Business loans are loans that help businesses when they need funding for certain projects. Some businesses run into emergency situations where they need cash to fund the purchase of an equipment, pay for space on which they operate, fund the hiring and training of new staff, or fund daily operations in the company. Sometimes, business owners even seek loans to grab certain projects that will enhance the growth of the company. Many lenders have designed loan packages for businesses. For some lenders, if the purpose of the loan promotes growth, they will try to grant you the loan.
Even though there are several loan options, getting a loan is still not a simple task. The fact that there are several loan options makes the process a lot more complicated. You will need to carefully search for the right loan option to help you get the best out of the loan you get.
How Do Small Business Loans Work?
Some business loans are for specific purposes while others are designed for general business funding. The decision to choose either depends on the borrower. Hence, it is up to the business owner to check and choose the option that will benefit his or her business.
- Equipment Loan
Equipment loans are designed to help a business owner purchase huge equipment to facilitate the business. For instance, when your office gets flooded and the flood affects some machines, your business operations may come to a halt. You may end up disappointing some clients. As a business owner who wants your business to grow, you will not want to keep disappointing your customers for a long time. If you do not have the cash to repair the machines or purchase a new one, you can acquire this loan to help you get a new equipment. You will need to make a down payment which is usually a percentage of the loan. In some rare cases, the minimum down payment can be 5%, however, most lenders request for down payment that ranges from 10% to 20%. The equipment you will purchase is sometimes used as collateral for the loan.
- Business Line of Credit
Getting a business line of credit is like getting a credit card. the lender will approve a revolving line of credit for your business. There is always a limit on the amount and you cannot borrow beyond that amount. You will pay interest but the interest will be on the amount you withdraw and not the credit limit. Since the line of credit is revolving, when you pay up the cash borrowed, your cash balance increases. This loan option gives you a lot of flexibility with regards to the loan amount. You always have cash you can rely on in cases of emergency. It is advisable to always pay the minimum amount and avoid going beyond the limit. You can use this cash to purchase equipment, fund a new project, or fill the gap in cash flow. You can this money for anything in your business.
- Invoice Financing
When your customers delay in paying the invoices, you may experience a break in your cash flow. This is when you can rely on this loan option. With invoice financing also known as invoice factoring, you will sell your outstanding invoice to the lender. The lender may purchase up to 80% of the outstanding invoice. You should note that you will pay fees and rates for the transaction. Invoice financing does not depend on you only; it depends on your customers as well. This is because customers will need to pay back their invoices for you to make complete payment to the lender.
- Merchant Cash Advance
You can sell a portion of your future sales in return for a lump sum. The lender will arrange the repayment terms with you. However, you will repay the loan with interest and fees. Merchant cash advances offer quick cash but they can be very expensive. Due to this, merchant cash advances should only be considered after considering other alternatives.
- SBA Loans
SBA loans are guaranteed by the Small Business Association (SBA). The SBA guarantees up to 80% of these loans. These loans are offers by lenders who are approved by the SBA. There are options when you want to get an SBA loan. They include the following.
- a. 7(a) loan program
This option is the cheapest and the most popular SBA loan option. You can use this loan to finance several business projects such as renovations, debt refinancing, and even establishing a new business. You can access loan amounts ranging from $25,000 to $5 million. Loan payments are usually made in monthly installments and repayment terms range from 5 to 25 years.
- b. Microloan Program
This SBA loan option is available for business owners who need working capital, cash to purchase machinery or furniture. The funds cannot be used to purchase real estate or pay up an existing debt. The maximum loan amount offered through this loan program is $50,000. The maximum payment term is also six years.
- c. CDC/504 loan program
This option provides loan for business owners who need long term financing to purchase huge equipment or real estate. This loan is provided by the Certified Development Company (CDC). CDC is a non- profit group that focuses on economic development in the community. You cannot use this loan for inventory or working capital. You can access up to 5.5 million and the repayment term can span from 10 to 20 years.
Costs Associated with Business Loans
- Down Payments
Some lenders request for collateral during the loan request process. This collateral can be a property. The lender may request for a business or personal collateral and you risk losing that property if you do not pay the loan on time. Some other lenders request for an equity investment which is usually called down payment. This amount can be 10% or more of the loan amount.
The Annual Percentage Rate (APR) is the interest rate you will be charged on the loan along with the fees that you will pay.
- Factor rate
Factor rate is charged on merchant cash advances and some short term loans. This rate is similar to interest rates and it tells how much interest the borrower will pay on the loan. The APR for invoice financing is also expressed as a factor
- Origination fees
The origination fee is charged by some lenders when they are processing a new loan.
- SBA loan guarantee fee
This fee is associated with the SBA loans. Since the SBA guarantees loans and makes them less risky for lenders, they charge a fee. This fee is passed on to the borrowers by the lenders. you should, however, note that an SBA loan does not come with an origination fee. When you pay a guarantee fee, you will not pay an origination fee.
- Late Fees
This is a fee you can avoid. The late fee is charged when you do not pay your loan on time. Some lenders will give you a few days to pay, if you are unable to pay during that time, the lender will charge this fee. This fee can be expensive and it adds up to your debt.
- Closing Cost
The closing cost is charged when the lender is closing the loan. Things that make up the closing cost include business valuation, filing and recording fees, and commercial real estate appraisal fees.
It is advisable to compare rates and fees of lenders. This can greatly reduce the expenditure on the loan.
Best Business Loans
Kabbage lends amounts that range from $2,000 to $250,000. This loan option is best for business owners who need cash immediately because Kabbage funds loans fast. It is also ideal for people who do not have good credit and have not been able to secure loans elsewhere due to their credit. One downside of securing this loan is that the lender will charge an additional fee if you carry a balance from the previous month. Among Kabbage’s business loan options is the line of credit. With this option, you should be in
Business for at least one year and you should have an annual revenue of at least $50,000.
This lender offers two packages: lines of credit up to $100,000 and term loans up to $50,000. For term loans, you will need a minimum credit score of 500 to apply but with the line of credit, you will need a minimum credit score of 600. Your business should operate for your business to be eligible for this loan. Your business should also accumulate a minimum annual revenue of $100,000. The origination fee is 2.5% of the loan and you may be required to make daily or weekly payments. Fortunately, you do not need to provide a personal collateral before accessing this loan.
LendingClub offers loans with low APR and flexible payment terms. LendingClub also offers quick funding so you can get funds when you need urgently. They can fund your loan in 2 days. However, you will need to put up your business’ liquidity assets as collateral. This is commonly referred to as the UCC-1 lien. Although borrowers with good credit enjoy low APRs, business owners with poor credit get loans with high APR. you will need a minimum annual revenue of $75,000 and you should be in business for at least 2 years. The origination fee ranges from 1.99% to 6.99%. This loan option is an excellent option for borrowers who do not want to use their personal properties as collateral.
Accion offers loans to businesses that are starting up. loan amounts range from $300 to $1 million. This loan is an excellent option for businesses who have been operating for less than six months. This lender does not request for a minimum annual revenue, hence firms with poor revenue can even apply. The loan repayment terms can be up to 60 months. You should note that you will be required to provide collateral if the loan amount is high. Although the loan requirements are flexible, you should be prepared to pay a processing fee of $165 and a 3% closing fee. There is no origination fee.
FundBox is another lender that is worth mentioning. This lender since its inception in 2013 has offered funds to over 500,000 business owners. There are no origination fee, maintenance fee, or inactivity fee. The maximum loan amount the lender can offer is $100,000. FundBox offers a business line of credit and invoice financing. For invoice financing, the loan term is up to 6 months and the loan term for a business line of credit is up to three months. This loan option is great for business owners who need cash to fill in the cash flow gap and for owners who have unpaid invoices. Due to the flexible loan requirements, business owners who are unable to secure funds from other lenders can try applying to FundBox.
BlueVine is worth mentioning due to several factors. The financial institution grants loans in 24 hours. Hence, Business owners who need funds urgently can apply to this lender. BlueVine grant loans to the tune of $5,000,000 when you apply for invoice financing. You can also get up to $250,000 when you apply for a line of credit. You, however, need to make an annual revenue of $250,000 to qualify. There are long-term contracts and you will not pay termination fees if you decide to end the lending relationship.
If you need cash to maintain a standard cash flow, purchase a new equipment, repair an existing equipment, or pay an existing debt, LendingTree can grant you a loan to sort out these issues. LendingTree offers several loan options including term loans, SBA loans, lines of credit, equipment loans, and invoice financing. You can acquire SBA loans at a minimum APR of 6.5% and a maximum APR of 9.0%. The APR on all other loan options depends on the lender.
Torro focuses on lines of credit and merchant cash advances. This lender can offer you a business line of credit up to $225,000, and a merchant cash advance up to $750,000. Your loan will be approved in less than 48 hours. Torro’s application processes are simple and you will be able to complete your application in minutes. You do not need to worry about completing a huge pile of papers. Their application process is paperless. You should, however, meet the following requirements in order to qualify for a loan. The minimum credit score requirement is 650. You will also be asked to provide a personal guarantee and a business plan. You should also not have any recent bankruptcy.
- Seek Business Capital
This firm focuses on startup businesses. Seek Business Capital provides professional business advice for startups and they proceed to develop a plan for the company. this company does not fund companies; it matches the startup companies with third-party lenders. When you submit your application, Seek Business Capital helps you to secure a loan in one to three weeks. The fees and terms depend on the third party lender. Seek Business Capital allows you to compare rates from other lenders and make the best decision based on the funding plan.
- National Funding
National Funding can grant you a loan to the tune of $500,000. However, your business should be in business for at least one year and your annual revenue should be at least $100,000. One good thing about this loan package is that there are no upfront costs when you apply for this loan. you can get your funds 24 hours after applying and you will get a discount when you pay off the loan early. The loan options available are term loans and equipment financing. You can get a minimum of $5,000 and a maximum of $500,000 when you apply for term loans. With equipment loans, the maximum fund available is $150,000.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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