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Business loans work by providing your company with funding to grow, cover cashflow gaps and other expenses.
With a traditional business loan, you can typically borrow from $5,000 to $5 million at rates starting at 5%. You repay the funds plus interest and fees in monthly installments, often over over five to 20 years.
Some business lenders require collateral, while others offer approval on your creditworthiness, revenue and other factors. If you can’t qualify for a business loan, there are alternatives.
There are several different types of business financing out there, each offering different terms and benefits. Which one is best for your business depends on its specific situation. If you’re buying machinery for your business, you might want to consider equipment financing. If you’re struggling with cashflow, a merchant cash advance, invoice financing or factoring might be the way to go.
Here’s how the most common types of business loans break down:
Fixed-term business loans come with interest and fees:
The total interest and fees is express as an annual percentage rate, or APR. It’s the easiest way to understand how much your loan is going to cost you over time. However, not all business loans display their costs as an APR.
Look into these features when you are considering business loan options.
Here’s what you can expect to happen when you apply for a small business loan.
Business loans typically start at around $5,000 and can top $5 million. How much you can borrow depends on several factors:
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It used to be that banks and credit unions were your two main options for business loans. That’s no longer the case. Let’s take a look at some common business loan providers in 2020.
Borrowing online is significantly easier than borrowing from a bank: There’s less paperwork and a shorter application. It’s now also easier to qualify for an online business loan as a small business.
Here’s a few types of loan providers you might find online:
Bank loans could be a good option for established businesses pulling in at least $1 million in annual revenue and need large amounts of funding — say, over $100,000.
Credit unions might be nonprofits, but they actually reject more applicants than any other type of lender, according to the 2016 Small Business Credit Survey by the Federal Reserve.
The Small Business Administration doesn’t actually fund loans itself. You’ll have to go to a lender that offers SBA financing to apply. You can find SBA loans online through sites like SmartBiz, though the SBA’s top lenders tend to be banks.
Whether you apply online or through a bank, SBA loan applications are typically more involved than other types of business financing. And since they involve taxpayer money, and you can get disqualified for reasons that other lenders don’t even consider, like having a criminal record.
Getting a loan can help your business in more ways than one. These include:
Answers to common questions about business loans.
It depends on the type of financing you’re looking for. Bank loans can be difficult to qualify for if you have a young business or don’t have excellent credit. Online loans can have more relaxed eligibility requirements, but the most competitive rates still tend to go to businesses that have been around a few years and whose owners have excellent personal credit.
Generally no, the IRS does not consider a business loan as taxable income. However, if the lender forgives the debt — meaning that you don’t have to repay it — your business will have to pay taxes on the forgiven portion.
While most business loans require a personal guarantee, it’s possible to find one that doesn’t. If you’d rather not pledge your personal assets, consider looking for a loan backed by collateral.
Yes. Business loans that don’t require collateral are called unsecured business loans. This means that you don’t risk losing your assets. But you might not get as low of a rate as a secured business loan. You might want to weigh the two options first.
Even many unsecured business loans require a personal guarantee from the business owner. This means that you’re responsible for covering the loan amount if your business fails.
This technically isn’t collateral because it doesn’t name any specific assets. But it’s a risk you’re taking on as a business owner.
Business credit scores aren’t as widely used. The owner’s personal credit score could be better at predicting whether the business is a risk to lend to.
Many business loans — even unsecured loans — also require a personal guarantee from at least one business owner, meaning that you’re responsible for paying off the loan if your business defaults.
It’s possible, but you likely won’t have as many options. If you have a partner who is a US citizen or permanent resident, you might have a better chance of qualifying for more competitive rates if you apply with them.
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