As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
2020 has been a hard year for a lot of small business owners. COVID-19 has completely changed the way many businesses are able to operate—and while emergency lending initiatives like the Paycheck Protection Program helped many businesses push forward through stay-at-home orders and other coronavirus-related restrictions, many are still in need of additional funding.
Luckily, there are plenty of loan options available for small business owners in 2020. Let’s take a look at some of the financing options you may want to consider for your small business (and what you’ll need to apply for those financing options):
What you’ll need to apply for a small business loan
As you’ll see in a moment, there are a variety of financing options for small businesses in 2020. But regardless of which financing avenue you decide to pursue for your business, the basic documentation you’ll need to apply for a small business loan is the same across the board.
Before you apply for a small business loan, you’ll want to gather the documentation you’ll need to submit your loan application, including:
- Business documentation. When applying for a small business loan, you’ll need to provide documentation to the lender that both a) proves you’re a legal business (like a business license) and b) gives them the background information they need to understand your business (like a business plan).
- Information on all business owners and/or partners. Lenders will also need information on all borrowers, business owners, and/or partners, including personal information (like name, address, and social security number) as well as background information (like resumes and history with the company).
- Tax returns. Lenders will need to establish both your business and personal income—so be prepared to submit your business tax returns as well as personal tax returns for all borrowers.
- Financial documents. Before they approve a loan, lenders want to know that you have the ability to repay that loan—so be prepared to submit a host of financial documentation to show them you’re capable of repayment, including bank statements, balance sheets, profit-and-loss reports (P&L), cash flow reports, and financial projections.
- Current debt. Again, lenders want to know your business has the ability to pay them back. And if you already have a significant amount of outstanding debt, it may hinder your ability to repay a new loan—which is why they’ll want to know about any outstanding debt your business currently holds (including other loans or business lines of credit).
In addition to the documentation you’ll need to submit when you apply for a small business loan, there are a number of factors lenders will use to determine your eligibility during the application process, including:
- Credit score. Your creditworthiness will determine everything from your loan interest rate to the loan programs you qualify for to what loan amounts you’re ultimately approved for; the higher your credit score, the more competitive your loan offer is likely to be. And, on the flip side, if you have bad credit (either business credit or personal credit), it could be harder to secure a competitive interest rate or get approved for a loan.
- Business history. Generally, banks, credit unions, financial institutions, and other lenders look at new businesses or startups as riskier loan candidates—while small businesses with a proven track record of success over multiple years can feel like a safer bet.
Understanding what lenders are looking for when determining your eligibility can help you better prepare for the loan application process—and determine which loan programs are the best fit for you, your business, and your needs.
The different types of financing you may want to explore for your business
Now that you know what you’ll need to apply for a small business loan, let’s talk about the different financing options you might consider for your business in 2020:
SBA Small Business Loan
The U.S. Small Business Administration (better known as the SBA) offers a variety of business financing options for small businesses operating in the United States:
There are four different types of loans offered by the Small Business Administration:
- 7(a) loans. The 7(a) loan program is the SBA’s primary lending program for small businesses. Under the 7(a) loan program, small businesses can secure federally guaranteed loans of up to $5 million dollars by applying directly with an approved lender (which include banks, credit unions, and other approved financial institutions).
- Microloans. If you’re on the market for a smaller business loan, you may want to explore the SBA’s Microloan program. Microloans, which cap out at $50,000 (but are typically much less; according to the SBA, the average microloan is $13,000), are processed through intermediary lenders and can be used to cover a variety of business-related expenses, including inventory, machinery, or working capital.
- Disaster loans. Another loan program through the SBA provides loans to support small businesses in the event of a crisis or disaster—like the COVID-19 pandemic. While funds through the Paycheck Protection Program have been exhausted, small business owners can still apply for an Economic Injury Disaster Loan (EIDL).
- 504 loans. The SBA’s 504 loan program provides loans that allow businesses to access necessary capital for specific fixed assets (like real estate, machinery, or other needed equipment). These small business loans (which are also federally guaranteed for up to $5 million dollars) are processed through a network of approved SBA lending partners called Certified Development Companies (CDCs).
While SBA loans typically require more paperwork and red tape than other loan types, they also generally offer more favorable terms for small businesses, including lower interest rates and longer repayment terms.
Application and eligibility requirements may vary based on the lender and/or the type of SBA loan you’re applying for; more information on eligibility, requirements, and the application process can be found on each individual loan program’s SBA.gov page.
Small Business Loans
Another financing option for small businesses in 2020 is to secure a small business loan—either through a traditional lender (like a bank or credit union) or a non-traditional lender (like online lenders).
A term loan is what most business owners think of when they hear the term “small business loan;” it’s a loan that has a clearly defined amount, repayment schedule, and interest rate (whether that interest rate is fixed or variable). Term loans can vary widely based on business needs and history, creditworthiness, and what the loans are being used for (again, more established businesses with a proven track record of success and/or significantly collateral will likely qualify for higher loan amounts and more competitive interest rates and repayment terms) and different lenders will have different application requirements and processes.
If you’re considering a term loan, the best thing you can do is research different lenders, find the best option for you, and get in touch with them directly for more information about their application process and requirements.
Commercial Real Estate Loan
If you’re planning to use your small business loan to purchase commercial property, you may want to consider a commercial real estate loan (CRE loan). CRE loans are used specifically to purchase property for commercial use (think a hotel, office building, or warehouse to store your company’s inventory) or to remodel or renovate an existing commercial property.
Small business owners can secure a CRE loan from a traditional lender or a non-traditional lender (including online lenders or through private companies) and repayment terms typically range between five and 25 years.
Similar to other loan types, different lenders will have different requirements for CRE loans—but typically, you’ll need a good credit score and a down payment of 25% (if you’re buying) or 25% equity in the property (if you’re taking out a loan for renovations or remodeling). And, in addition to evaluating your business when determining eligibility for the loan, the lender will also likely evaluate the property—including things like property type, loan-to-value ratio, and any rental potential.
Working Capital Loan
If you’re looking for a loan to finance your business’ day-to-day operations, you might consider a working capital loan.
Working capital loans are used to finance a business’ daily operations, which could include everything from payroll to business rent to repaying debt. If you’re looking for a small business loan to inject working capital into your business, cover your expenses, and keep your operations moving forward in 2020, this could be a good option for you.
Nearly all types of lenders, including traditional financial institutions and online lenders, offer working capital loans. While requirements and terms will vary by lender, many working capital loans require high credit scores and collateral—so that’s something to keep in mind during the application process.
If you need cash immediately—and know you’ll be able to pay it back quickly—a bridge loan could be a solid financing option to explore in 2020.
Bridge loans are short-term loans that provide immediate cash assistance to small businesses. Essentially, these loans are meant to “bridge” a financial gap (hence the name)—and to help your business move through a temporary loss of revenue or dip in cash flow.
Bridge loans are a solid option if you need to move through the loan approval process—and access your loan—quickly. But that speed and convenience come at a cost; while terms and eligibility requirements will vary by lender, bridge loans typically have higher interest rates, shorter repayment terms (usually a year or less), and more fees than other types of small business loans. They also usually have stricter credit score and debt-to-income ratio requirements and may require collateral—so only explore this option if you meet the eligibility requirements and are confident your business will have the revenue to repay the loan quickly.
Bridge loans are available through both traditional and online lenders, although not all lenders provide these types of loans—so if you’re already working with a lender, make sure to ask them if they offer bridge loans.
Business Line of Credit
Just like you might apply for a personal line of credit to cover personal expenses, you might also consider applying for a business line of credit to cover certain business expenses.
A business line of credit is a loan that gives you access to a fixed amount of capital to cover business expenses. You can use as much or as little of that capital as you’d like—and you only pay interest on the funds you use. As you pay down your balance, those funds become available for you to use again if you so choose.
Small business owners can apply for a line of credit with both traditional and nontraditional lenders. Similar to the other financing options on this list, the credit limit and interest rates for business lines of credit can vary widely based on your creditworthiness, your lender, and your business history—but interest rates are typically more competitive than business credit cards. Eligibility requirements (including annual revenue requirements and length of business history) will also vary by lender—so ask your lender about the application process.