You’re ready to begin your journey for a small business loan, but there’s one problem: Every online article you read about what to do says something different. Should you start by compiling financial documents, researching requirements, or contacting potential business lenders?
You’ve already done something right by wanting to be prepared. The more time you devote to preparation, the easier it will be to be approved for your desired business funding program and pay it back without endangering cash flow.
In this guide, we’ll break down everything you need to do in order to accomplish both of these things. If you’re wondering why this process seems more complicated than it did ten or twenty years ago, it’s because the business financing industry has changed dramatically, mostly for the better. The following information is based on the numerous options you now have in terms of products and business lenders.
Your small business loan journey begins with a question: Why do I need a small business loan? You cannot determine which type of small business loan and business lender are right for you without answering this question. And while you might intend to use the funds for a highly specific purpose (buying new equipment, hiring more full-time employees, ordering bulk inventory, etc.), this is only part of your answer.
Think about why you can’t cover the expense(s) yourself along with the short-term and long-term goals of obtaining the necessary funds. How will this move affect other elements of your business? Chances are, an increase in revenue or productivity is not your only desired outcome. Maybe you also stand to raise profitability, build business credit, or widen your target demographic.
The next step is to choose a business funding program that will help you achieve your answer to the question from Step 1. Here are the most popular types of small business loans available today:
Now that you know what program sounds right for you, it’s time to find a business lender that offers your selection. Here are the most popular sources of small business loans along with the programs they offer, the borrowing limits for each program, and the time it takes for the average borrower to receive funding (AFT):
Commercial Bank: Term Loan ($10,000 to $5M), SBA Loan ($5,000 to $10M), Business Line Of Credit ($5,000 to $100,000) AFT (48 hours to 90 days).
Credit Union: Term Loan (Up to $250,000) Business Line Of Credit (Up to $15,000) AFT (Up to 90 days).
Peer to Peer Lender: Technically, peer-to-peer lenders like Funding Circle, Lending Club, and Street Shares aren’t business lenders themselves. The money doesn’t come directly come from them. Instead, they act as a middleman between the borrower and individual investor or an institutional investor, like a hedge fund or investment bank. Between these three options, you can get a Term Loan ($2,000 to $500,000), Business Line of Credit ($5,000 to $150,000), and Invoice/Accounts Receivable Factoring (90% of invoice), all of which will reach your bank account in anywhere from 1-14 days.
Online Lenders: The most reputable online business lenders include Kabbage, OnDeck, and BlueVine. Between these three options, you can get a Term Loan ($5,000 to $2M), Business Line of Credit ($2,000 to $250,000), and Invoice/Accounts Receivable Factoring (Up to $250,000), all of which carry an AFT of 24-48 hours.
United Capital Source: Term Loan ($10k to $5m), SBA Loan ($50k to $10m), Business Line Of Credit ($1k to $250k), Merchant Cash Advance ($7,500 to $1m), Invoice/Accounts Receivable Factoring ($10k to $10m), Equipment Financing ($10k to $5m), Revenue Based Business Loan ($10k to $5m), AFT (24-48 hours).
As you’ve probably heard, one of the most confusing parts about taking out a small business loan is that every business lender has their own requirements. Keep in mind that certain business lenders (particularly banks and credit unions) tend to be biased towards certain industries. So, if you are slightly lacking in one area, you might still be able to be approved if the business lender has worked with many other businesses like yours.
Working with a business lender with experience in your industry is also just a good idea in general. The business lender might know exactly which program would make the most sense for your needs. Here are the general requirements for the options listed above:
Commercial Bank: Credit score must be above 700. Business must at least six months old, but preferably over two years old. Annual business revenues of at least $100,000. Several banks offer unsecured business term loans and business lines of credit, which means you do not need collateral. But in order to qualify, you must fulfill the other requirements with flying colors. What makes all bank loans so much harder to qualify for (compared to other options) is the near-universal requirement of significant working capital. Banks favor applicants who have enough money to finance their desired investment on their own, a.k.a applicants who don’t really “need” a loan. Collateral, however, can sometimes make up for having less working capital than the bank would like. Equipment, inventory, accounts receivable, or even all the business’ assets can be deemed collateral.
Credit Union: In order to borrow from a credit union, you must live, work, worship, or attend school in a specified area, or be a member of a group such as a school, labor union, or homeowners’ association. There are, however, numerous credit unions that anyone can join, usually by making a donation to a certain charity or joining an organization that is affiliated with the credit union. As for general requirements, they aren’t much different than those of a traditional bank, though many do not require collateral. Applicants for small to mid-sized loans may also be able to fall slightly short on some requirements, mainly because credit unions are non-profit.
Peer to Peer Lender: At least one year in business, minimum personal credit score of 600, and annual revenue of at least $50,000. Other requirements, like personal guarantees and recent bankruptcies, are based on which lender you choose.
Online Lenders: At least six months in business, 585+ credit score and $75,000+ in annual revenue for a Business Term Loan. For a business line of credit, a minimum credit score is not required but you must be in business for at least a year and earn at least $50,000 in annual revenue. Invoice/Accounts Receivable Factoring requires a credit score of 530+, at least 3 months in business, and $100,000+ in annual revenue.
United Capital Source: At least six months in business and $100,000 in annual revenue. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, accounts receivable factoring, and revenue based business loans. UCS’s SBA “Marketplace” Loan is available for borrowers with credit scores as low as 650, but you must be in business for at least 2 years, earn at least $1.2 million in annual revenue, and have no bankruptcies or foreclosures in the past three years.
Here are the interest rates and terms for these five types of business lenders:
Commercial Bank: 4% to 10% on most bank loan products, 1-5 years for term loan, 5-25 years for SBA Loan.
Credit Union: Every credit union has their own interest rates and terms, but the interest rates are usually lower than commercial banks. A 2015 report found that the average 36-month Term Loan from a credit union had an interest rate of 9.39%.
Peer to Peer Lender: 7.4% – 40%, 6 months to 5 years for most products.
Online Lenders: Term Loan (Interest of 6% to 99%, 3 months – 5 years), Business Line of Credit (Interest of 15% to 99%, six months – twelve months), Invoice/Accounts Receivable Factoring (Interest of 15% to 68%, 1 week – 13 weeks).
United Capital Source: MCA (Factor rates starting at 1.09%, 3 – 18 Months), SBA Loan (Interest of 5% and up, 3 – 25 years), Business Line Of Credit (Interest of 8% and up, up to 18 months), Term Loan (Rates starting at 9%, 3 – 10 years), Invoice/Accounts Receivables Factoring (Interest rates starting at 5.8%, Up to 24 Months), Revenue Based Business Loan (Rates starting at 9%, 3 – 10 years), Working Capital Loan (Rates starting at 9%, 3 months-10 years)
Congratulations for reaching what is arguably the most tedious stage of the small business loan journey: documentation. Every business lender requires different documents for each of their programs.
If you plan on borrowing from an online business lender or a company like United Capital Source, the paperwork will be minimal. You’ll only need 4-5 documents at most, such as business bank statements, business tax returns, credit card processing statements, and business financial statements. This last series of documents includes your balance sheet, income statement and cash flow statement.
If you plan on taking out a loan from a commercial bank or credit union, however, you’re probably going to end up compiling a lot of paperwork. In addition to the previously-mentioned basics, you’ll need a business plan, which is usually 12-15 pages in itself. Here’s some of the other documents your business lender will most likely require:
Welcome to the last stage of your small business loan preparation process. Regardless of the program or business lender you choose, strong cash flow will significantly raise your chances of approval and make it much easier to pay off the debt on time. So, before filing an application, do whatever you can to improve cash flow. This could mean cutting expenses, increasing productivity, spreading brand awareness, or negotiating new deals with vendors.
Yes, that’s quite a few items to put on your to-do list. But once you’ve completed this stage, you can safely tell yourself that the worst is over. Besides, wouldn’t it be so much harder to do these things when you’re trying to pay off debt at the same time? You’ll soon find out that small business loans are far from the only reward that comes with consistently improving cash flow as your business grows.
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