Gone are the days when an entrepreneur could walk into a bank and get the funding needed to start up, float or expand a business. As traditional institutions have scaled back on loans to small businesses, online lenders are stepping in to provide the short- and long-term financing that keeps Main Street alive. Even to those who can’t qualify for a bank loan.
We show you how to compare nontraditional financing options to get your business ideas off the ground, fund equipment or vehicles, cover temporary shortfalls and more. We’ll tell you how these loans work, what you might pay and common options you’ll choose from. While you may not qualify for them all, you’ll be better equipped to get the financing or capital to keep you thinking big for your small business.
Kabbage Small Business Loans
Kabbage provides small business owners with a revolving line of credit up to $150,000 to grow their businesses.
- Recommended Credit Score: 550 or higher
- Maximum Funding Amount: $150,000
- Minimum Funding Amount: $2,000
- Quick approval process
- Must have been in business for at least one year
- Must have annual revenue of $50,000 or more or $4,200 per month for the past three months
Compare business loans from top lenders
- If the provider quotes a different rate to the one above please let us know
How does a business loan work?
How a business loan works depends on the kind of loan you get. Some of your traditional business loan options include SBA loans that are government-backed, fixed-term business loans and equipment financing. These loans typically come with repayment periods up to seven years, but some may be longer. You’ll make monthly repayments until the loan is paid off. Some lenders offer options of additional repayments at no extra fee.
If you opt for a line of credit, you get access to ongoing funds at a predetermined limit. You only pay interest on the amount you draw.
Invoice financing is another type of funding you can consider. With invoice financing, a provider lends you money on outstanding invoices. The lender gives you a significant portion of the invoice amount, and you repay the loan when your receive payment from the client. Continue reading to learn about even more business financing options.
What types of business financing options are available?
Choosing the right type of financing is the one of the first steps to getting funding for your business. There are many types of financing options catering to the different needs of businesses. Here are some of the most common:
- Business overdraft. This type of finance is usually taken out by smaller businesses or those with fluctuating cash flow. It’s designed to finance the day-to-day cash needs of a business and are lent by banks and credit unions, as they’re tied to a business bank account.
- Business line of credit. Similar to a business overdraft, a business line of credit gives businesses additional funds as and when they need it. The difference is this finance is usually secured by a personal guarantee.
- Credit cards. Both personal and business credit cards are utilized by business owners when financing short-term capital requirements. Some benefits of credit cards are interest-free grace periods and frequent flyer points, but can be expensive if not paid back in full each month.
- Cash flow lending. This type of financing is opted for by businesses that generate cash flow but aren’t able to provide security. The loan is secured by the working capital assets of the business.
- Invoice financing. If you’re business relies heavily on accounts receivables, invoice financing provides ongoing funding on your outstanding invoices. Loans are typically paid back within three months or as soon as you receive payment on the invoice.
- Invoice factoring. Many businesses have capital tied up in outstanding invoices, so this type of finance allows them to sell invoices to a third-party company. The third-party company will buy the invoice from your business at a percentage of the amount due, usually up to 85%, and then collect full payment from the client.
- Trade finance. Businesses looking to purchase goods from a domestic or international supplier can consider trade finance. Through a letter of credit, bank guarantee or documentary collection you simply pay interest on the amount provided for each trade transaction.
- Vehicle finance. Businesses that need to purchase vehicles have access to a range of vehicle financing options. As the loan is secured your business can look forward to more competitive rates, and depending on the use of the vehicle, tax benefits.
- Equipment finance. If you need equipment for your business, whether it be for a construction site, a medical lab or an office, you may need financing to lease or purchase it.
What type of financing are you interested in?
How much do business loans cost?
When considering the cost of a business loan, there are two parts to evaluate: rates and fees. Rates will depend on several factors including your creditworthiness and the loan term. Fees are usually predetermined based on the lender.
Interest rate is what you’ll most commonly see when considering business loan costs. This is the amount charged as a percent of your loan principal. It can be compounded daily, monthly or annually.
Fixed interest rates remain the same throughout the entire term of the loan. Variable interest rates can fluctuate throughout the term of the loan, and your repayment amounts may go up or down depending on the market.
Another type of rate you may see charged on a business loan is a factor rate. Factor rates are decimal figures that act as payment multipliers. They’re applied once on the principal loan amount to demonstrate how much your business loan will cost over the loan term. (Example: A 1.25 factor rate on a $10,000 business loan for a 12-month term would result in you ultimately paying $12,500.)
Many lenders charge one-time fees to get your loan started, such as establishment fees, document fees or origination fees.
Some lenders may charge ongoing fees like monthly fees for invoice financing or line fees for lines of credit.
Some lenders may also charge penalty fees for things like early repayment or late payments.
The annual percentage rate, or APR, of a business loan takes into account any fees charged in addition to the interest rate to give you a more accurate idea of how much your loan will cost over time.
How to compare your business loan options
- Loan amount. Use the amount you wish to borrow to narrow down your options. Minimum and maximum loan amounts vary by lender, with some minimums as low as $2,000 and maximums over $1,000,000.
- Loan term. Traditional fixed-term business loans typically have loan terms ranging from one to seven years. On the other hand, short-term financing options like invoice financing are meant to be repaid within just a few months. It’s important to know what you can afford so that you can choose the loan term that best suits your business’ cash flow.
- Interest rate. Interest can vary widely depending on the type of business loan you choose. Loans backed by the Small Business Administration — or SBA loans — tend to offer competitive interest rates. Ongoing financing options like merchant cash advances tend to come with higher interest rates. This feature requires your attention because even a small difference in interest rate percentage can have a big effect on the total cost of the business loan.
- Type of lender. Banks tend to have stricter qualification requirements than other lenders when it comes to approving business loans. That’s why many small business owners turn to non-bank loans for funding. Depending on how established your business is, either might work for you.
- Collateral required. Although unsecured loans come with the benefit of not putting up an asset as collateral, there are advantages to secured loans as well. Secured loans may come with lower interest rates and longer repayment periods depending on the asset you provide as security. Learn more about business equity loans if you own a home or other high-value property and need a business loan.
- Loan purpose. If need funding to start a very specific type of business, like a taxi company for example, there may be tailored loan options available to you. Some lenders also offer additional services for business owners taking out tax debt loans or loans for other highly specific purposes.
Are you eligible for a business loan?
- Business age. To qualify for a business loan, your business will typically have to meet a minimum age requirement, which is usually at least six months. To apply for a business line of credit or equipment loan, this tends to increase to one year. To qualify for a traditional-term loan or an SBA loan, your business may need to be at least two years old.
- Revenue. Lenders look at the revenue your business generates to make sure you can repay the loan. Many business lenders require a minimum annual revenue of $50,000 to $75,000. Some lenders may consider monthly revenues if your business hasn’t been established for over a year yet. When the monthly revenues are considered, the requirements are usually higher at around $10,000 per month or more.
Can I get funding for my startup?
Many business lenders require that your business has been established for at least six months and that it’s meeting certain revenue minimums. There are some lenders who may consider your business plan and personal credit profile in lieu of business experience to evaluate your loan application and asses risks.
Borrowing options for businesses whose cash flow rely heavily on invoices
If your business sometimes has gaps in revenue because out outstanding accounts receivables, there’s a loan option that might suit your needs: invoice financing. Invoice financing lets you borrow against your outstanding invoices and repay the lender once the client pays you.
Invoice financing is meant to be an ongoing service with loans paid back in up to three months. This type of loan may be ideal for service-based businesses that send out a lot of invoices but don’t always receive payment right away.
Invoice factoring is another option to consider. Invoice factoring is when you sell your invoice to third-party. That third-party company pays you a percentage of the invoice and then collects money from your client directly. This is more of a one-off arrangement.
Pros and cons of business loans
- Multiple options. Capital funding for businesses can be easy to find, provided you find out which kind of loan suits you best. Once you know what kind of funding you want, you can get considerable variety when selecting the right lender.
- Various loan amounts available. As long you as you can demonstrate an ability to repay and meet other eligibility criteria, you could borrow any amount from $2,000 to $5 million.
- Use funds for different purposes. There are so many types of business financing options available to fund virtually any business need.
- Interest rate and fees. The interest rate you get depends on multiple factors. It can vary from 6% to 35%. You may have to pay additional fees and charges as well.
- May require collateral. If your business is recently established or doesn’t generate enough revenue, some lenders may only approve you for a secured loan which requires you to put up an asset (such as your home or car) as collateral. You risk losing that asset if you default on the loan.
Frequently asked questions about business loans
How quickly can I get a business loan?
This depends on the kind of loan you want. The turnaround time for a personal loan for businesses can be as little as four days. With a merchant cash advance or invoice financing, you can get your hands on the approved funds within one day. In some cases, the process can take two weeks to a month or more.
What do I need to apply for a business loan?
This differs between lenders. Generally, you will need a summary of your business’ financials, a business plan, financial forecasts (including cash flow forecasts) and your personal information. However, many new lenders simply request to log into your business’ accounting software to get this information for themselves.
Will my credit history be assessed?
Some lenders rely solely on your business financials to make an approval decision while others may take your personal credit history into account. You can check the lender’s website or call their customer service to confirm.
What is an SBA loan?
The US Small Business Administration (SBA) offers different loan programs in the form of SBA loans. You can use funds from an SBA loan for a variety of purposes such as purchasing equipment or inventory, adding working capital, buying real estate, acquiring other businesses, or even refinancing existing debts.
What criteria do I have to meet to get a business loan?
Eligibility criteria can vary from one lender to another. However, it’s normal for a lender to look for a regular flow of income in terms of sales over a prolonged period of time.
Do small business loans require collateral?
Some do and some don’t. If your business financials are strong, you may qualify for unsecured business loans that don’t require collateral. Be sure to compare how a secured business loan may benefit you, as they may offer some benefits as well.
How hard is it to get a business loan as a startup?
There are lenders who offer business loans to startups. You may have to meet alternate eligibility criteria to qualify since you don’t have business history to prove you can repay the loan.
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