The quest for a small business loan begins with a question: Which type of small business loan is right for you? Your answer will have two parts: a certain product from a certain business lender. Let’s start with the first part, since it’s much easier to choose a product that seems appropriate than a business lender. If you are not 100% sure about which product makes the most sense for your needs, certain business lenders are willing to work with you to make that decision.
Here are the most popular types of small business loans:
- Standard Business Term Loan: You receive a set amount upfront that is then paid back (with fees) over a set period of time. Fixed payments are made each month.
- SBA Loan: Same structure as a term loan. The only differences are the requirements and terms, which will be explained later on.
- Business Line of Credit: You are given a credit limit that you can borrow from at any time. Payments are only made when you borrow.
- Merchant Cash Advance (Credit Card Factoring): You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales.
- Invoice/Accounts Receivable Factoring: The business lender purchases your outstanding invoice/receivable for a discount price and pays you right away.
- Equipment Financing: Like a traditional business loan, you receive financing to pay for a particular piece of equipment, then fixed payments are made each month.
- Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
The next step is to figure out which business lender offers the type of small business loan and borrowing amount you have in mind. Here are the business funding programs, borrowing amounts and average funding times (AFT) from the most popular business lenders:
- PayPal/Loanbuilder: PayPal Working Capital, which is basically a Merchant Cash Advance (borrowing limit is $500,000), AFT (24-48 hours).
- Kabbage: Business Line Of Credit ($2,000 to $250,000) AFT (24-48 hours).
- OnDeck: Term Loan ($5,000 to $500,000), Business Line Of Credit (Up to $100,000), AFT (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).
- 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).
- 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. But they can get you loans from $2,000 to $500,000 that will reach your bank account in anywhere from 1-14 days.
Here are the interest rates and terms for products offered by these six business lenders:
- PayPal/Loanbuilder: Similar to a Merchant Cash Advance, the debt is paid off via a percentage of daily sales that go towards the borrower’s PayPal account. The percentage is based on the amount borrowed, which is based on your PayPal sales history. Once you are approved, you are presented a series of daily repayment rates to choose from. But no matter which rate you select, the amount must be paid back in full within 18 months. There are no period periodic interest charges, late fees, pre-payment fees, and penalty fees.
- Kabbage: Borrowers choose between making monthly payments over the course of six or twelve months, with APRs running between 24% and 99%. Monthly payments are a percentage of the amount borrowed plus another fee of between 1% and 10% of the amount borrowed. With the six-month plan, your fee is 10% for the first two months and 1% for the final four. The 12-month plan has higher fees in the first six months but drops to 1% for the final six. There are no pre-payment fees.
- OnDeck: As low as 9% simple interest for merchant cash advances & 9.99% APR for business term loans, 14% to 40% for lines of credit. 3 to 36 months terms for MCA’s & term loans, 6 month terms for business lines of credit.
- 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)
- Commercial Bank: 4% to 10% on most bank loan products, 1-5 years for term loan, 5-25 years for SBA Loan.
- Peer to Peer Lender: 7.4% – 40%, 6 months to 5 years for most products.
Here are the main requirements for each business lender:
- PayPal Working Capital/Loanbuilder: Up until the creation of Loanbuilder, Paypal Working Capital was only available to PayPal users, specifically subscribers of PayPal Premier or PayPal Business for at least three months. In order to qualify for Paypal Working Capital, you must process at least $20,000 in annual sales for PayPal Premier or $15,000 in annual sales for PayPal Business. Loanbuilder requires an annual revenue of $42,000 and 9 months in business to qualify for their lowest loan amount.
- Kabbage: A minimum personal credit score is not required, but a score of at least 500 is preferred. Borrowers must be in business for at least one year and have an annual revenue of at least $50,000. Instead of providing paperwork, borrowers simply connect Kabbage with their business checking account, bookkeeping software or online payment platform such as PayPal or Quickbooks, Personal Guarantee.
- OnDeck: At least one year in business for business term loans and lines of credit, $100,000+ annual revenue for term loans and lines of credit 500+ personal credit score for term loans and 600+ for lines of credit (Most borrowers have 660 or higher), No personal bankruptcies in past two years, Personal Guarantee for Term Loan.
- 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.
- 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, meaning 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 with enough money to continue making payments in the event of a rough patch or failed investment. Your chances of approval are also higher if you can provide collateral. Equipment, inventory, accounts receivable, or even all the business’ assets can be required for collateral.
- 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.
Depending on the program or business lender you have in mind, the aforementioned requirements might not be the only things you must possess in order to qualify.
Here are four other major factors that could impact your eligibility:
- Paperwork: If you are interested in just about any bank loan, get ready to prepare significant paperwork. First, you have the basics that are required by most business lenders: balance sheet, profit and loss statement, cash flow statement, business tax returns, bank statements. For a bank loan, you must also present a detailed business plan that explains how you will use the loan, your business’s debit schedule, and your personal tax returns. Certain bank loans may require commercial leases, business licenses, articles of incorporation, and a personal resume.
- Cash Flow: Certain products from certain business lenders may not be available for businesses with tumultuous cash flow. This could include businesses that are prone to seasonality, random changes in demand, or elongated business cycles. So, before setting your sights on a specific business lender, make sure they have experience with businesses that deal with similar cash flow issues. Some business lenders have products that are specifically geared towards these issues or can customize repayment terms to account for upcoming slow periods.
- Knowledge of Financial Health: Though many business lenders do not require a business plan, all borrowers should know how they will use the loan and what it will do for their businesses. They should also be able to answer virtually any question about their business’s finances, whether it’s in regard to inventory, accounts receivables, monthly expenses, taxes, sales, etc.
- Industry: The best business loan for you will most likely come from a business lender with experience with your industry. Banks, for example, are notoriously biased against industries that are known for cash flow issues or low profit margins. Other business lenders, however, have experience working with countless industries, even those with “risky” reputations, like restaurants, retail stores, or hotels.
The final step to qualifying for a small business loan is preparing everything you need to be approved for your desired program. This usually just means compiling the necessary documents, cleaning up your credit, and doing whatever you can to improve revenue cash flow. For many applicants, the third action includes cutting expenses, contacting business partners who owe them money, or simply speeding up productivity to increase revenue. No matter which business lender you choose, your chances of approval will be much higher if it is abundantly clear that you made a conscious effort to improve cash flow before applying. The more time you spend preparing for a small business loan, the easier it will be to pay it off.