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Small Business Loans

A Practical Guide to Business Credit

Business Loan University Video Series How to find the best business loans in 2024
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Choosing the right loan for your small business is vitally important. Learn more about the options for business loans using our guide below

Small Business Loan Guide

With so many options to choose from, how do you decide which loan program is right for your small business? Our simple guide will help you decide which programs will be best for your business needs, just follow these steps to get started:

Browse the Most Popular Types of Small Business Loans

SBA Loan

The U.S. Small Business Administration, or SBA, is a federal agency that provides loan guarantee programs to businesses that may not be able to get traditional bank loans and receive long-term, low interest rate funding. The SBA has a number of loan programs designed specifically for small and medium sized businesses, including microloans, SBA 7(a) loans, and CDC/504 loan program.

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Loan Amount
$5,000 - $5 million
Loan Terms
5-25 Years
Interest Rates
Starting at 6.5%
Time of Funding
As little as 30 days

Business Line of Credit

With a business line of credit, lenders will establish a credit limit for a maximum amount of money they will lend you. You can draw as much as you need up to your limit and like a credit card; you pay interest only on the amount you borrow. Business Lines of Credit can help bridge the gap during seasonal lulls and other lean periods. A business line of credit can ensure that you always have the capital you need, when you need it.

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Loan Amount
$10,000 - $1 million
Loan Terms
6 months - 5 years
Interest Rates
7 - 25%
Time of Funding
As little as 48 hours

Equipment Financing

Equipment financing allows you to borrow money to purchase necessary business equipment outright. The borrower will pay back the total amount borrowed, plus interest and fees over a pre arranged period of time.

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Loan Amount
Up to 100% of equipment value
Loan Terms
Estimated life of equipment
Interest Rates
8 - 30%
Time of Funding
As little as 48 hours

Merchant Cash Advance

As the name implies, a merchant cash advance grants a lump-sum amount to the business owner and that amount is paid back (in addition to any fees charged) directly from a portion of future daily or weekly credit card sales.

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Funding Amount
$2,500 - $250,000
Payment Terms
Deducted daily from merchant account
Factor Rates
1.14 - 1.45
Time to Funding
As little as 24 hours

Unsecured Business Loan

An unsecured business loan is a loan that does not require the borrower to pledge assets of the company to borrow funds. However, in most cases an unsecured loan requires a personal guarantee of repayment and will generally have a higher interest rate and fees.

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Loan Amount
Up to $100,000
Loan Terms
Up to 7 years
Interest Rates
4 - 36% APR
Time of Funding
As little as 4 days

Business Acquisition Loans

A business acquisition loan allows you to purchase an existing business, buy-out a partner or purchase/expand a franchise.

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Loan Amount
Up to $5 million
Loan Terms
Up to 25 years
Interest Rates
3% - 10%; may be fixed or variable
Time of Funding
As little as 48 hours

How important is your credit profile when applying for a small business loan?

The quick answer is "Very important". When it comes to small business lending, owners and their companies are seen as one-and- the- same. Small business owners generally exert a lot of influence over their company so lenders put a heavy emphasis on the owner's credit profile. The better your credit history and credit score (FICO), the better the chances you will get a loan; and, likely on better terms. Your personal FICO score is also a component of the BizAnalyzerTM.

Once again, it's important not to leave this issue to chance. Pull your own credit report; know what it says about you. Free services like freecreditreport.com will allow you to run your credit score without harmful credit "inquires" (which lower your score) appearing on your report. Also, many credit card companies offer free credit reports with their online accounts.

Do not stop at the FICO score. Examine your credit report closely. If you see an item that does not belong or may be outdated, file a request to have the item removed from your report. Inaccurate and outdated entries in credit reports are more common than most people realize.

The image below shows how your FICO score is created and what importance is placed on each issue. If you think you can improve on any of these areas in a few months, you may even consider delaying your loan application until your score improves.

Inquiries
Debt Usage
Payment History
Credit Age
Account Mix

What is your ability to repay a small business loan?

Whether a business loan, a car loan or a mortgage, the first question a lender will ask you is "how much do you want?" As a business owner you should ask yourself "how much can I afford to repay, and on what terms", then work back from there.

Business Loan Tip 1

Calculate Your Debt Service Coverage Ratio (DSCR). Understand how much you should borrow based on an objective analysis of your business situation.

Lenders will focus on this metric as well. The amount you can afford to repay can usually be determined by knowing and understanding you Debt Service Coverage Ratio. This is the standard practice lenders use to calculate how much free cash you have to repay debt. Your debt service coverage ratio is a simple equation:

Debt Service Coverage Ratio (DSCR) =

Net Operating Income

Total Debt Service

DSCR can be calculated on a monthly or annual basis.

Let's examine a hypothetical example. Let's take an average month of operations sales and expenses. Let's assume the cash flow of your small business is $6,000 (gross sales minus expenses). Now let's assume that your loan payments will total $1,500 per month. That makes your DSCR a 4, which is pretty strong. Most lenders will look for a score of at least 1.5 and definitely above a score of 1. A DSCR of less than 1 means you don't have enough free cash flow to repay your loan from business operations.

Business Loan Tip 2

Perform a Small Business Loan Performance Analysis with BizAnalyzerTM

PERSONAL CREDIT

ACTUAL 737
POINTS TO THE SCORE 21

TIME IN BUSINESS (MONTHS)

62
20

INDUSTRY RISK

LOW
15

CORPORATE RISK

HIGH
3

CASH FLOW

50%
6

ANNUAL REVENUE

$800,000
10

Comparison with your peers!

FICO Percentile in US Full-Service Restaurants

737 Median (680) FICO 737 beats 68% of Businesses in Full Service Restaurants Industry

Age in Business (Months) Percentile in US Full-Service Restaurants

62 Median (25) 62 Months in Business beats 72% of Businesses in Full Service Restaurants Industry

Annual Revenue($) Percentile in US Full-Service Restaurants

$800,000 Median ($590,000) Annual Revenue of $800,000 beats 59% of Businesses in Full Service Restaurants Industry

BizanalyzerTM Dashboard

What a FICO score is to personal credit, BizAnalyzerTM is to business credit. Understanding how lenders will evaluate your risk as a borrower will empower you to get the best loan and terms available. Taking a small business loan is an important step in your business operations. Understanding why you are borrowing money and determining the value it brings to your business is a complex and often, an uncertain event.

Business Loan Tip 3

Know your target monthly repayment amount and choose the best available loan type. Armed with some basic knowledge and you BizAnalyzerTM Score you are ready to begin the process of applying for your loan. Determine your monthly repayment amount, then choose the loan type that fits your business needs.

Choosing a small business loan product and submitting an application

Many business owners report feeling stressed when applying for a small business loan. It seems that lenders are asking for more and more documentation with each passing day. In reality, most lenders have a standard discovery list of documents that are required to apply for and process a loan. Knowing which documents will be required and getting that documentation in order before you apply for your business loan can reduce your stress and speed-up approval of your loan.

Typical documents required to initiate your loan application include:

  • Several months of bank statements
  • Outstanding credit account statements (if hard credit report not pulled)
  • Corporate tax returns for multiple years
  • Balance sheet and/or statement of profit/loss
  • Individual tax returns

Lenders vary in the amount and history length of the documents they need to process your loan application. Be prepared to provide up to 2 years of history. Not all lenders will require two years on all documents, but many will not require more than that. In any case, be prepared to furnish all requested documentation.

The Cost of Credit

After you have gone through the application process and you are approved, you need to still make some important decisions. Understanding the true cost of credit can be confusing. Choosing between the available loan products can greatly affect the amount of the total or true cost of your business loan.

Start by asking your lender about Annual Percentage Rate or APR. APR takes into account all fees and interest rates so you have a standard measure of the cost of credit across different type loan products. Ask the lender to explain any and all fees associated with your small business loan. Typical fees associated with loans may include:

Loan Processing and Service fees:
Over the lifetime of a loan, your lender will perform a variety of activities, such as customer service or billing, to manage and administrate the loan. A service or processing fee is used to cover the cost of these expenses. Service fees are frequently billed monthly or according to the loan repayment schedule, but some lenders may only charge a one-time service fee. Service fees are usually charged as a percentage of payment amount (if billed regularly) or of the total loan amount (if one- time).
Prepayment penalty:
Prepayment penalties are charged for prepaying on a loan balance. Prepayment penalties may be included in the loan contract as a way to protect the lender from the loss of paid interest arising from prepayment or early payment.
SBA guarantee fee:
This is a fee charged by the Small Business Administration for all 7(a) loans it guarantees (the SBA will guarantee loans up to 85% of the loan amount). All SBA lenders are required to pay this fee (if applicable), and lenders have the option of passing this fee onto their borrowers. The guarantee fee is based on the loan's repayment terms and the dollar amount guaranteed, not the total value of the loan. For loans under $150,000, there is no guarantee fee. For loans over $150,000 with terms of one year or less, the fee is 0.25% of the guaranteed portion. For loans with terms longer than one year, the fee is 3% for loan amounts ranging from $150,000 to $700,000 and 3.5% for loans over $700,000. An additional 0.25% is charged for any guaranteed portion of more than $1 million.
Referral fee:
If you apply for a business loan through a lending platform or marketplace, you may be charged a referral fee for the lending platform "referring" your application to a lender.
Other common fees:
You may also see other loan fees such as documentation fees, monthly or weekly fees and invoice factoring fees. Some of the fees, such as monthly, weekly, invoice factoring, fixed loan or line fees, can be thought as similar to the interest rate on the loan. Other fees may be the same as one of the fees listed above, just under a different name. The best way to understand each fee associated with a loan is to thoroughly read the loan offer and contract.
Origination fee:
This is a fee charged for processing the loan application and approval, including verifying a borrower's information. Origination fees may be charged as a flat fee (e.g., $350) or a percentage of the loan amount. If it's charged as a percentage-based fee, it will typically be between 1% and 6% of the loan amount. Sometimes the origination fee is included in the total loan amount, meaning the borrower is essentially borrowing the fee and repaying it with interest.
Packaging fee:
Sometimes an optional service, the packaging of a loan refers to the preparation of the loan application (e.g., relevant financial statements, planned use of funds) so that the lender can review it. If you borrow through a lending platform, this fee is frequently standard, as the lending platform helps you prepare your loan application before it is sent to lenders for review.
Non-sufficient funds (NSF) and unsuccessful payment fee:
These fees are assessed if a loan payment is unsuccessful. this normally happens when the borrower's bank account does not have enough money to cover the amount that is being withdrawn. NSF and unsuccessful payment fees are generally flat fees, ranging from $15 to $35 per unsuccessful payment.
Late payment fee:
This fee is self explanatory. it's charged when a loan payment is made past its due date. A late payment fee may be either a flat fee, frequently around $10 to $35, or a percentage of the payment amount or outstanding balance (often 2% - 5%).
Wire transfer fee:
Commonly a flat fee, a wire transfer fee is charged when a borrower uses a wire transfer to make a loan payment. The typical fee ranges from $10 to $20 per wire transfer.
Payment by check fee:
This fee is charged when a borrower makes a loan payment by check. It's usually charged as a flat fee, generally around $10 to $20 per payment by check.

Browse the Most Popular Types of Small Business Loans

SBA Loan

Business Line of Credit

Equipment Financing

Merchant Cash Advance

Unsecured Business Loan

Business Acquisition Loans

Additional Loan Types