Here’s exactly how to choose the right business loan for your company.
This guide also provides answers to the following questions:
- What is the easiest business loan to qualify for?
- How to get a small business loan even with bad credit?
- How to get a loan as a brand new startup?
- How to get the most money from a lender, and at the best possible terms?
Basically, you’ll get to know the exact types of small business loans you qualify for, and the necessary steps you need to take to get them.
Types of Small Business Loans
The various types of small business loans include:
- Installment loans
- Lines of credit
- Equipment loans
- Working capital loans
- Merchant cash advances
The above-listed types of loans for small businesses fall under either of the two categories – secured and unsecured business loans.
A secured business loan is one that allows lenders the ability to recover their money back by either selling or auctioning the asset taken from the small business as collateral.
While for an unsecured small business loan, lenders make use of other means to get back their money other than collateral. Here, a lender offers slightly higher interest rates.
This kind of loan is best for small business owners who are not willing to risk their small business assets in the process of getting funding.
Once you decide to apply for a small business loan, a lender will collect:
- Your personal information
- Relevant business information
- Income information of your business
- Taxpayer ID or Employer Identification Number (EIN)
Still, some alternative small business lenders will require you to provide at least a single year’s of data on your business operation and annual revenue statement.
Traditional banking institutions might require you to provide at least three (3) years of data on your business operation.
How to Choose the Right Business Loan
When trying to choose the right business loan, you have to understand that lenders and credit issuers have three (3) main things they constantly look out for to determine if your business should be approved for credit and financing.
These three (3) things include:
- Cash flow
Getting an SBA loan for example will require you to have all three (3) of these.
First, you as the business owner must have a good personal credit rating. Your business also needs to have well-established business credit.
For the secured type of financing, your business will need to have collateral that is equivalent to the amount of money you are requesting from the lender.
And finally, your business needs to have consistent cash flow that is verifiable with its total years of tax returns.
The truth about small business financing is that you don’t need all three (3) C’s requirements (cash flow, credit, and collateral) to get a small business loan. You only need one!
Let’s break this down as simple as it can be.
#1: Cash Flow
Let’s say for example the strength of your small business lies in its cash flow. Maybe you’ve been in business for more than six (6) months and have money coming in and out of the business consistently, and you can show this with your monthly tax returns or bank statements.
This, in turn, opens a lot of funding options for your business just based on its cash flow.
You can turn to small business financing alternatives from platforms like PayPal, Square, and Stripe and get a loan of as much as half a million dollars with a considerably low amount of interest rate.
Sometimes even, these platforms won’t charge you interest on the loan offer. They’d just charge you a set fee, especially with PayPal and Square.
If you consistently have cash coming into your business through any of these platforms, and you’re consistently growing that amount time after time. You are most likely to get approved for funding via any of those sources.
You can also qualify for a merchant cash advance (working capital financing) for your business where you can borrow as much as 12%, sometimes even higher in cash advances of the total amount you consistently process yearly via those accounts.
This means that if your business does $300,000 in annual revenue, with cash flow advancing, you can get as much as $36,000 to $40,000 in small business financing just based on the fact that your business’s got consistent cash flow and you are managing its bank account responsibly.
Thus, if your business has a good cash flow management system, then you choose the following types of small business loans for funding:
- Merchant cash advances
- Working capital loan
- A business line of credit
The best part of getting a loan based on your business cash flow is that your credit doesn’t matter.
Even if you have a really bad personal credit rating, there is a good chance that you can get approved for funding via any of these options.
Good credit rating plays a really significant role when trying to choose the right business loan.
This could come in the form of your personal credit rating or that of a guarantor, family member, friend, or even a potential investor.
With this, you can get approved for funding even if you are a brand new startup or even a high-risk industry.
This financial option also lets you use these business lines of credit to help build your business credit, and in turn, help you qualify for more types of small business loans without a personal guarantee or personal credit check.
If you and your business have the strength of good credit, then your cash flow doesn’t really matter.
The best types of small business loans that fall under this category are unsecured business loans.
Thus, if you and your business have a good credit rating, you can try applying for the following types of small business loans:
- A business line of credit
- Installment loans
Now, let’s say the option you have when trying to choose the right business loan is collateral.
This simply means that you can get any kind of business loan just based on the asset that you have to use as security where your personal or business credit doesn’t matter.
A lot of assets can work here as collateral, but the most preferred by lenders include:
- Real estate
- 401k’s (employer-sponsored pension account)
- IRA’s (Individual Retirement Account)
- Business equipment
- Purchase orders
- Account receivables
Thus, if you are willing to finance your business growth based on collateral, you can apply for the following types of small business loans:
- Equipment loans
- And generally all secured types of small business loans
5 Major Questions to Ask Yourself Before Applying for a Small Business Loan
- What fees will I pay on the loan offer?
- Are there limitations on how I use the loan?
- What are the repayment terms?
- What if I need to get another loan later?
- What happens if I can’t pay back the loan offer?
Getting a small business loan is a great way to grow your company faster, but don’t pursue funding when your business is not doing well.
Taking a small business loan when your business is not currently doing well will only make its financials worst.
When it comes to small business lending there’s no general rate that is available to everyone and their business.
Every business is different, and so is every lender.
Thus, what your business may qualify for in lending from one lender, another business may qualify for something more or even less from that same lender.
Lenders generally make up how much they are going to charge you in rates and fees for a small business loan based on risks.
A couple of things go into how small business lenders calculate risks for a loan offer, most of which include:
- Your time in business
- Your business type
- Personal and business credit rating
- Cash flow
- And so much more
It’s also important to know that your business evaluation for a loan offer changes constantly. Thus, you may qualify for a specific loan amount today, and not do the same in the next month or so.
Also, most lenders will require you to show proof of how you are going to use the given loan offer. So it’s always best to check with your lender to avoid getting limited on your spending for the loan offer.
For a secured business loan, timing is very important.
The loss of your personal assets is critical here, so it’s always best to work with a repayment term that you are most comfortable with.
When it comes to getting more than one small business loan, a few lenders actually offer this to customers, so it’s always best to confirm from your lender to see if you qualify for one.
How to Get a Small Business Loan without Cash Flow, Good Credit, and Collateral
If your business lacks good cash flow, credit, and reputable assets to use as collateral, then this is where business credit building comes in pretty handy.
By leveraging business credit building, you can get as much as 85% of the funds you need through credit cards that you can collect in your business name.
A business credit card, unlike other financial options, won’t require you to provide a personal guarantee or credit check as you work to build your business credit.
Your credit doesn’t also matter here, as well as your business cash flow and collateral.
With this, anybody can get access to business credit even when they can’t get other types of small business loans.
Types of Business Lenders
The three (3) types of small business lenders include:
- Big banks
- Small banks
- Non-bank lenders
Thus, you will need to apply for a small business loan based on:
- The amount of fund your business currently needs
- The size of your business
- The term of the business loan
- Financial reporting
A big bank will generally offer smalls business loans of up to $5million, while small banks usually offer business loans of up to $450,000.
Non-bank lenders usually offer short-term financing to small business owners. This usually comes in the form of unsecured loans from online or fintech lenders.
You can get up to $10,000 in small business funding from a non-bank lender.
Depending on your current credit score, business cash flow, time in business, and business type, the best small business loan deals usually start around 8-9% in rates and fees.
If when discussing with a small business lender and all they do is throw out rates to you on the loan offer without properly evaluating your business or looking at any of your financial information, most of the time, they are just lowballing you to get you to send them your loan documentation.
When trying to choose the right business loan for your company, all you really have to look out for is what is your business strength?
Is it your cash flow, credit, or collateral?
Now, based on those strengths, you can easily determine which is the best type of business loan lender that can offer your financing based on that strength.
When trying to choose the right business loan for your company, don’t just get all wrapped up in the loan rates and fees, you also need to take a look at and understand your various opportunities.
How much money can you earn from this opportunity? and then try to estimate the cost of the funding from there.
If the business opportunities outweigh the cost of your funding, then it makes sense obviously to get the small business loan offer.
Generally speaking, as a small business owner, if you are looking to explore different financing options, you want to do it with a company that has access to a reasonable number of lenders, and not just one.
This puts you in a better position to negotiate loans terms and fees.
You must also understand why you need the business loan and what you intend to use the entire funding for.