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What is a business loan?
We break down your financing options to ensure your company has the funds to grow.
Your options for borrowing money for your business goes well beyond the traditional term loan. Depending on your business and what you need the funds for, you might want to consider a line of credit, merchant cash advance or other type of business loan.
What is a business loan?
A business loan is any type of financing that’s used to fund business expenses — from paying staff wages to purchasing inventory.
Available through banks, credit unions and online lenders, your business typically needs to be at least six months old and bring in over $50,000 a year in revenue to qualify. Other factors like your personal credit score and relationship with the lender will also play a role.
Depending on the type of financing, you can find unsecured options that don’t require collateral or secured loans backed by your business assets or the item you’re purchasing. Interest rates can be fixed or variable, with repayment terms lasting anywhere from six months to 25 years.
What types of business loans are available?
From term loans to lines of credit to short-term funding, you have a variety of business loan options to choose from. What’s right for you will come down to the type of business you own and what it needs funding for.
- Term loans. Business term loans are typically unsecured and ideal for covering a one-time expense. You receive a lump sum — typically anywhere from $5,000 to $5 million — that you pay back plus interest and fees over five to 25 years.
- SBA loans. The Small Business Administration (SBA) offers several loan programs for business owners who’ve struggled to qualify for financing in the past. These are typically term loans that come with more competitive rates since they’re partially backed by the government. However, the application process can take months to complete.
- Lines of credit. Similar to a credit card, you receive access to a credit line that you can draw from as needed. Depending on the lender, you’ll either be on the hook for fixed installments over a set term or minimum monthly repayments.
- Equipment and vehicle financing. These work like term loans, but they’re secured by the equipment or vehicle your business is purchasing. Rates tend to be lower than with their unsecured counterparts, but you risk losing your asset should you default.
- Short-term business loans. Short-term business loans — typically invoice factoring, invoice financing and merchant cash advances — are ideal for businesses that need emergency funds fast. While they’re typically easier to qualify for, they’re more expensive than the other options on this list. And repayments are usually due daily or weekly over a few months.
How much can I borrow?
Depending on the lender and type of financing, you may be able to borrow anywhere from $5,000 to $5 million. The exact amount depends on how long you’ve been in business, your annual revenue and your personal credit score. What you plan on using the funds for and your existing relationship with the lender may also play a role. And some lenders might require collateral for larger amounts.
How can I apply for a business loan?
Because business loans are so common, you can find lenders that offer both online and in-person applications. You can also go through an online business loan connection service to prequalify with multiple lenders at once.
The information you need to provide will vary depending on the the type of business loan you’re applying for and the provider you go with. In general, you might need to have the following documents on hand:
- Proof of monthly and annual revenue
- Business tax ID number and tax returns
- Business bank statements
- Government-issued ID for each business owner
- Business plan
Is a business loan connection service a direct lender?
No, a business loan connection service isn’t a direct lender. Instead, it works with affiliate lenders to help you find financing you might qualify for. After filling out an online form, you’ll receive prequalification offers from lenders that may be able to provide funding. This gives you an idea of what rates and terms you might qualify for before filling out the lender’s full application.
How long does it take to get a business loan?
The turnaround time for a business loan largely depends on the lender you work with and the type of financing you’re interested in. It can take a bank or credit union one to two weeks to process a business loan application and disburse your funds.
Alternatively, online lenders may be able to offer you an instant approval decision and fund your loan within a few business days. And with SBA loans, the entire process can take several months.
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How do repayments work?
Repayments will also depend on the type of business financing you opt for. With many short-term financing options, repayments are withdrawn daily or weekly from your business bank account. Term loans, lines of credit and other longer term business loans usually come with monthly repayments due on a preset date.
And like the repayment schedule, how long your loan term lasts will also vary greatly. Short-term financing can come with terms of only a few months, while equipment and property loans can have terms as high as 25 years.
What happens if I can’t repay the loan?
The default will be noted on both your business and personal credit reports if you aren’t able to repay your loan. You might also be on the hook for nonsufficient funds (NSF), overdraft or late payment fees depending on the terms of your contract.
If you backed the loan with your business assets, real estate or the equipment you were purchasing, your lender can repossess these items to recoup the damages. And if you agreed to a personal guarantee, you may be responsible for covering the full cost of your loan through your personal income and assets.
To prevent these consequences, talk to your lender immediately if you’re worried about missing repayments. It may be willing to adjust your repayment plan or extend your loan term to prevent you from defaulting.
Can I pay off the loan early?
Probably, though your lender may charge a prepayment penalty for doing so. This might be a flat rate or a percentage of what you would have paid in interest. Read through your contract and talk to your lender to learn what fees you might face for early repayment.
5 alternatives to a business loan
Not ready to take out a business loan just yet? Consider one of these alternatives:
- Personal loan. Some lenders will allow you to use a personal loan for business expenses. This can be ideal for startups and businesses struggling to meet minimum revenue requirements.
- Business credit card. For small cashflow needs, a business credit card may be a good option. It can help build your business credit score while earning points or cash back for every dollar spent.
- Grants. For free funding you don’t need to repay, you might want to look into business grants. You may be able to find opportunities through federal and state government agencies, as well as private corporations. Just keep in mind these can take months to apply for — and are generally quite competitive.
- Investor financing. Funding from an angel investor can help take your business to new heights. But you’ll have to be willing to give up equity in your company in return.
- Crowdfunding. Are you a startup or newer business thinking of expanding? You might want to look into crowdfunding — it’s a great way to judge interest in your area for your product or service and drum up funding.
Whether you’re looking to fund a one-time purchase, new equipment or an emergency expense, a business loan can help you reach the next stage of growth. Check out our guide to business loans to learn more about how they work and compare even more lenders.
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