of 10 years. You can submit your application to the Brooklyn Chamber of Commerce to avail this program.

SBA microloan

Most SBA loans can take up to 3 months to process. However, not all businesses can afford to wait that long, especially if they need funds immediately. If you just need that quick working capital boost of not more than 50,000 dollars, the SB microloan might be your answer. Processing time is within two business days, which you can apply at most New York banks and approved SBA lenders.

NYC Capital Access Loan Guaranty Program

NYC Economic Development Corporation came out with this program to provide up to 40 percent guarantee on loans with their six partner lenders. This option is great for new businesses that need a little more funding but not over 250,000 dollars and falls short in some traditional start-up business loans requirements.

BCNA loans

Business Center for New Americans or BCNA provides financing to small businesses located in Staten Island and Queens. As their name suggests, they also accommodate loan applications from immigrants, refugees, startups provided they have a guarantor when the loan amount is above 3,000 dollars.

Online lenders

Often, commercial banks and federal loan programs that have all these perks require strict documentation, which not all businesses may be able to fulfill. Online lenders are all about less-fuss and fast loans, albeit offer them at a higher interest. You can apply for invoice financing with Fundbox and get processed on the same day. Kabbage offers a business line of credit in three repayment periods: 6, 12, and 18 months and monthly charges fees in place of standard interest rates.

Special loan programs and business products

WE NYC supports women business owners in cooperation with the NYC Department of Small Business Services. They facilitate the process to encourage women by providing business resources, connecting them to local lenders that will be more accommodating to finance their loans.

Check if you qualify

New York lenders will require business documents and proof of income to essentially determine if they can trust that you can repay the money they will lend you.

Do you have good credit?

One of the things a financial institution wants to know is how you can manage credit, which a credit score reflects. A score of 670 and above is considered good and can get you approved for many business loans. Try checking your credit score once in a while, even if you are not applying for a loan. But if you are, you can secure your free credit report from any credit bureaus like Experian, TransUnion, Equifax, and other financial websites.

How long is your business operating?

You should target lenders that provide start-up business loans if you have a new business. Otherwise, you might not meet lender requirements which often include the age of your business. Commercial banks would go for businesses that are at least two years old, while alternative lenders accept applications from businesses operating for a minimum of one year.

How much is your business making?

For existing businesses, creditors would look for the profitability of your company. But some of you might find it a bit ironic considering you are getting a loan because you don’t have enough funds. Hence it is crucial to use your loan proceeds on things that help increase your income. In other words, if you are aiming for a bigger loan amount, you should be able to substantiate your application by showing that you will have enough revenues to cover your payments. For those with minimal annual income, you can still pursue other funding options such as short-term loans or equipment financing, depending on your purpose.

Do you have collateral?

Most business loans in New York city require security in the form of collateral. It gives more confidence and assurance to the lender and compensates for the shortcomings of the borrower, such as having a low credit score. Lenders minimize the risk with the contention that the borrower will exhaust efforts to fulfill their loan since a lot is at stake. Collateral assets have a value that can dictate how much loan will be granted. They are often real estate properties, either personal or commercial, equipment, inventory, bank deposits, or a blanket lien, allowing the lender to seize anything on your business if you cannot pay your loan anymore.

Talk to potential lenders in New York

When applying for the right small business loan, you should set aside some time to shop for lending options. Among the types of lenders, small business owners would want to get bank loans since they offer some of the lowest interest rates. It is your best option if you hit all the standard loan requirements. But if you fall short in your qualifications, online lenders or alternative lenders would be the next best thing. They have less stringent guidelines but charge higher interest in exchange. Microlenders are another option and perhaps will be the most lenient among the creditors. However, they have smaller loanable amounts, among other limitations.

Most lenders will be very accommodating and willing to give you financial advice. Ask all the pertinent questions since they help create informed decisions. Aside from their requirements, extract as much information as you can about interest rates, terms, processing time, and sample computation. With the estimated monthly amortization, you can determine if this is doable on your end; you don’t want your loan repayment to cripple your finances instead of assisting your cash flow or boosting your business.

After weighing all the offers discussed to you by the different lenders, you must choose only one that will provide your target loan option. You don’t want to submit one application after another within a short period because it will negatively impact your credit score.

Once you have decided which lender you can work best with, organize all the documents you need to submit, including a detailed business plan. The New York Small Business Development Center can provide technical assistance and additional resources to help you create one for free.

What is behind every successful Florida business? Aside from the entrepreneur’s passion and the hardworking Floridians that make up the business, it is the access to business credit. Many Florida small business owners grow their enterprise with the help of small business funding solution, whether in the form of loans or venture capital, to provide financial assistance. This type of support is crucial in keeping the entrepreneurial spirit alive. Let’s face it; almost all businesses have had to contend with financial challenges, especially initially. Thankfully, there is no shortage of small business loan options from local lenders in the sunshine state. These financing options could lead you to golden opportunities your Florida business needs to hit the ground running.

This article will guide you on how you can get a loan for your Florida small business.

1. Determine why you need a small business loan

While it’s easy to assume that newbie entrepreneurs can always use financing solutions for their business growth, not all actually need or would want to secure a small business loan. Hence, it is important to ask yourself why you will apply for one. Do you require working capital? Are you short in funds to pay your business expenses? The beauty of loan programs is that most offer the flexibility of use while others are optimal for a specific purpose. In any case, make sure it is for your business, and at the same time, it will be able to fulfill your loan obligation given its potential for a higher income.

Learn about the different types of Florida small business loans

Working capital loans help Florida-based businesses overcome challenges in their cash flow, among other things. But such funding resources also come in various types that target a specific need of the borrower. Let’s discuss some of the most common ones.

Small Business Administration SBA loan

When applying for a business loan for the first time, we suggest that you consider trying it out for an SBA loan. Most Florida businesses qualify for this loan, whether you are a full-service restaurant operator or an insurance agency. The main difference between SBA loans and standard business loans is that the Small Business administration SBA guarantees them up to 85 percent of the unpaid outstanding balance when the borrower defaults. The SBA-approved lender, which SBA district offices in North and South Florida can help you find, also provides technical assistance to those applying for microloans.

SBA loans are available through accredited banks and lenders, not directly through the Small Business Administration of the federal government. These loans have different variants, such as the 7(a), 504, express, etc. They usually offer more competitive rates and longer repayment periods. Nonetheless, except for the SBA express loans, you need to consider that their processing time can take three months.

Equipment loans

It is common for Florida small businesses to purchase equipment, upgrade or replace their current one, which is crucial for their enterprise. This equipment may be necessary to increase production or facilitate tasks that increase revenues. Equipment financing can help you acquire the equipment you need. It could be a dental chair or a commercial oven, which becomes your loan collateral. The lender can finance up to 80 percent of the purchase amount, so you need to put in the rest. You don’t have to worry about waiting long for the funds because this loan has a quicker turnaround time.

Term loans

If your business needs outright cash to consolidate debt or cover day-to-day expenses, you can benefit from term loans. As their name suggests, these loans are paid in installments within a specified period, usually up to five years, and are multipurpose in nature. When you need small to moderate amounts, short-term loans whose processing can take several days might be right for you. Traditional financing from banks and financial institutions would have more stringent requirements than an alternative lender. However, the interest rate is the tradeoff, as it is higher for lenders who may require less documentation. Often, you have to present fixed assets as collateral for this transaction, which could be commercial real estate, personal property or vehicle, etc.

Invoice financing

Have unpaid invoices been hampering your cash flow? Perhaps you can consider applying for invoice financing as a business loan in Florida. The way it works is that you can borrow a percentage of your outstanding invoice from a lender. Once your client has settled this invoice, you can repay your lender along with the interest and their fees. An offshoot of this transaction is invoice factoring, where the lender or the factoring company takes over your unpaid invoice and handles collecting the payment instead. Given that you are unloading yourself of the unpaid invoice, the lender usually would charge a higher interest under this loan type.

Revolving credit line

There would be Florida businesses who don’t need a huge lump sum; they only want quick access to funds as necessary. Hence, a business line of credit provides entrepreneurs with an approved pool of funds at their disposal. The borrower gets charged interest based only on the amount they draw from this pool. Typically, this type of business financing is unsecured, but for amounts more than 100,000 dollars, the lender will require collateral. Meanwhile, a business credit card also works similarly, the difference being the form of funds that you can access as you use it to purchase items or pay for transactions.

Merchant cash advance

One of the business loans in Florida that allows you to get your future sales right when you want it is merchant cash advance. It also offers flexibility in repayment because you get to pay it back based on a percentage of your actual credit card sales or a portion of funds in your bank account. It assists small businesses during a low sales season. Although its convenience comes at a higher interest rate, it also makes up for faster processing and accommodates lower credit scores.

3. Compare lenders of small business loans in Florida

The Florida Department of Economic Opportunity provides federal resources to Florida small businesses such as loans and other funding programs to flourish in their industry. But their facilities may not be sufficient for some borrowers who may need a higher amount, or their industry is not eligible for certain loans. Traditional financing like a bank or credit union would have at least one high financing loan program available for Florida small business owners. There are also other lenders such as a credit union, an online lender, even peer-to-peer lending that offer different types of business loans. These lenders vary in interest rates, terms, and requirements. Hence it is important to weigh the pros and cons of each potential lender before jumping the gun.

Let’s peek into some of the best lenders and loan options for Florida businesses.

Enterprise Florida

Loan guarantees add extra confidence to the lender if the borrower cannot finish off their loans. Enterprise Florida results from a public-private partnership that promotes economic opportunity and development. Their Microfinance Guarantee Program is designed to assist small businesses with less than 25 employees by guaranteeing up to 50 percent of their loans, amounting to not more than 250,000 dollars.

FirstBank

If you need a substantial amount to fund your small business, you may consider a commercial mortgage loan from FirstBank. This bank, an SBA preferred lender, has multiple office locations in South Florida. Aside from SBA loans, they also offer business lines of credit, construction loans, and other commercial loans.

Florida Black Business Loan Program

This loan option is targeted at black business owners who have a minimum of 51 percent equity and are available only in two lenders: FAMU Federal Credit Union and Miami Bayside Foundation. FAMU accommodates eligible borrowers with Florida small businesses, while Miami Bayside Foundation caters specifically to those living in Miami Dade county. The borrower can normally loan up to 75,000 dollars, but it stretches to 150,000 for special cases.

SSBCI loan participation

State Small Business Credit Initiative, or SSBCI, was established by the government under the Small Business Jobs Act of 2010. It allocates funding to states that enhance small business credit availability to borrowers and extend loan participations to lenders. Their loans range between 250,000 dollars to 5 million dollars are multi-purpose; you can use them to cover startup costs, inventory purchases, franchise fees, except real estate purchases.

Community Contribution Tax Credit Program

While it is not exactly a loan option, Florida small businesses that make donations to this program can benefit by reducing taxation by up to 50 percent in sales tax refunds or tax credits. However, you should check first if the organization you will be donating to is listed among qualified recipients of the Florida Department of Economic Opportunity before claiming your tax credits or refunds.

Florida Credit Union

Florida Credit Union, an SBA lender, offers a Paycheck Protection Program geared to help small businesses ensure their employees are paid despite the recent repercussions of Covid 19. Qualified borrowers include those with no more than 500 employees and can loan 2.5 times their average monthly payroll expenses, or a maximum of 10 million dollars, whichever is lower. As long as the proceeds are used to pay employee salaries, rent, utilities, and mortgage interest, it is entitled to loan forgiveness.

Florida SBDC network

A Florida small business owner can also benefit from having working capital funds and mentoring. The truth is, not all entrepreneurs go into the industry fully knowing what to do and how to overcome the obstacles. This SBA resource partner has a large database of everything you need to learn about growing your business. It has in-house experts who will provide business training and consult with, especially when navigating the ins and outs of managing a business.

4. Check your qualifications for Florida small business loans

Credit scores

One of the main qualifications if you are going for a more substantial amount with a lower interest rate is strong credit. Banks usually require a minimum credit score of 680 for loan approval. In case you fall short of this score, there’s still hope given the other loan programs you can get in South Florida and other parts that cater to business growth. But you have to remember that these loan options provide small and moderate amounts and would come with a higher interest.

Business income and tenure

Most lenders would require Florida small businesses to operate a minimum of 1 year. However, if you are a startup company, you can look for lenders that can accommodate your needs but expect that they will likely grant you a smaller amount. Having a strong personal credit score, among other things, can otherwise raise your approved funds.

Meanwhile, you must be able to present the viability of your business by creating a solid business plan. This document helps your lender understand your business. It should include an executive summary, company description, market analysis, organizational chart, marketing strategies, and financial projections. Moreover, you should also explain the purpose of your loan request and your intended loan amount.

Once you have completed your documentation, you are ready to submit your loan application to your chosen lender.

Final thoughts on Small Business Loans Florida Entrepreneurs Should Consider

So do you know now which loan option to pursue? We hope that this article will help you take advantage of the loan offerings you can avail yourself of wherever your business is located in Florida. It is reassuring to know that the Florida state government is very supportive, given the many loan programs it has put in place that ultimately help your business succeed. We also suggest you consult a financial advisor if you can in case you need further information. Feel free to ask as many questions when talking with potential lenders to land the right loan for you.

As they say, everything is bigger in the lone star state – the geographical area, the state pride, open-pit BBQs, and even opportunities for small businesses, making it a great place to grow and be successful in your enterprise. This climate is evidenced by their overwhelming presence, more than 2.6 million entities, and a total workforce of nearly 5 million; they comprise more than 99 percent of all businesses operating in the state. Indeed, these small businesses are a vital component of the local economies growing in Texas. It is very important to learn about the choices you have and how to get them.

How loans benefit Texas small businesses

A cash infusion is sometimes just what a small business needs to get off the ground. But bringing in investors may not often appeal to you; that Texas pride of not wanting to give up control of your company. It is why small business loans might work for you – you borrow money and return it within a target period.

If used responsibly, a small business owner has a lot to gain from loans, aside from the obvious. Being able to manage credit will reflect strongly in your business profile. It builds a credit score, helping you qualify for lower interest rates and better loan terms in the future.

Getting funds through loans helps you grab Texas business growth opportunities, whether that may be upgrading your equipment or increasing your inventory to lower acquisition costs. Borrowers can also procure funds as needed through a revolving line of credit on standby, allowing you to get any amount within the set limit.

There are times that small business owners resort to Texas business loans to save their business from going south. While it can be a tricky situation, the truth is you should leverage loans against your viability and potential for success. You don’t borrow the money you can’t repay. Sometimes you just need that little push that a loan can do for your Texas business. It could only be a matter of lifting off your current roadblocks with that extra funding to get that cash flowing in again.

Some types of Texas small business loans to consider

There are many small business loan types, each having features that cater to certain business qualifications and purposes. Hence, you will find loans with lower interest rates but require a high credit score and more documentation. And then, there are business financing options where not much is required in exchange for a higher interest rate.

Small Business Administration SBA loans

The Small Business Administration SBA is known for small business loans with flexible features such as a fixed rate for a longer repayment period and fewer collateral requirements. It guarantees up to 80 percent of the defaulted balance by the SBA federal agency. Texas small and medium businesses can apply for this loan in most commercial banks, credit unions, and accredited SBA lenders.

SBA 7(a)

The SBA 7(a) is one of the most commonly acquired SBA loans. You can repay it for up to 10 years when used as working capital, debt refinancing, or any non-real estate financial assistance.

SBA 504

If SBA 7(a) is ideal for use as additional funds for the business, this SBA loan is targeted for land or property purchase or any major piece of equipment. Since this loan is part of the state’s economic development program, the business securing it is required to have job creation as part of its undertaking.

SBA Express loans

The long processing time of SBA loans can be a letdown because, more often than not, small business owners need funds fast. SBA Express loans are like an expedited SBA 7(a). What would normally take up to 3 months has been shortened to 36 hours. However, this loan applies to smaller financing.

Short term loans

Another way for Texas small businesses to get quick funding that usually does not require collateral is a short-term loan. Most lenders and financing institutions offer it with a repayment period anywhere from 6 to 36 months. Depending on your loan amount, you can get a loan approval as fast as the next business day.

Revolving lines of credit

It is the type of loan where the borrower is given a pool of funds they can draw from any time they need it. Hence, you only pay interest for the actual withdrawal amount and not the entire pool.

Equipment financing

Perfect for equipment purchases such as machinery, computers, and the like, you can pledge the item as collateral for this loan. The lender usually covers up to 90 percent of the item’s purchase value and is repaid in fixed installments.

Covid loans

We all know how Covid-19 restrictions have impacted many small businesses. In this regard, the Texas government has expanded two types of loans. One is the Economic Injury Disaster loan or EIDL, which has a low-interest rate targeted for those who suffered significant economic injury brought about by the changes in the way we conduct businesses during Covid-19.

Certain businesses may qualify for the Paycheck Protection Program or PPP. The loan is guaranteed 100 percent when the borrower defaults after using the funds to cover payroll, rent, mortgage interest, and utilities.

Texas supports small business owners

The Office of Small Business Assistance is one of the resources of the Governor’s Office that supports Texas small business owners. They provide financial assistance through reduced taxes, grants of up to 10,000 dollars, and other forms in kind where entrepreneurs enhance their skills through one-on-one training. At the same time, they also work closely with lenders and community partners to help small businesses get access to working capital. 

With a wide array of offerings, each having its features and qualifications, there will at least be one that suits your needs. Based on this strong support of the local government and a competitive market, you can explore the following loan programs for small businesses in Dallas, Austin, Houston, and San Antonio.

Product Development and Small Business Incubator Fund (PDSBI)

This program is administered by the office of the Texas Governor and his appointed board, along with the Texas Economic Development Banks. It offers secured loans with flexible amortization based on a low variable interest rate and reasonable Loan-To-Value ratio qualifications. Such loans are designed to finance eligible projects, prioritizing industries such as agriculture, biomedicine, biotechnology, aerospace, semiconductors, and renewable energy. 

Fixed assets that match your target loan amount can serve as collateral. You can present individuals or communities to serve as your loan guarantors to bolster your eligibility. Although you will not be required to submit an economic impact study, you need a comprehensive business plan. Furthermore, your Debt Service Coverage Ratio should be at least 1.2.

Texas Capital Access Program

One way to provide financing for small businesses with difficulty with traditional lenders is the Capital Access Program. The state of Texas contributes to the loan loss reserve account while select non-profit lenders take care of the rest of the financing and underwriting. Small and medium businesses with less than 500 employees and plan to use the proceeds in their business, except purchasing real estate that the business is not occupying will qualify for the program. Loan applicants should submit their request to any of the two participating lenders: PeopleFund in Austin and LiftFund in San Antonio.

Texas Leverage Fund (TLF)

TLF is another financing source for specific businesses categorized as economic development corporations using either a Type A or Type B sales tax scheme. There are around 500 Texan communities that have already adopted an economic development sales tax. Qualified businesses can secure low-cost loans up to 5 million dollars using a variable prime rate. 

The loan amount is based on sales tax collections that are pledged as collateral and considers the borrower’s debt service coverage ratio. As defined in the 1979 Development Corporation Act, it should cover eligible project costs, including buildings, manufacturing equipment, sports-related purposes, and others. This economic development bank also provides flexible loan terms to suit specific business needs.

Local Texas lender options

We mentioned earlier how Texas is conducive to small enterprises given the support of the state, communities, and the market. As a business owner, you don’t just sell your product or service; you also create jobs for people. All you need as an entrepreneur is to work hard, grab the opportunities, and success will be within your reach. And it doesn’t hurt that you have these lenders nearby.

Texas Capital Bank Small Business Loans

While they offer loans in different types that small businesses can consider, Texas Capital bank is known for their asset-based financing, which are loans secured by business-related assets. These include accounts receivable financing and equipment financing, helping small business owners manage their cash flow. Since it is a traditional lender, loan applicants should be able to present financial documents and possess a strong credit history to avail any of their business loans.

PeopleFund Small Business Loans

PeopleFund is a nonprofit lender that caters to disadvantaged groups and those in low to moderate-income areas. They have Small Business Administration SBA loans, disaster loans, and term loans with flexible underwriting, low down payment, and no pre-payment penalties.

Business and Community Lenders (BCL) of Texas

This nonprofit organization offers business lending catering to different sectors such as startups, minority entrepreneurs, growing businesses, rural communities, etc. These entrepreneurs might find it challenging to obtain business loans, especially startup funding for newly-opened businesses or because of bad credit.

Texas Trust Credit Union

Credit unions are great Texas business financing sources where small businesses can also procure loans that banks offer, such as term loans, business lines of credit, commercial real estate loans, and business credit cards. Texas Trust Credit Union has a presence in Dallas, Henderson, and other parts of the lone star state. To qualify, you must first apply for credit union membership to take advantage of their high financing percentage for commercial real estate loans.

Business Investment Growth Austin (BiGAustin)

New Texas businesses can turn to microlender BIGAustin with streamlined startup business loans and basic eligibility requirements. Whether you are located in Bastrop, Gillespie, or other nearby counties, your business can avail of secured loans amounting to 50,000 dollars with up to six years payback period provided you have been operating for at least one year.

Steps in getting a small business loan in Texas

Now that we have discussed the various small business loan options, there’s at least one that could be the right loan for you. The following will guide you on Texas small business loans:

1. Determine if you meet the purpose of a Texas small business loan, which could be as working capital, delayed invoice payments, equipment purchase, increased inventory, or anything related to your business operations or its expansion.

2. Shop for potential lenders, and ask about their offerings, requirements, processing times, and loan terms. Compare and decide which one you will pursue your loan application with and the type of loan you will seek based on your qualifications and ability to repay it.

3. Consult a financial advisor if you can, especially if you don’t have enough financial knowledge to help you make an informed decision. You can also use the SCORE resource library, which hosts a treasure trove of free information for entrepreneurs, such as valuable tips in cash flow management and many useful business templates.

4. Gather your documents according to the requirements of the lending team dedicated to checking them. These include your financial statements reflecting annual revenue, business checking account statements, credit records, and a detailed business plan indicating your target loan amount and your loan purpose. If you are pledging collateral, you must submit a clean title or lien-free title (for real estate and vehicle) or a personal guarantee, depending on the loan criteria.

5. Review your documents and submit them along with an accomplished loan application form to your chosen lender or financial institution.

Final word on Texas small business loan financing

Texas provides a highly favorable environment for small businesses to grow and achieve their goals with the help of loans from nonprofit and traditional lenders alike. You have to remember that small business loans and loan guarantees are not the only solutions to business funding. Entrepreneurs can also check their eligibility for federal grants from Texas Department of Agriculture, Texas Enterprise Fund, and Texas Workforce Commission. They can also consider angel investors who would provide equity contribution for growing businesses in exchange for a certain number of shares in your company. The state is teeming with opportunities, and it’s now up to you to grab them while you can.

The entrepreneurial spirit is very much alive in California. In fact, a good majority of industries from San Francisco down to San Diego are made up of small businesses. However, Covid 19 restrictions have impacted many small businesses, including their owners and employees. Recognizing them as the primary drivers of economic development, the local government of California is providing recovery means by expanding their support through federal relief, micro-grants, loan guarantees, and access to capital. In any case, California small business loans are still very much available to those who need them as we discuss your options and more in this article.

California financing law for small business owners
With things gradually returning to the way they should be, the state remains a great place to start and grow an enterprise. And it helps that California business loans promote transparency, all thanks to a senate bill that requires alternative lenders and other financial institutions to furnish disclosures to borrowers of small business loan options. This law under SB 1235 was brought about by the evolving nature of the small business market. Since an increasing number of operators are not well-versed financially, they are not being completely made aware of the true financing costs of securing a business loan. As such, these small business owners end up borrowing more money than they can actually afford to pay back, which can jeopardize the very businesses they’ve worked so hard to get off the ground.

Hence, all non-bank lenders are required to reveal the full financed amount, total financing cost, loan term, total payments to be made, annual interest rate, and prepayment guidelines. It applies to practically all types of business loans in California, including term loans, business lines of credit, merchant cash advances, invoice factoring, and other small business financing based on the asset.

Check your qualifications

California small businesses needing additional working capital or payment for business expenses turn to affordable business loans without giving up equity or company stake. It allows them to grow their enterprise and at the same time remain in charge of their business operations. But before anything, the borrower should look into their credentials, especially if they intend to consider traditional lenders like commercial banks and other major financial institutions with their loan application.

For starters, if you are applying through a loan program, your primary business should be located in California. A minimum of 51 percent of your employees should also hold residence in the state.

A credit score is another important factor for loan approval. Without having established one may limit your financing options. If you’ve just built your business, you must at least have a good personal credit score of around 680, or a minimum of 80 if it’s your business credit score. It is always recommended to check your credit records, a free service, before proceeding with your application.

Lenders also consider your business income and cash flow when granting loans to California-based businesses. They often use your debt-to-income ratio when assessing your risk as a borrower. Aside from income, they would like to know if you have existing debts, which they use as a basis for your ability to pay your loans. Business tenure is an additional factor since lenders would prefer a track record of 2 years or more.

If you plan to get a more substantial loan amount, you must prepare to have collateral which most lenders will require from you under the circumstances. Any tangible asset with considerable value can qualify as collateral, such as real estate, equipment, etc., and loan up to 80 percent of its appraised value.

Small business loan guarantee program

If you can’t present collateral for a loan or fall short in loan qualifications of conventional lenders, this type of assistance from the Small Business Finance Center is extended for California small businesses with 750 employees or fewer and eligible non-profit organizations. The SBFC works with several financial development corporations to provide loans for those whose capital access is restricted,

This government unit is found within certain banks and covered by the business and economic development of the Governor’s Office. It can guarantee up to 95 percent of your loan amount or 2.5 million dollars, whichever is lower, and a maximum of 7 years. Aside from issuing a small business loan guarantee program, the SBFC also provides a jump-start loan program consisting of microloans that aid small businesses in low-income communities and disadvantaged groups.

California Capital Access Program (CalCAP)

Another way to enhance credit for participating lenders is through CalCAP’s loan loss reserve program. It enrolls a portion of its disbursed California business loans into a loss reserve account. In other words, the lender is insuring the amount they can potentially lose from the loan when the borrower defaults completely. This way, more small businesses that would otherwise be deemed ineligible can benefit from their enterprise.

Choose the most suitable type of business loan for your needs

There are different small business loans available for small businesses. Choosing the right one will provide the funds you require and make its repayment easy for you to manage. The following loan options are available in Southern California, the Golden State, and Bay Area counties that are worth considering to fund your business recovery or growth.

Microloan
Based on its label, microloans are for small business owners who need a relatively small amount, around 50,000 dollars or less. That said, the repayment term would be shorter, ranging from 6 months to 2 years. This loan has more relaxed application requirements and is ideal for covering startup costs and supplemental cash flow.

Sources: non profit lenders, microlenders, peer-to-peer

Term loan
This type of loan is for entrepreneurs who need a significant amount to expand their business, plan to improve their facilities, or use it as working capital. It is often secured by physical assets such as real estate property and vehicles. Term loans offer competitive rates whose repayment period range from 5 to 7 years. Long-term loans, also referred to as business equity loans, which can be repaid in 10 years, require real estate such as one’s primary residence as collateral.

Sources: banks, credit unions, financial institutions, SBA lenders

Small Business Administration SBA loans
SBA loans are similar to traditional lender loans, but with one major difference, it has federal backing. SBA or Small Business Administration does not act as the lender; instead, it guarantees the loan by up to 85 percent if the California business owner defaults in their payments. This way, it helps reduce lender risks and, at the same time, encourages the small business community to be the primary drivers of economic development.

Sources: commercial banks, SBA preferred lenders, microlending institutions, community development organizations

Commercial real estate loan
As a first mortgage, the real estate acquisition, an office building or store, serves as collateral for the loan. The borrower can choose between fixed and variable interest rates that are highly competitive and longer repayment terms. Loan-to-Value or LTV is associated with this loan, which is the loan amount relative to the value of the asset or collateral. Typically, its LTV is up to 80 percent.

Sources: banks, alternative lenders, hard money lenders

Business lines of credit
Sometimes, small businesses do not need a lot; they just want to prepare for that time. It could be for the upcoming low sales season or whenever payment for bulk orders gets delayed and other emergencies. A business line of credit is practically funding on tap. It provides revolving credit access and pays interest based on withdrawn funds only. Your credit line replenishes according to your repayments.

Sources, banks, credit unions, online lenders, non-profit lenders

Invoice financing
Businesses can practically sell their unpaid invoices and purchase orders that clog their cash flow. The lender, in return, gives you up to 90 percent of the invoiced amount and charges a corresponding interest while waiting for the client or contractor to pay the invoice.

Sources: banks, factoring companies, credit unions

Equipment financing
If you are buying a major piece of equipment, you can get a loan for that purpose and pay a reasonable amount of interest within a specified period.

Sources: commercial banks, alternative lenders, credit unions

Covid-19 loans
If your business is one of those impacted by Covid-19 restrictions, you can seek up to 50,000 dollars in loans through CDC Small Business Finance. The SBA Microloan Recovery program is one example of this special type of loan. It has a 5 percent fixed interest rate and a maximum loan term of 5 years.

Sources: CDC Small Business Finance, Accessity

Alternatives to small business loans

Small business grants
With the effects of Covid restrictions sweeping the nation, California has released over 100 Billion dollars in financial assistance to small businesses. These came in the form of PPP and EIDL federal programs. The California Relief Grant program also released up to 25,000 dollars based on an annual revenue tier. 

Small business grants are funding sources that are generally not treated as loans; hence, the recipient has no repayment whatsoever, essentially free money. These small business grants may be provided as cash, training, resource, tax relief, free business counseling, or a soft loan with little to no interest and has the most convenient terms. For their part, the business has to make sure they will carry on with their operations given their assistance. Whatever the amount is issued as a grant is expected to have an economic return many times.

Sources: federal units, banks, philanthropic communities, private foundations

Business credit cards
Credit cards are still considered loans because you need to repay them. The advantage is the ease of securing one and an opportunity not to pay interest when you settle balances in full.

Sources: commercial banks, credit card companies

Merchant cash advances
You can access future sales and repay them according to a certain percentage of your actual credit card sales. It solves issues during the low season because it adjusts to your business income.

Sources: merchant services companies

Choose a lender who has the most optimal terms

Different factors affect your choice of lender of California business loans. One is their requirements. If you don’t have a stellar credit score, the chances are that you will opt for alternative or online lenders. The second thing to consider is their service. Most of the time, when California-based businesses need funding, they want it almost immediately. The processing time is crucial and the reputation of the lending company. Low-interest rates are always preferred but usually reserved for those with stronger credit and higher collateral, which commercial banks can offer. California businesses can also use lender match tools to help them land the right lender.

Here are some of the best California small business loan options:

1. Valley Economic Development Center (VEDC)
This loan provider works only with small businesses in California and New York. From microloans to standard business loans, borrowers can loan up to 500,000 dollars at competitive rates.

2. Accion
Businesses situated in San Bernardino, San Diego, and nearby counties can seek “rapid loans” through Accion, which are these small loans you can get on the fly. The rates are fixed up to 18 percent and require little documentation to get.

3. LAFCU
Small businesses in Southern California will be glad to have this lender as a viable option for many types of business loans. Eligible borrowers must be their members first and reside in LA or Southern California.

4. LA Community Development Commission/Housing Authority
Their smart funding program can finance loan amounts of up to 1.5 million dollars for manufacturing, medical, and transportation industries.

5. Jewish Free Loan Association
This non-profit organization gives loans up to 36,000 dollars maximum at zero interest to qualified California businesses. While this may be a nice offer, it comes with stricter requirements, such as having two guarantors with a good credit score.

6. Wells Fargo
We know that SBA loans are the top choice for getting the best rates and terms. Wells Fargo is perhaps the best bank you can get them from, having been previously a top California SBA lender and maintaining their outstanding track record.

Organize your documentation

It’s time to gather your documents for submission after deciding on the type of business loan and which lender to get it. Depending on your lender requirements, you may need your personal or business financial statements, detailed business plan, business license, income tax returns, previous loan records, if any, among others. Once you’ve completed them, you are ready to submit your filled-out loan application along with the documents. Loan processing time varies among lenders, longer for an SBA loan.

Final word

There is no better way for small businesses to get back on track than seeking a California business loan now. Each loan type aims to address a specific need for your business, and choosing the right lender with optimal loan terms is highly important. And if you are lucky, you might even get financial assistance for free. Whether located in San Bernardino or the Golden State, you’ll certainly never run out of viable options.

But before you even get either too excited or nervous about your initial foray into securing small business financing from a traditional lender, ask yourself, “Do I really need a business loan? Am I qualified? What do I need to do to get a loan approval? ” This article aims to help you answer these questions and prepare you for your small business loan application. It will hopefully increase not only your loan approval odds but also strengthen your commitment to repay your lender without fail.

Setting your expectations

First of all, most lenders will have many requirements from a startup business or a new borrower, and they probably won’t waive any of them. And the irony is business owners are applying for a loan because they don’t have the funds to finance their local business. Yet, the creditor should see if you have enough assets as security and your business income is high based on a positive cash flow to repay them. If everything fits, you are a source of profit for these lenders.

In any case, the burden of proof essentially lies in you. You can’t expect banks to make concessions at this point, and nothing is personal. If at all, it’s the client who will come after them, and not the other way around. You shouldn’t be disheartened nonetheless; you have to put in an effort, especially since getting the funds you need can make all the difference for your business growth.

Build your credit/ risk profile

Credit scores are everything; you cannot get funding from major lending channels like commercial banks without a solid credit history. And it’s not just loans; they can prevent you from renting an apartment, assigning utilities to your name, and worse, even landing a job.

Your credit score is based on the details of your credit report at the time of verification. It is important to know your current credit score before you pursue your loan application. You can get this information through credit bureaus or any credit reporting agency for free.

If it turns out you don’t have a strong personal credit score, you still have an opportunity to do something about it. The same goes for your business credit score, which is basically non-existent when you are a startup or without any prior business loan. As such, your creditor will depend on your personal credit score that you must check. Unless it is erroneous, which you can correct by raising a dispute with the credit bureau, you can work on your creditworthiness when your score falls short of the target. However, you will have to put your loan application on hold. Anyhow, below are steps you may consider to give your credit score a much-needed boost.

1. Use your credit card responsibly through small purchases that get paid in full every month.

2. If you can only pay the minimum due of your credit card or credit line each month, make sure you keep your usage to a maximum of 30 percent of your credit limit.

3. Always pay your credit card, utility bills, and loans, if any, on time. However, these accounts should be under your name, so they get recorded in your personal credit history.

4. Be watchful of identity theft which can negatively impact credit scores, by checking your credit report frequently.

5. Don’t disregard credit cards that you haven’t been using for a while just yet, especially if you’ve had them for years. Tenure is also an important factor that impacts your score.

6. Check if you have other bills with maxed-out balances and prioritize their payment to lower your credit utilization rate.

7. Apply for a short-term credit builder loan from credit unions and online lenders. It works by holding loan amounts in a bank account until borrowers finish paying them in installments. You can hit two birds with one stone: build credit and save at the same time.

How long does it take before you see any improvement?
If you’re trying to repair bad credit, it may take more than a year for your score to increase substantially after performing all the credit-rebuilding measures. But if you’ve just fallen short of the acceptable credit score, you may be looking at up to 6 months to see any noticeable change. Hence, you should expect to put off your loan application for several months to a year.

Learn about your loan options

A business owner will have to make the right choice regarding the type of loan they will apply for. There are two general loan criteria; collateral and interest rate. You have secured and unsecured loans, which refers to having a collateral requirement or not. The other would either be fixed or variable interest rates. Both criteria can be crucial in getting the best loan possible for your needs.

Online lenders would usually have the same loan offerings as traditional lenders. California finance lender loans, for instance, also require collateral during application. Below are the different loan products you can consider getting to serve your business purpose:

Term loan

Perhaps the loan that many people are familiar with, term loans involve direct borrowing that should be repaid within a specified period or term. For entrepreneurs, term loans provide a great source of working capital to cover shortfalls in operational expenses, among other reasons. The loanable amount can be as high as 2 million dollars, payable between a year and five years for qualified loan applicants. This loan is released as a lump sum, carries a fixed rate as low as 6 percent, and often requires collateral.

Business line of credit

A line of credit is ideal for those looking for flexibility but need a little less than what a term loan can accommodate. It works in such a way that once you are approved for this type of loan, you don’t have to use the funds right away. Instead, they are on standby, ready to be accessed anytime you need them. Your interest is charged based only on the amount you take out from your pool. It is revolving such that all your repayments will replenish your credit line. Hence, there is no fixed term; it depends on how soon you can pay off your withdrawn amount.

Small Business Administration loan

SBA loans are funding instruments by the Small Business Administration or SBA, a federal agency. They focus on assisting small businesses that would otherwise have difficulty getting help from a traditional lender. They have different loan programs similar to standard small business loans, except that the government backs them. SBA does not grant them, but banks and authorized lenders do; hence they are more appropriately called SBA-backed loans instead. In case of a business defaulting, the government shoulders up to 80 percent of the borrower’s outstanding balance.

Merchant cash advance

This loan is a type of receivable financing which differs from other business loans in the premise. The business owner is given an “advance” of their projected income. They repay it based on a percentage of their credit card sales or sales deposits to their business bank account. You can get approval in one day without involving heavy paperwork. Often, the borrower would only need to present their cash flow statements and a few other documents. However, a higher interest is a price to pay for ease of processing and convenience.

Accounts receivable financing

Your sales are doing great, but where is the money? Oh wait, you have piles of unpaid invoices! This scenario is very common, impacting your company’s cash flow. You can’t put your operational expenses on hold while you wait to get paid. Hence, one option for small business owners is to secure accounts receivable financing from a factoring company. They finance up to 80 percent of the total amount of open invoices and purchase orders, which you can repay within a year.

Equipment loans

When you need money to purchase equipment or anything related to your business, such as processing software, equipment financing might be your best bet. Many lenders can accommodate up to five million dollars for this type of business loan, but you will be required to put up a down payment for the purchase, which is usually twenty percent of the purchase amount. The item you will use the loan proceeds for will serve as the collateral for the loan.

Gather financial documents

When applying for a business loan, lenders need assurance that the money they will lend you will be repaid within the agreed period. As such, borrowers should substantiate their loan request by providing business financial statements and business licenses. Organizing these documents is important because they serve as proof of the existence of your business and provide comprehensive information on your personal finances. 

Financial reports such as a profit and loss report, balance sheet, and cash flow statement can further increase your loan approval odds. If you have a startup, you can submit personal financial statements or apply for personal loans instead. These documents should reflect your capacity to repay your loan as they are also used as bases for lenders on how much interest they will charge you. Ensure that you have an audited financial statement or one that a CPA or Certified Public Accountant has at least reviewed. 

Meanwhile, you might find that alternative lenders who are generally less stringent with documentation may require the same. However, it also depends on the type of business loan you will apply for. Small business loans such as merchant cash advance, invoice financing, business credit card, and equipment financing may require fewer documents.

Create a business plan/ loan proposal

Key points of a business plan

1. Include an executive summary where you will briefly describe your business and the current economic climate that surrounds it.

2. A market analysis will present an overview of your industry and its outlook, your target patrons or niche if any, and a brief marketing strategy.

3. Present an organizational structure, its description, and projected salaries.

4. Your financial analysis should be at least three years, or up to five years if necessary.

5. Explain why you need small business financing but itemize your reasons, including how much cash you need.

Look for potential lenders

When considering a business loan, one should take the time to “window-shop” and compare lenders and financial institutions. Not all share the same loan offers, each having its terms and, more importantly, interest rates.

Types of lenders
– commercial banks
– online lenders
– community banks
– peer to peer

It is important to know the right questions, such as their recommended business loan for you, documents you need to submit, processing time, collateral requirements, and other details. That’s why arming yourself with some financial fundamentals so you will be more confident in throwing technical inquiries, and at the same time, you’ll be able to understand the answers. If you consider an SBA loan, you can also ask if your bank has a preferred lender status. The advantage of being an SBA preferred lender is a shorter processing period for SBA loans.

Tips in choosing a lender

1. Check their requirements
As mentioned earlier, some lenders have more relaxed guidelines and qualifications. This option may be good to note, especially if you cannot meet a high credit score, for example. Some business lenders put more weight on other elements like collateral or the type of loan you are applying for.

2. Review their terms and fees
Ask your potential lender for a copy of their terms which you can go over in detail. You should not take it for granted as it can be crucial, especially when you encounter unforeseen events. Also, consider how much they charge in other fees and penalties.

3. Reasonable interest rates relative to the type of loan and requirements.

When comparing interest rates, they should be in the same loan category. For instance, lender A offers 6 percent for a short-term loan while lender B is 7 percent. You cannot compare if it’s two different loan types. A business line of credit will generally have a higher interest than an SBA-backed loan. But sometimes, you might go for lender B even if it has a higher interest because they do not require collateral. Hence, your decision to choose the best lender based on the interest rate can also be influenced by other factors.

On the other hand, make sure that you know the rates that are being quoted to you by your lender. The interest may be low, but the APR is different and usually higher because it includes other fees that come with your loan. When dealing with alternative lenders, be wary of factor rates which can be deceiving. Hence, you should always ask the APR as it gives a more precise cost of your loan.

Find out what form of security you can offer

Realistically speaking, financial institutions are likely to require collateral for your loan. Although it doesn’t guarantee your approval, it increases your odds of getting it. A secured loan is also one way to snag a lower interest rate from your lender. For instance, if you require 100,000 dollars, you should find collateral that has a slightly higher cash value.

Often, lenders will cover a percentage ranging from 80% to 90% of the asset value to cover the depreciation cost. While many borrowers prefer not to present collateral, it can be beneficial for them because they can use it as leverage to get better loan terms. It also helps you be more responsible and diligent in your loan obligation because you would not want to risk losing your asset to your creditor.

Meanwhile, here are examples of business collateral and their corresponding value that the lender is willing to finance:

Real estate – up to 75 percent
Inventory – up to 50 percent
Equipment – up to 80 percent
Bank deposit – up to 90 percent
Other personal assets – up to 70 percent

Analyze your business ability to repay

As already mentioned, lenders will always want to know if you can repay the loan money they will loan you. They use your debt service coverage ratio, which measures your cash flow against business debts, to assess your paying capacity. It is computed by dividing your annual net income from your annual debt payments. Typically, lenders prefer a ratio of 1.15 or higher. Having a value lower than one only means you have a negative cash flow. In short, you don’t have enough money to cover your debts, and if at all, you would be using your savings a lot more, which shouldn’t be the case. 

Borrowers can compute for this financial ratio, so you can still do something to improve it before submitting your loan request. If you find your DSCR lower than 1.15, you can look for other means to increase your business revenue and reduce your operating expenses. In doing so, you don’t only increase your loan approval odds, but you also get to improve your business finances.

The Final word on Small Business Loan Financing

Once you have decided to secure a small business loan, make sure that you consider one that is most suitable to your needs and your ability to repay. It also helps consult a financial planner before inking a loan deal to avoid grey areas and ensure everything is in order. Remember that this loan should ultimately help your business, not add an unnecessary burden to you.

Can you imagine a world without credit? Would that mean everyone is rich? Well, not exactly. In any case, small enterprises thrive by borrowing money that would cover day-to-day business costs or future financial needs. Lenders will loan you the money based on your capacity to pay, your credit history, among other factors. You know that once you’ve secured a small business loan, you need to repay it one way or another. But, what are you getting yourself into in the first place – is it an installment loan, revolving credit line, or both? Before your questions drown you in confusion, let’s get right to it.

How a small business loan works

Whether growing or established, small businesses are fueled by credit that comes in the form of loans. For startups, loans often serve as working capital, while medium to large enterprises can use them for expansion plans or supplemental funds. Such loans also help with cash flow, equipment purchase, fund purchase orders, increase inventory, pay for operational costs and recurring expenses.

A small business loan allows you to take advantage of business opportunities you will otherwise miss if you couldn’t borrow money to grab them. That is why when used responsibly, personal loans or business loans can contribute to your financial success.

Applying for a business loan
While the idea of a business loan may seem exciting and daunting at the same time, you need to ask yourself first why you would want it. Your loan purpose is a crucial factor before a lender approves your application. Make sure you have your documentation in place as well as your detailed business plan, collateral (if necessary), and other requirements. Conduct your research and compare lenders before deciding which one you will pursue your application with. Your fund sources include banks, online lenders, credit unions whose offers vary depending on whether they are installment or revolving accounts.

Installment loans vs revolving credit lines

Installment loan

Longer-term and regular repayments characterize an installment loan. A mortgage loan, SBA loan, term loan, personal loan, and student loan are some examples of installment credit. Each payment you make gradually decreases your balance, prioritizing interest charges over principal.

For instance, you have a term loan for 100,000 dollars payable for five years, at 10 percent APR (Annual Percentage Rate) for 2,500 dollars per month. A sample breakdown of the monthly installments would be 2,000 goes to payment of interest charge while 500 dollars is deducted from your loan principal in the first few months. But perhaps in the third year, it changes to 500 dollars for interest, and 2,000 for the principal, as more payment gets applied to your balance.

Often your payment amount is fixed depending on the nature of your loan’s interest rate. As such, your installments may change when you have a variable interest rate business loan. It means your interest rate is dictated by the federal government as expressed in the prime rate. While it is variable, there is also a chance that it will not change based on a stable market. Many installment loans are secured either by collateral or a personal guarantee, where the business owner will be personally liable even if it’s a business loan. Student loans are just one of the very few installment loans that do not require collateral as the federal government provides them.

Salient features of installment loans

Lump-sum upfront proceeds
An installment loan may be your answer when you need a considerable amount of money. It would allow you to take advantage of business opportunities that can slip momentarily if you didn’t have access to a fixed lump sum.

Monthly payments
Installment loans entail regular payments within a specified longer repayment period. With a fixed interest rate, you can prepare your budget ahead of time to keep your credit in good standing because you’ll be paying the same amount throughout. Variable interest rate loans would mean different possible amounts every cycle. When they do change, they generally stay within range of your payments.

Tax deductions
Your loan proceeds are not considered revenue; hence you don’t have to account for them in your tax filing. On the other hand, the interest you pay may be tax-deductible.

Additional fees
On top of your interest, you will also pay the origination fee, administrative fee, and application fee. There are late and prepayment penalties if applicable.

Pros of installment loans

predictable payment
higher loanable amount
upfront loan
lower interest rates

Cons of installment loans

longer processing time
stricter requirements
requires a form of security or collateral
late penalty charges

Revolving line of credit

On the other hand, a revolving line of credit is a financing scheme where a borrower is provided with a set amount they can access in portions or as needed. It is typically sought to help manage cash flow for small businesses. This revolving loan is repaid during each billing cycle according to the borrower’s capacity and the minimum payment amount.

For example, let’s take a credit card with a credit limit of 10,000 dollars. You use it to purchase items worth 2,000 dollars; hence you now have 8,000 dollars remaining on your credit card, which you can continue to use if necessary. When you pay the 2,000 dollars on time, your credit limit is renewed to 10,000 dollars. This cycle continues for as long as you manage your credit well enough.

Provided they meet the minimum payment, if there is one, they can maintain their credit and get charged with an interest rate based on the drawn amount. Repayments are then funneled back to the available credit. Credit cards and business lines of credit are popular forms of revolving loans available for small business owners.

Salient features of revolving credit

Funds at your disposal
The lender will approve your credit limit, the maximum amount of funds available to you. As such, you can access any amount within this limit when you need it. At the same time, you will only be charged based on your withdrawal amount and not on the entire sum allocated for you.

Earn rewards
When using business credit cards for a major purchase, you have the bonus feature of earning points which you can exchange for various rewards. You can also skip paying for interest when settling the balance in full on your due date. This condition means you get to enjoy credit for roughly 30 days or so without being charged interest.

Additional fees
You will pay the application fee, membership fee (for business credit card), and the origination fee (for every amount drawn from the credit line). There is a late fee and prepayment fee charged when applicable.

Pros of a revolving line of credit
flexible borrowing
quick application process
collateral may not be required
no-interest option (for business credit card)

Cons of revolving credit
higher interest rates on the unpaid balance
requires strong credit score
not qualified as tax-deductible
annual fee

How are installment and revolving credit different from one another?

To further illustrate the difference between installment credit and revolving line of credit, let’s use a loanable amount of 20,000 dollars as an example. Under a revolving loan, you can opt to take out 5,000 dollars for starters and make succeeding withdrawals from the remaining credit. Unlike revolving credit, you will only get the lump sum or the whole loanable amount in an installment loan.

Even if you’ve paid the amount you borrowed from your credit line, you can simply draw another amount when you need it because it is readily available for you. But with installment loans, you need to reapply anew once you’ve fully paid them.

When do you start paying?

Payment for the installment loan will commence after the loan proceeds have been released to the consumer, usually one month later. The amount you pay remains consistent during your loan term except if you have a variable rate scheme. This scheme helps relieve your cash flow given the repayment period. You also pay after you draw funds from your revolving line of credit but will depend on their amount to determine your minimum payments which change every billing cycle.

3 main factors to consider when applying for business loans, whether installment or revolving

Credit history

Whether personal or business, your credit score should at least meet the preference of lenders, which many have put at 700. You can ask for your credit report from credit bureaus and several financial service providers if you are unsure you have at least an acceptable credit score. When your score is low, it does not necessarily mean you have zero chance of securing any financing. Many online lenders offer loans that accommodate borrowers with low credit scores. However, expect to have less favorable deals than you would if you have strong credit.

Business plan

Small businesses and startups should prove to their lenders that they have the growth potential and have a detailed plan on how they will achieve their projections. It would be best if you were prepared to justify your intended loan amount by submitting your financial statements, list of business assets, and projected income after acquiring the details you need.

Collateral

Borrowing money is not as easy as telling someone you need it, and they’ll give it to you, end of the story. Lenders need assurance that the money they will lend you will be paid back. One way to satisfy this condition is by asking the borrower for collateral. A secured loan requires any tangible asset with considerable value, such as property or the item you intend to buy using the loan amount itself. 

When the borrower is unable to continue their repayment for some reason, the lender will seize the collateral as payment for the installment debt as indicated in the loan agreement. You can also present bank deposits or stock certificates for this purpose. In the absence of collateral, lenders may also ask for a personal guarantee or bank lien to support your loan application.

Impact of installment and revolving loans on credit score

Installment loan

There is a common misconception that the higher your credit utilization rate is, the more it will harm your credit score. 

Credit utilization rate is the ratio of your actual loan and the maximum allowable amount. Usually, the borrower would max out the amount approved under an installment type. Remember that this amount was approved based on your income capacity to repay; hence it will not affect your credit score negatively per se. What would is if you have too many simultaneous loans, more than you can afford to pay, and your inability to pay them on time.

Revolving loan

Just like installment loans, your payment history forms a considerable part of your credit score, which could be up to 40%. However, this is where the credit utilization rate would matter next to timely payments. Financial advisors recommend limiting usage to under 30 percent to maintain a good score. Even better if you will pay your balance in full or revolved balance at the soonest to renew your small business line of credit.

When you have trouble paying for the outstanding balance of your credit card, considering the high-interest rate, a consumer will turn to borrow money via an installment to pay it off. This way, what would typically be up to 25% APR has dramatically reduced to 7%, which is significant savings for the borrower.

Which is best for credit score?

While both loans carry weight on your credit score, a revolving account earns more points than installment credit. Sure, you pay your installment loan on time and carry it through to its last final due, all of which reflects good credit. But when you have a credit line that you can manage responsibly, it is rewarded with a much higher credit score. You see, having access to funds all the time is a very tempting proposition and can easily go haywire if the consumer does not stay on top of their business finances and get into deeper debt. It is why revolving credit is a key factor for lenders that provide them insight into your borrowing behavior and holds more weight than installment credit when it comes to giving you credit points for it.

Final thoughts

So, is a small business loan installment or revolving? We now know that it is both, and choosing which to get largely depends on your business needs and qualifications. Whatever you choose, being a responsible borrower will not only benefit your lender but, more importantly, yourself and your credit report.

You have finally received your small business loan, which you will use for inventory management or as additional cash flow and working capital for your enterprise. Problem solved, you think? Well, that’s only less than half the battle for the entrepreneur. Because now it’s time to work doubly hard so you can fulfill your loan repayments. Not paying your loan will impact your credit score and your ability to secure business financing in the future. In other words, repaying your small business loan is an obligation that should not be taken for granted. Nonetheless, some ways can help you deal with your monthly payments more responsibly.

Apply for a small business loan you know you can repay

Don’t borrow the money you can’t pay back – it’s plain common sense. A loan is neither a grant nor free money; it is debt meant to be returned to the lender, including interest payments. Lenders are business people just like you; they earn from the money that you borrow from them. Exercising prudence is key in paying off your loan payments with ease. Taking out a loan may be part of your strategic business plan. But when you borrow more money than you can repay, it will throw off your amortization schedule. Worse, you may find yourself deep in even more debt and sleepless nights.

Select the most convenient loan term

As a rule of thumb, the higher your loan amount, the better you can manage it with a longer repayment period. Unless your business is raking in huge monthly sales, spreading out your monthly payments for five years or more can help give you a little more room to deal with all your other payables. The longer term will also depend on the type of business loan you have, the type of lender, your loan purpose, and your financial profile. Hence, it’s important to take into account all the other factors before you make such financial decisions.

Term loan
Traditional lenders like banks and credit unions will allow many small business owners to repay their short-term loans between five and seven years. This term is based on a minimum 3-year business tenure, strong credit, and profitability, among other things. On the other hand, alternative lenders with less stringent requirements can approve a repayment period for up to five years.

SBA loan
SBA guaranteed loans give leeway but are more difficult to secure given their heavy documentation, stricter guidelines, and longer processing time. Their longest repayment term is 25 years and has the most reasonable interest rates you can find. When you avail of the CDC/ 504 loan to purchase equipment, real estate, or any major business assets, you also get to enjoy a longer repayment duration. For equipment loans, they allow up to 10 years, while real estate doubles that at 20 years.

Line of credit
While a typical business line of credit is repaid much quicker, usually six months to 1 year, you can stretch it up to four years, depending on your lender agreement. However, having a longer term may not be favorable for those in constant need of quick cash. The sooner you can “refill” your credit line with repayments in a shorter time, the more you can easily fund your future financing needs.

Review your actual loan terms and conditions

While you must have fully understood your loan contract before you signed it, it won’t hurt to review them again after that. It’s easy to forget the details once the loan is released to you.

Set up your payment mode

Borrowers would prefer a more convenient way to settle their loan payments which an automatic debit or autopay system will provide. You can accomplish it by enrolling your account in the system, where it will automatically deduct the amortization or fixed amount from your business bank account through ACH. This autopay guarantees that you don’t miss your due date granted that your account is sufficiently funded. Some business lenders allow you to choose the day of the month that your autopay will execute. Meanwhile, other banks continue to accept mailed checks as loan payments but usually include a check processing fee.

Paying for Small Business Administration SBA loans
There are three ways to make monthly payments on your SBA loan. One is accomplished online at Pay.gov, a payment portal for everything related to the federal government except taxes. The source of funds for this payment method could be your ACH, debit card, or PayPal.

Another way to pay is to do it online using your personal or business bank account. You will have to include US Small Business Administration either as a one-time or recurring payment recipient and use your 10-digit SBA loan account number located in your billing statement. Please note that it is different from your loan application number. Meanwhile, you can also send in a check made payable to the US Small Business Administration.

Paying for EIDL loan
When you availed of the Economic Injury Disaster Loan, you can also repay it via Pay.gov using your 10-digit loan account number. If you took out more than 25,000 dollars, you’d need to pay 100 dollars as a UCC filing fee. Always verify your business credit report after your UCC-1 filing has been released. It will also be crucial for those with personal guarantees, especially when securing another small business loan. Any remaining lien can hamper your future small business finance applications. In comparison, you will need not pay back an EIDL grant or EIDG since it is essentially free money given by the government.

Your loan payment frequency

Bank loans typically follow a monthly amortization schedule. However, more lending institutions are now allowing more frequency options, including weekly, bi-monthly, and even daily repayments, which are done on weekdays except special holidays. The latter is used with merchant card advances where a certain percentage of the daily sales is repaid to the loan.

Some small business owners would adopt a repayment schedule every two weeks, making two payments in a month. For example, you pay 1,000 dollars every month with a one-year loan term. When you pay it every two weeks instead, splitting the amount to 500 dollars each, you get to fully pay the loan in 336 days compared to 1 year or 365 days. In other words, you can complete your loan earlier by almost a month. Others, especially retail businesses, also find this arrangement much easier to budget for.

Fixed and variable repayments
Aside from frequency, your monthly payment may be fixed or variable. A fixed repayment scheme is the same amount billed according to frequency during the loan term. Borrowers have no option to pay less or more under this arrangement.

On the other hand, variable repayments may depend on two factors. If you have a variable interest rate business loan, the annual percentage rate will depend on the prime rate. Any movement will prompt a change in the repayment amount. It is usually available in a business line of credit and a long-term loan.

The other reason you might have variable repayments is that you are paying back your merchant cash advance. In effect, this type of loan has no definite maturity date since it relies on your business’s cash flow.

Take note of late payment penalties

Being a responsible and disciplined borrower will positively impact your credit history. One way to exemplify it is to pay on time. It shows that you can manage credit, making you more attractive to preferred lenders. A single late payment that constitutes your payment history is a form of delinquency. The longer it takes you to pay beyond your due date, the worse it may get. It will not only affect your credit score but you also get penalized for it. Hence, it is worth knowing how much your lending institution charges under the circumstances or if they have a grace period without penalty and a negative credit score. For strict lenders, paying a day late may already be counted as past due.

Create a repayment plan and follow through

Just as you have carefully planned on getting a loan, you should also do so concerning its repayment. Cramming is never an option; you will find it difficult to pay, and it reflects badly on your business credit score.

Conscious spending
You have to determine how you will allocate funds from your business income. One of the ways to do that is to be frugal in managing your business expenses. It is not uncommon for small businesses to overspend, especially during the first several months of operation, depleting funds that would have been used to pay back the loan.

While all sorts of payables come with being in business, you can still employ money-saving methods that will allow you to have more ability to repay your business loan. For example, if you can still make do with a small office instead of upgrading to a larger space that can cost you more, don’t make that extra spend. Such sacrifices will pay off later; you just have to exercise control and patience.

Monitor financial capacity
You can adjust as soon as your revenues double or triple that will empower you to not only pay for your debts and bills but also afford you other things that you’ve been putting off, like finally getting an air conditioner in the office.

Save some from your business loans
Alternatively, you can also get funds for your repayment from the loan proceeds themselves. Upon receiving your loan, try not to spend everything on your business. Set aside around 20 percent of your proceeds as buffer or emergency funds, which you can use at any time you will be in a tight spot. It can be useful during lean sales, instead of skipping your monthly payments that will only incur penalties that can be more detrimental to your profits.

Tighten data security
Aside from tightening your belt, it would help if you did the same for your data security. Small businesses are highly vulnerable to breaches and attacks because many take this matter for granted, thinking that data hackers are only after big corporations. Hundreds of million dollars are lost from business income to data thieves alone. Strengthening your company’s cyber security will help you save those precious dollars and allow them to loan repayments.

Implement stricter purchase controls
As mentioned earlier, small businesses need to make sacrifices by skipping expenses they can put off until their company has fully gotten off the ground. There must be a purchase approval system to control expenditure to supplement this task. Don’t be too loose with requests for petty cash and the like. Make sure to create an application process for your employees to observe when they require purchases. You can ask them to fill out a purchase form that includes the details and the purpose of their request. This way, the approving officer can filter out unnecessary requests by prioritizing only the more important ones.

Focus on selling profitable items
Once you have identified products and services with high selling power, invest more in them to increase your revenues. Monitoring your sales is key to being more proactive, especially if you notice that certain items are underperforming. There is just more pressure when you have financial obligations such as small business loans, personal loans, and other loans; there’s no room to relax. Nonetheless, it will prove to be rewarding for your business later.

Look for new revenue streams
The majority of startups are tied up to business financing and operational expenses that it’s common for entrepreneurs to have almost zero profit initially. To help this situation, you can also augment your business with other means so that not all your income will just go to paying your debts. And besides, it will be draining for the entrepreneur if all his efforts are not paid.

Paying off early

Being able to complete your monthly payments may sound like a better proposition, especially when your business is booming. But is it always the best for you?

When it is beneficial
While it is true that paying the outstanding balance of your business financing in full is unloading a burden off your backs, you should look into your loan terms once again. If you follow an amortization schedule where the interest rate is the priority when your repayments are applied, cutting your loan term short will save you a significant amount. There may be prepayment penalties, but they are usually minimal, so you’ll still have big savings nonetheless. 

Another situation is when your business has seasonal sales. If you’re paying fixed amounts monthly, it will prove challenging to do so during your lean season. So when you have extra funds to fully pay your loan and then some to maintain financial health, it would be a wise decision to do so.

When it is not
It would be better to stay the course even if all of a sudden you have been pocketing huge profits when there is no incentive from the lender, such as paying fixed amounts. You have a 2-year loan term with a monthly repayment of 2,000 dollars, for example, and you find yourself equipped with the means to finish it early on the 13th month. If you’ll be paying all your remaining months in one lump sum, saving you nothing in return, it’s much more sensible to carry on with your remaining term instead. You can either invest your extra cash or spend it on other important projects that will yield earnings for you.

When unable to pay

No matter how flawless your credit history may have been, things happen. While you risk missing your upcoming repayment, all hope is not lost. As a responsible sole proprietor or partnership, don’t wait to get a non-payment notice from your lender. Be proactive by letting them know beforehand. If it’s just a temporary issue, you may request your lender not to put it in your credit record when you can make payment during the extension provided to you.

For a secured loan, your collateral may be in the bubble when your loan defaults but communicate with your lender nonetheless. Although some offer financial protection to a small business owner, business lenders are generally willing to meet halfway, whether that’s providing you with a moratorium or restructuring your loan. Whatever solutions you can come up with to carry on with your loan, they are also inclined to support your business to get back up to its feet. Ultimately, the lender wants to recoup their money whatever means necessary.

It is not unusual for small business owners nationwide to resort to business financing options for various reasons. After all, they can only pay out of pocket for so long. Small business loans can provide the support they require, whether they need business funding for sudden bulk purchase orders, supplementing cash flow, business capital, or making up for income losses.

But often, a traditional lender would require collateral, whether it is for a business loan or a personal loan. This condition can be an impediment considering that many businesses, big and small, have either closed down or continue to struggle with debt due to income loss and recent economic restrictions. Can these impacted businesses looking for the right financial partner to work with their specific needs still get a small business loan without collateral? Let’s find out.

What are small business loans?

Small business loans are lending instruments catered to small and medium enterprise needs. A lender provides funds conditionally to the borrower plus interest. Over time, small business loans have evolved to adapt to the changing needs of entrepreneurs. There are term loans, SBA loans, equipment financing, to name a few.

Why do business loans require collateral?

Commercial lenders and banks look at every borrower regarding how much risk they present. They offer loans that usually involve personal or business assets such as real estate property as a collateral requirement. It is one form of assurance to the lender if the business defaults because they can repossess the collateral to cover the outstanding balance. This setup describes how traditional secured loans work.

Also referred to as a collateral business loan, there are other examples of a secured loan. Equipment financing is where the equipment purchased using the loan proceeds will serve as collateral for the transaction. On the other hand, invoice financing uses the unpaid invoices of the company as collateral.

The collateral value should be more than the borrowed funds to satisfy the lender requirements. Business owners can loan up to 90 percent of this value. The bank determines the loan-to-value (LTV) ratio of the physical asset, which dictates the maximum loanable amount to the small business owner. For commercial real estate property, as an example, you can acquire a business loan of up to 70% of its appraised amount.

As such, putting up collateral from a borrower’s end should not be taken lightly. You don’t want your lender seizing your property which you have likely worked hard to acquire. Lenders consider this reason, knowing you have more skin in the game, so they are more confident when it is a collateral business loan. They would protect their interests first because nothing more can appease them than having collateral as a “just in case” despite the strict vetting process. It also enables them to provide their clients with more competitive interest rates. Another reason for this collateral requirement is that some lenders would like to tap clients with less than favorable business credit scores.

Pros and cons of secured loans

Pros:

High loan approval odds

You can avail of practically any type of small business loan with collateral requirements for as long as it is proportionate to your business assets. If you are presenting a piece of real estate as collateral, you can get its value from an appraiser, which you can show to your potential lender.

Compensates for low business credit scores

As mentioned, a secured loan allows lenders to mitigate the risk of loaning funds to someone who falls short of their preferred credit score. It could mean a score of 680 or thereabouts, which is several points below the usually acceptable score of 700. Hence, it may be lower than the target but not too low to be considered a bad credit, which otherwise would have even more limited options.

Lower interest rates

Banks can offer loans with collateral at a lower rate than a no-collateral small business loan. The personal asset acts as a buffer, providing confidence and guaranteeing that the lender can still collect any unpaid outstanding balance through liquidating such assets.

Increased negotiating power

When borrowers can provide collateral for their loan, they can have lower APRs and better loan terms, such as a longer repayment period or a higher loanable amount.

Improved personal credit score

Once you complete a secured loan without fail, it will benefit your personal credit score tremendously. It sends a signal to future lenders how you have responsibly handled your credit, making you an attractive client.

Cons:

Repossession of property in case of repayment failure

Anything can occur during the loan duration; you can become sick or lose money in your business, which causes you to fall behind on your monthly amortizations. You then know what happens next when you don’t pay – you lose your property to the lender.

Limited option
While cash-backed deposits and stock certificates can serve as collateral, they are often insufficient to cover your desired loan amount. Banks would often match the value of the deposit and will still require additional assets before granting loan approval.

Alternatives to collateral

Sometimes it’s difficult for banks to waive the collateral requirement. While they would rather take tangible assets, the truth is, there are other forms of security you can offer to your lender aside from collateral.

Blanket lien

In place of collateral, a borrower may sign a blanket lien where the lender will have control of all business assets when unable to fulfill their loan obligation. This condition means that although there is no collateral, any business asset in the form of inventory, equipment, property, accounts receivable, etc., may be seized in proportion to the owed money. It is covered under the Uniform Commercial Code or UCC, standardizing US commercial transactions.

Personal guarantees

This option is about the personal assumption of liability for a small business loan. As with business loans, the business itself is the debtor, and in case of default, the person who owns the business will not be affected credit score-wise. When you sign a personal guarantee, you waive this boundary such that, whatever your business owes, you also owe it as a private individual. The bank is empowered to come after personal assets, which extends to your family assets if you are married.

Cosigner

When you need a little more funding, but your personal and business qualifications fall short, you can present a guarantor or cosigner for your loan. This option will only be valid if your cosigner has a high personal credit score. While it may not be as easy to find someone willing to risk their good credit reputation, once you do, you can enjoy benefits such as a low APR and higher loanable amount.

Small business loans without collateral (unsecured business loans)

We know that to get the lowest rates possible, secured loans will most likely give them to you. But the reality is most small businesses don’t have qualified assets. And when some of them do, they still would prefer unsecured business loans because they don’t want to risk their properties. And often, clients would feel that the banks are undervaluing them.

Thankfully, not all small business loans require collateral. Lenders are taking a bigger risk lending money this way; however, they make up for it in other ways by setting stricter terms and higher interest rates.

Below are examples of unsecured business loans offered by banks and alternative lenders, which you can consider when you are unable (or prefer not) to provide collateral.

Term loan

Like a regular mortgage, albeit without presenting collateral, a short-term loan is granted up to five years and is typically used to fund business investments. It follows an amortization schedule where several mortgage payments are applied to the interest before the principal. It might be challenging for a bank to provide you with this loan compared to online lenders.

SBA loan (Small Business Administration)

SBA loan programs have the backing of the Small Business Administration federal agency, which supports growing businesses. The agency will cover between 75% and 85% of the outstanding balance in the event of non-payment of the borrower. Attractive as it may be, this type of unsecured loan is tough to get given the stringent requirements and longer processing.

Business working capital loan

This loan caters to funding daily operations such as payroll, rent, etc., instead of paying for major business expenses or investments. It is linked to personal credit and features short loan periods and smaller amounts.

Business line of credit

This type of business financing might very well be the best no-collateral option there is. However, very few banks will offer it to you; hence you can access more of them from online lenders. An unsecured business line of credit is ideal for startups who often need recurring funding, which works by giving you a credit pool you can tap into at your disposal. You will pay back whatever amount you take out from this credit line plus interest. Any repayments you make are put back into your credit line.

Business credit card

Perhaps the simplest way to secure financing for your business, especially if you require minimal funding, business credit cards can be a useful tool to get small businesses up and running. The process of getting one is quicker and lends you more flexibility. While it works similarly with lines of credit, you can enjoy better rates. You can even take advantage of several card companies’ introductory zero APR promotions.

Merchant cash advance

Also known as a cash advance loan, a merchant cash advance provides a lump sum that you will repay using a percentage of your credit card sales or debited from your business bank account. Retailers, for example, get to pay according to their actual revenues without impaling them whenever the sales income is low. However, you may consider a merchant cash advance a last resort due to their high-interest rates presented as factor rates.

Other non-collateral small business loans

Other unsecured loans can come with some form of guarantee as they are essentially self-securing. Such loans include accounts receivable financing or invoice financing and equipment financing. The unpaid invoices and the purchased equipment serve as collateral without requiring the borrowing to present any existing asset.

Pros and cons of a small business loan without collateral requirements

Pros:

Having no collateral is one less worry

As mentioned earlier, many more small businesses can use a loan without this demanding requirement that most of them may not be able to come up with. In case you have one but don’t like to use it, you avoid the risk of losing it to your creditor when you could no longer pay for some reason.

Higher profits (for the lender)

While riskier for the lender, they also benefit from high-interest rates with higher returns for their money when loans of this nature are fully paid without a hitch.

Faster application processing

Both secured and unsecured business loans entail strict vetting by traditional lenders. But without the collateral, which otherwise takes additional time examining it and determining its value, an unsecured loan is processed a lot quicker. The proceeds are released faster, which is always favorable to the debtor who may need these funds immediately.

Flexible repayment terms

An unsecured loan that business owners can access on an “as needed” basis allows them to repay them in full at practically any time they can do so to minimize their accrued interest. Every cycle, a minimum payment is required to ensure the borrower can fulfill their loan obligations and build their credit history in the process.

Cons:

High-interest rate

We know by now the risks on the lender’s side when it comes to financing loans without collateral. As such, it is compensated with higher than average rates.

More documentation

Since the borrower does not have collateral, the lender will require documents to substantiate the application and minimize risk. It is why it would be harder to qualify for an unsecured business loan. A high personal credit score will be required for those who don’t have established businesses yet.

Lower loanable amount

Still associated with risk management, a commercial lender will be more conservative than an alternative lender with no collateral. Hence, an unsecured business loan can only help you with moderate funding at most. It cannot likely finance expansion projects and sizable purchase orders.

Steps in applying for an unsecured business loan or loan without collateral

1. Choose which type of unsecured business loans best caters to your needs and qualifications. Talk to potential lenders and ask all pertinent questions. Discuss with your financial advisor as well.

2. Verify your personal or business credit scores from credit bureaus and other financing companies that offer them for free.

3. Depending on the amount you will need, get ready to sign a personal guarantee or a blanket UCC lien to satisfy your lender’s requirements.

4. Decide which lender you have the highest loan approval odds and meet your financing needs, and submit your documentation after that.

5. Once your loan application is approved, read the terms and conditions of your contract, most especially the fine print, carefully before sealing the deal.

Final thoughts on non-collateral small business loans

Small business owners are equipped with tools to help them succeed with the help of financing, even without collateral. But first, ask yourself why you are seeking funds and how confident you will be able to fulfill them without fail. Remember that having no collateral does not make it easy for you not to pay your debts. What happens after that will impact your creditworthiness in the future.

The small business game is strong in America. After all, it won’t be called the land of opportunity if its citizens cannot pursue their entrepreneurial dreams. And one way that supports many individuals in this endeavor is having access to small business loans. Ironically, though, it is common knowledge that securing this type of small business financing can be difficult. No doubt, it’s a risky business for most lenders, but if done right, it can be financially rewarding for both parties. It is why business lenders must be very convinced that they will recoup their money and then some.

So, how hard is it to get a small business loan? Let’s find out.

The business of lending and borrowing

A business loan is where a lender and a borrower agree to use funds for business-related purposes. The latter repays the former the amount plus interest within a certain period. While there is a process involved, it is easy to misconstrue that this facility is only for cash-strapped small business owners. Many large enterprises would also turn to short-term loans whenever they need capital infusions and other types such as invoice financing and California finance lender loans.

It is important to note that a small business loan does not just sustain the business in the interim by solving insufficient cash flow issues. Having access to such business loans guaranteed the growth of small businesses.

While they are available as an option, it’s not like you can go to online lenders and secure funding for your business in a snap. There’s paperwork, credit-worthiness checks, and other strict vetting measures. Indeed, it does not come easy.

Why is it hard for small business owners to get a loan?

Try asking someone, a wealthy friend perhaps, if they can lend you say, 5,000 dollars, how do you expect they will respond? Do you think they’ll hand you over that amount and take your word for it? They’ll probably ask when you’ll give it back or how you will repay them. That is also how most lenders also think. And here are reasons why applying for a business loan can be quite challenging.

Requires a high credit score

You wonder if there is a lender where you can apply for the easiest business loan. Hence, it is stressful to know that this loan might by hampered because your credit record is below the acceptable standard. A desirable credit score will help in the loan application process. Hence, if you have not been diligent in your previous financial obligations, it will come back to bite you.

Bad credit is why around 20 percent of small business owners are rejected from the get-go. A low credit score is essentially a red flag to most; lenders prefer not to deal with a customer who was not so diligent in their past loans. If you have been in this situation, it would be best to review your credit report before submitting your loan request.

Instead of proceeding directly to lenders, you can dispute any irregularity or inaccuracy by contacting your credit reporting company. As a rule of thumb, you are likely to be turned down if your credit score is lower than 700.

Cash flow should be sufficient

It might seem counter-intuitive at first glance; you need additional funding, yet you have to prove you have enough cash on hand or high income. Since lenders are primarily concerned about being repaid within the approved period, they also want to know if you have a positive cash flow. It indicates that the liquid assets of your business are growing. That said, having poor cash flow will make it difficult to justify how you will be able to defray your monthly payments. When this situation persists, it can cause a business’ untimely demise.

To determine if you can afford your amortization, divide your annual net income by your annual debt, including your projected loan payments. If you come up with a value of at least 1, you can cover your target loan amount. However, lenders will require a value of around 1.35, leaving some room for a buffer and serving as financial protection for the business.

Your business plan must be clear

Winging it certainly won’t help you win the banks over. It is vital for traditional and online lenders to gauge how auspicious your business can be based on your vision and comprehensive planning. In addition, you need to present to your lender how you intend to use the loan amount.

Lenders tend to favor a small business owner who has a detailed allocation of the loan proceeds. This practice reflects diligence and professionalism, which increase their confidence in you. Remember that you’re not getting free money; hence your vision will help guide you to achieve your goals and make good on your monthly payments.

You can’t just submit your loan request carelessly

Sending multiple loan applications in close succession will negatively affect your chances of being approved for a business loan. Each loan request you submit will get a hit in your credit score, pulling it down. This practice should be avoided if you want to increase your business loan approval odds. For traditional and online lenders, it is an indication of desperation. As such, you need to be careful when submitting your loan application by shopping around first.

Once you’ve narrowed down your list of lenders, choose wisely and one that you have better chances at approval based on your assessment. When you get disapproved, work on what caused your result before reapplying or trying a different lender.

Your industry may not be appealing to the lenders

Let’s face it; traditional lenders may favor certain industries; hence they may not be as open to taking a risk with you given the nature of your business if it involves gambling and alcohol, for example. Such industries are deemed high-risk because they are vulnerable to regulations and compliance. Business lenders are wary of retail and food industries whose revenues are not consistent; hence they will encounter challenges getting loan approval. Other high-risk industries include accounting, agriculture, insurance, legal services, travel agencies, and utilities.

You just started your business

Depending on the amount you need, you may apply for other bank loans or personal loans. But, you will find it hard to present your company if it’s still young, without a proven tenure. An established business is preferred over startups which may be disheartening. However, some online lenders may be more accommodating to new businesses or those with fewer than six months in operation.

You don’t have collateral

Although there are unsecured loans, the amount you need may prompt your lender to require collateral that you cannot provide. It may also be required if you’re a new business owner because you don’t have a business credit score yet. By now, you know that you have to establish good business credit to increase the odds of your bank loan being approved. Otherwise, you will have to look for other financing options or settle with a smaller amount that will likely gain approval without any additional security asset or personal guarantee.

Involves a lot of documentation

Applying for bank loans automatically requires documents to support small business loan applications. Some business owners lack organization, making it hard to consider getting traditional loans or Small Business Administration (SBA) loans. Aside from a written business plan, you have to present your financial statements bank statements, among other substantial documents. Securing bank loans won’t be easy if you cannot fulfill such requirements.

Some types of business loans to facilitate business growth

There are two main categories of loans, secured and unsecured. Secured loans will require acceptable collateral, whether real estate, car, stock certificates, or other assets with value. The opposite can be said about unsecured loans; you can get them from banks, online lenders, and credit unions that prefer borrowers with high credit scores.

Meanwhile, the following loan options have their pre-qualification and loan terms that can address the specific needs of small businesses.

Short term loans vs. long term loans

The quickest way to get results is applying for a short-term loan, provided you only need less than 250 thousand dollars that the borrower can repay in under a year. You can get approval in a couple of days. Long-term business loans cater to an established business needing funds to support its growth. The terms allow the entrepreneur to repay their lump sums anywhere from three to ten years.

SBA loan

This type of loan is more reassuring for business lenders. Since it has government backing, it can manage the risk much better because it can recoup up to 80 percent of the defaulted balance. Small businesses can loan as much as 5 million dollars and enjoy lower rates and better terms than when you get a business loan from alternative lenders.

Merchant cash advance

A merchant cash advance is an unsecured loan for small businesses. This financing is often used by restaurants and retailers needing additional funds.

Repayment terms involve a percentage of card sales or cash deposits made to the business bank account. It essentially provides breathing space for the business to adjust to its actual income and borrow from its projected earnings. However, this loan comes at higher interest rates and shorter terms.

Invoice financing

Another means of borrowing from future revenue, albeit with a little more certainty than merchant cash advances, is that invoice financing accepts unpaid invoices and provides up to 90 percent of their amount to the borrower. It serves as advance payment, which can help with cash flow issues. An interest fee is usually charged every week until the customer pays the invoiced amount and fees before the invoice is returned to the borrower.

Equipment financing

A lender provides funds to purchase machinery, vehicles, or any equipment, becoming collateral for the transaction. It offers relatively lower interest rates and does not require a down payment. If the borrower defaults in payments, the lender has the authority to repossess the collateral you have provided.

How to apply for a business loan for the first time

Now that we have discussed some of the most common loan options that small enterprises can avail of when they need business funding, find out if you are ready to take these steps that help you land the right business loan.

Ask yourself if you really need to secure financing

The first thing is to decide if taking out a loan will help your business endeavor. It could be many things. You might need to buy a major piece of equipment, and doing so will be worth it and give a solid return for you. Or perhaps you need to fund purchase orders, and you lack capital. You are short in cash flow, for the time being, making it hard for you to cover some of the operational expenses. It may be because of payment delays from your customer or seasonal low sales. Such scenarios warrant financing one way or another.

Determine your credit score

As mentioned earlier, it would save you from loan rejection, which can even bring down your credit score further if you submit your loan application only after you’ve verified if your bad credit history is actually reflected in your record or not. Please note that you can get your credit report from several credit bureaus, finance websites, and card issuers.

In case your credit score turns out to be below 700, it doesn’t mean that you’ll never get approved for a loan. You might want to step back a bit and improve your score first. This way, you’ll not only be able to get approval but offered a lower interest rate as well. It means you will have to put off your loan request for several months to a year. On the other hand, there are still other financing options if you require funding right away, regardless. In any case, knowing your credit score beforehand will guide you accordingly.

Talk to your potential lenders

Start setting up appointments with banks and financing institutions and learn about their offerings. Traditional banks and online lenders usually share the same types of loans. You are likely to get a lower rate from a bank, but it has more stringent terms and documentation than online lenders.

During your discussions, the lender will let you know their requirements and give you other information about their loan products that can cater to your needs. Ask about the fees involved and all the hard questions so you can gauge if your current business situation meets their qualifications.

When lenders ask you back, be truthful in your answers and avoid exaggerating your projected revenues. However, it will do you more good if you can pitch the potentiality of your business when you deem it necessary, especially if the lender is on the fence with you.

Choose which business loan will be most optimal to your needs

It’s time to check which small business loan is best for you. If you have a strong personal credit score, you are at an advantage because it allows you to negotiate with lenders that will give you favorable terms such as the lowest annual percentage rate (APR), etc. When you can put up eligible collateral, it even ups the ante for the borrower, with many lenders knocking at your door. If you need a larger amount, you would want to spread the monthly payments over a longer period hence a long-term loan may be an excellent choice.

What you should remember when choosing the right financing for your small business

1. For long-term loans and SBA, you need to go by the book, meaning you need to present a strong case for your business. If you have a decent amount of tenure, good credit history, relatively high revenues, you stand a great chance of being approved. You are also likely to meet the criteria of most banks and other financing institutions, where you often get the most competitive rates.

2. If your business has only been operating for a few months, you still have other friendlier options to your circumstance. A short-term loan may be the right fit for business owners operating for at least six months. You can also consider applying with online lenders who do not have too high qualifications from their borrowers and choose the most suitable loan from their roster.

Tip in boosting your loan approval

1. Presenting additional tangible assets such as real estate property or high-value corporate bonds as collateral can also help you secure a small business loan even if you fall short in some of the requirements. When the borrower pledges collateral, it adds confidence to the lender, giving them more competitive interest rates.

2. Although it may be challenging, having a loan cosigner with a strong credit score, if ever you can find one and are willing to go through the application process with you, can help you land a small business loan approval. You get to have the same benefits because this cosigner extends their favorable situation to you to afford to negotiate your rates and have much better terms.

When it is becoming too hard for you to get a business loan

There are other financing alternatives for business owners who fail to meet the criteria of traditional lenders. Aside from bootstrapping, you can find other means to support your needs. Business credit cards can sustain short-term financial needs that, when managed responsibly, can even help build up your credit score. If your industry qualifies, you can get free money through business grants that the government offers. However, getting approved for this type of funding source may be difficult. In any case, you can check if it can be an option for you.

Another way to help your business without incurring debt is to seek crowdfunding suitable when launching a product or business. You can find several websites that cater to this task. You may also try to find an angel investor, but it would mean giving up a certain percentage of your company ownership. As someone pitching this idea to a venture capitalist, you must be prepared with your solid business plan to assure them that investing in you will be profitable.

Secure your financial documents

Once you’ve chosen your lender, you should gather all the necessary documentation. It includes but is not limited to financial statements, business tax returns/ personal tax returns, business licenses, bank statements, business plans, articles of incorporation, commercial lease, and others.

Submit your business loan application

You will fill out the details in your application form, such as your business name, SSN, Business Tax ID, annual revenue, the purpose of the loan, desired loan amount, etc. Most online lenders have a quick turnaround processing time of two days, depending on which type of business loan. Banks take weeks to process loans, while SBA loans, in particular, are known for their long processing time of 90 days, more or less.

As they say, to make money, you have to spend money. And anyone running a small business that keeps a tight cash flow knows that very well. Operational expenses can easily become very overwhelming. Hence, small business loans are part and parcel of an entrepreneur’s life.

One of the deciding factors in availing of a small business loan is the interest rates. So your next concern would be, is a small business loan fixed or variable? The answer is here in this article, plus a whole lot more, which hopefully can help you decide between a fixed interest rate loan and a variable rate loan.

Here are some terms you will encounter.

Interest

It is the cost of borrowing money or a loan, usually represented by a certain percentage of the loan amount.

Small business loan

It is a type of small business financing used for a particular purpose such as equipment purchase, additional credit line, factoring invoices, among others.

Compound interest

Interest is computed on the outstanding balance from the loan principal plus its accrued interest.

Base rate

A base rate is the minimum interest rate charge is set by the bank or financial institution. Sometimes, the government pegs it at a reduced rate to stimulate growth.

Prime rate

Also referred to as prime lending rate, the prime rate is interest granted by major banks for their most creditworthy borrowers.

Lender

The lender could be a person, a group, or a company that is the source of funds for the loan.

SBA loan

It is a type of business loan, a portion of which is guaranteed by the US Small Business Administration (SBA).

What are fixed-rate loans?

Fixed-rate loans are loans whose repayment is computed based on a single rate throughout their duration. Regardless of market upheavals, the fixed interest rates charged to the loan will not change.

Pros and cons of fixed-rate loans

Pros: Your monthly repayment amount will remain the same so that you can set a definite budget during your loan term. At the same time, your repayment terms will not be affected by sudden spikes in market rates, allowing you to protect your business.

Cons: When base rates go down, you don’t benefit from it as your rate is fixed. Also, comparatively speaking, fixed rates are usually quoted higher than variable rates. For example, your fixed rate is 11%, while the variable rate is 9%.

What are variable rate loans?

Variable-rate loans mean their interest rate can change anytime during the repayment period. The behavior of financial markets that causes this change is tied to the prime rate, which the Federal Reserve determines. Hence your interest could go up or down. Essentially, borrowing money with a variable rate is like investing in the stock market; only you would want the rates below, or else you will pay more for your loan. The rate can also stay the same given an economic growth at a reasonable pace and manageable inflation.

Pros and cons of variable rate loans

Pros: The borrower has the opportunity to less monthly repayments than he is used to when the base rate goes down. Hence, if your current interest rate is 8 percent and there is a reduction of 0.5%, it becomes 7.5%. And depending on the market where your loan continued to enjoy the lower interest rates, it can significantly reduce your overall cost for the entire loan duration.

Cons: The uncertainty of the market may bring about higher interest rates such that the borrower ends up having a higher monthly payment, which can throw off their budget.

Is a small business loan a variable or fixed rate?

Whether fixed or variable, interest rates stay within a range of values across banks, lenders, credit unions, and financial institutions. Generally, though, you should not only ask for the interest rate but also the APR as this percentage will give an estimate of your total cost.

As of this writing, term loans range from 4% to 6%. The line of credit is between 5% to 10%, and SBA microloans charge anywhere between 5% and 8% APR.

For other types of small business loans like merchant cash advances, banks prefer to quote them in factor rates over APRs. A factor rate is used to compute the total small business’s monthly payments by multiplying it to the cash advance amount.

What fees are involved aside from interest rates?

The borrower shoulders other fees which comprise the APR when securing a small business loan. An initiation fee will cover the administrative cost of processing your loan application. An underwriting fee is paid to the underwriters responsible for reviewing your documents. Closing fees apply to real estate appraisal, packaging, or the valuation of your business. Aside from that, there’s a guarantee fee for SBA loans that the borrower shoulders to defray the SBA program cost. Incidental fees would include late payment and prepayment charges.

What else should you ask your lender when applying for a small business loan?

Given that your loan request is granted, it is worthwhile to ask the following questions to your lender aside from interest rates.

1. Are there incentives if I pay earlier than my due date or if I pay several months’ worth of repayments in advance?
2. How soon do I begin with the monthly repayments? What payment channels do you accept?
3. What type of business loan do you recommend for my business needs?
4. What is the lowest interest rate you can offer me? APR? What fees comprise this APR?
5. Can I change my monthly due date at any point in the loan term?
6. Can I talk to some of your previous borrowers?

Final thoughts

Is a small business loan fixed or variable? You now know the answers to this question. When choosing between the two rate plans, remember to consider your cash flow, preference, loan term, risk tolerance, and business goals.