Everything You Need To Know About Business Financing

The Credit Review
March 22, 2019
Everything You Need To Know About Business Financing

Whether you are starting a business, building on your current one, or just need help with your cash flow, a business loan may be the right option for you.

But which one is right for you? With all the different types of business loans and all your options for lenders, it's important to know your options based on your needs.

Each type of loan will have various requirements to qualify that are usually based on your personal credit history, annual revenue, time in business, debt-to-income ratio, cash reserves, and business plans. Keep in mind that meeting the minimum requirements doesn't guarantee that you will receive a loan.

Lenders like banks and credit unions tend to be more difficult to qualify for while online lenders generally offer more flexible qualification requirements.

Below, we list the different types of business loans available and the best one for your needs.

Types Of Business Loans

SBA Loans

Pros:

  • Low interest rates between 5% and 13%
  • High loan amounts (up to $5 million)
  • Long repayment terms
  • Do not have to have been in business for a long time
  • Can be used for almost any business purpose

Cons:

  • Difficult to qualify
  • Strong credit history needed
  • Long application process (3 weeks to several months)

Best For:

  • Businesses looking to hire new employees, refinance an existing loan, or open a new location.
  • Borrowers with strong credit who can wait for funding

Our Recommended Lender: LendingTree

The SBA (Small Business Administration) creates various small business loan programs and while these loans aren't offered directly by them, they are offered by trusted partners (usually banks, local lenders, and online lenders).

These SBA loans are some of the most affordable since they back part of these loans (which range from $5,000 to $5 million) and sets caps on interest rates.

SBA loans come with a variety of term loans, such as traditional loans, microloans, real estate loans, loans for veterans, and more. For example, microloans can lend amounts up to $50,000 for new businesses, SBA 7(a) loans fund a variety of businesses purposes, and CDC/504 loans can purchase large equipment or real estate.

Repayment terms on these loans depend on your circumstance and range from 6 years (for a microloan), 7 years (for working capital), 10 years (for buying equipment), 20 years for a 504 loan, or 25 years (for real estate purchases/SBA 7(a) loan).

Business Lines Of Credit

Pros:

  • Large lines of revolving credit helps cash flow
  • Flexible borrowing option
  • Generally unsecured loans (which require no collateral)
  • Quick and flexible funding
  • Potentially low interest rates and high borrowing amounts
  • Allows options for businesses with less than perfect credit

Cons:

  • Might have extra fees (such as draw fees and maintenance fees)
  • Businesses must have adequate revenue
  • Strong credit requirement
  • Late and missed payment penalties
  • Collateral may be required for some loans

Best For:

  • Businesses in need of short-term financing costs (such as unexpected expenses, cash flow issues, payroll costs, and financing projects)

Our Recommended Lender: Kabbage

Business lines of credit allow businesses to access revolving lines of credit to withdraw any funds you need, repay it, and continue withdrawing for as long as you need.

These business lines of credit are similar to a credit card with a high limit and increase the funds available in your checking account. You can withdraw up to your limit at any time to cover short-term needs such as dealing with cash flow, buying inventory, or unexpected expenses.

Business lines of credit can be acquired at banks and online lenders who can transfer cash into your business checking account. Borrowers only have to pay interest on the advanced amount. Interest rates are generally lower (as low as 7%) since these loans are seen as low-risk.

Businesses can receive credit line approval quickly, even if they have lower credit. Repayment terms last from 6 months to 1 year, but specific loan terms depend on your business' creditworthiness, current finances, revenue, tax returns, and potential cash flow.

Business Credit Card

Pros:

  • The ability to earn rewards on your purchases
  • There is no collateral required

Cons:

  • These cards have potentially high costs and variable rates that could increase
  • There may be extra fees
  • Your personal credit is on the line if you fall behind on payments.

Best For:

  • Small and basic purchases such as office supplies, client expenses, or travel
  • Startups who do not have a long financial history

Business credit cards are very similar to consumer credit cards with their revolving lines of credit but usually have smaller credit limits and greater rewards. Like with personal credit cards, you can use it up to the credit limit and repay the required amount (either minimum or full).

These cards do not look at your business's finances but if you fail to repay it your personal credit will be put on the line.

Invoice Factoring And Financing

Pros:

  • Quick approval
  • Easy to qualify for since the invoice is used as collateral
  • Fast funding
  • Clients will not know their invoices are being financed

Cons:

  • The cost is higher compared to other funding options
  • Early repayment may come with high fees

Best For:

  • Businesses that need quick cash for unpaid invoices
  • Businesses that have clients on monthly or regular payment schedules

Our Recommended Lender: BlueVine

Invoice factoring allows business owners to sell unpaid invoices to factoring companies who will advance the invoice (usually around 75% to 100%) to cover any needed cash flow due to clients not paying on time, which will then be paid back by the clients.

Invoice financing is similar, except that businesses use these unpaid invoices as collateral to get a cash advance and are in charge of getting payment from their clients.

Repayment varies on the company you work with. These can be made by a lump-sum payment or on a weekly basis. Companies may charge you a weekly fee or take a percentage of your invoice until they are paid back.

Business Term Loans

Pros:

  • Can be used for any business-related purpose
  • Businesses can borrow larger amounts
  • Quick approval (within a couple of days) with an online lender

Cons:

  • Some term loans have repayment fees
  • Borrowers with bad credit may require collateral (like real estate or equipment) or a blanket lien on the business

Best For:

  • Businesses with strong credit
  • Businesses planning on expanding or making a large purchase

Our Recommended Lender: National Business Capital

Term loans are large loans that are repaid with interest through scheduled payments over several months or years.

The amount businesses can borrow depends on the lender. Some online lenders may offer amounts up to $1 million (with direct deposit and quick funding) while traditional banks may offer amounts from $1,000 to $500,000.

Interest rates are based on your business' financial situation and creditworthiness. The majority of term loans don't require collateral so rates usually fall between 7% and 30%. Businesses with poor credit may require some form of collateral, which can affect your interest rates.

Repayment terms also depend on your lender but usually range from 1 to 5 years. Since these loans are amortized, the regular payments made are generally the same amount.

Equipment Financing

Pros:

  • Businesses can own the equipment and build equity
  • Businesses with good credit and finances can receive low rates

Cons:

  • A down payment may be necessary
  • Equipment bought by your business may lose its value during repayment
  • Businesses with poor credit can still qualify and use equipment as collateral

Best For:

  • Business that want to purchase and own equipment such as machinery or office vehicles

Our Recommended Lender: BlueVine

Equipment loans allow businesses to purchase and own equipment such as machinery or vehicles. The asset that is purchased is then used as collateral to secure the loan.

Equipment loans generally finance around 80% to 100% of the equipment and have competitive interest rates (around 8% to 30%). Repayment terms usually last around 5 years or as long as the equipment is still functional.

Merchant Cash Advance

Pros:

  • Quick approval and funding
  • Funding without collateral
  • Loans up to $250,000
  • Available for businesses with poor credit

Cons:

  • High interest rates

Best For:

  • Businesses that can't receive financing from other means
  • Businesses that need funds quickly
  • Businesses with poor credit and short trading history

A merchant cash advance allows businesses to receive a lump sum of cash with the agreement that they will repay the loan with a portion of future credit and debit card sales. These loans usually provide fewer funds and have shorter repayment terms.

Funding tends to be much quicker and easier than other methods and allows businesses to receive their capital on the same day. The downside is that MCAs come with extremely high interest rates that can go range from 15% to 350%.

Repayment is made by giving a merchant cash advance company a percentage of your credit or debit card sales or by fixed withdrawals (daily or weekly) from a bank account until the advance is paid off in full. This repayment period can last anywhere from 4 to 18 months.

Commercial Real Estate Loans

Pros:

  • Potentially low interest rates since the financed property is used as collateral

Cons:

  • Financed property is put on the line as collateral

Best For:

  • Businesses looking to purchase real estate

A commercial real estate loan allows businesses to finance property while using the purchased property as collateral, which allows these loans to have lower interest rates.

Businesses can receive these loans from banks, commercial mortgage lenders, specialty lenders, or the SBA (which offers a 504 loan).

Loan rates, terms, and repayment depend greatly on the lender and your business' finances.

Peer-To-Peer Lending

Pros:

  • Competitive rates
  • Fewer eligibility requirements
  • Funds are directly deposited into your account

Cons:

  • Can take time to receive funds

Best For:

  • Businesses who are looking for competitive low rates
  • Businesses who can't receive loans from traditional lenders

Our Recommended Lender: LendingClub

Peer-to-peer (P2P) funding allows your loan to be funded by individual investors through a loan marketplace.

Each lending marketplace has different eligibility requirements but it is usually easier to qualify for a loan in a P2P marketplace than through a traditional lender.

Funds are generally directly deposited into your account within two weeks.

Personal Loans

Pros:

  • Easier eligibility requirements for newer businesses
  • Quick funding

Cons:

  • Potentially high rates
  • Loan amounts are usually capped at $100,000
  • Personal credit is put on the line
  • Some lenders may not allow personal loans for business use

Best For:

  • Startups and new business owners with good credit

Our Recommended Lender: Monevo

Personal loans are loans that can be used for any reason, including financing a business venture. Lenders will look at your personal credit and finances to determine if you qualify for a loan and which rates and terms you receive.

The Bottom Line

Finding the right business loan is essential to your business' success. You can find more information on our top business lenders here.