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Intro To Small Business Loans

Small business loans are not what they used to be. In the past, the only reputable sources of funding were banks and credit unions. To qualify, you needed flawless personal credit, consistent cash flow, plenty of money in the bank, and at least two years in business. Even if you could qualify, no one had time for the notoriously stressful application process. You had to fill out mountains of paperwork and wait several months just to learn whether or not you’ve been approved.

As you can imagine, these inconveniences did not give business loans the best reputation. Thankfully, the business financing industry responded by creating a new experience that makes business loans significantly more accessible. There are more products to choose from, the requirements are much looser, and you can access all of them in much shorter time frames.

In this comprehensive guide, we’ll answer the following questions and more:

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What Are Small Business Loans?

Small business loans provide funding that can be used for a myriad of purposes. Some common purposes of business loans include purchasing equipment, ordering inventory, renovating a property, and paying off other existing debts. You can access amounts as low as $10,000 and as high as $10 million.

With most products, the amount you are given must be paid back within a set time frame. Each business loan product has a cost, so you end up paying back more than you borrow. The amount paid back to the lender can either be determined by an interest rate or a factor rate.

The requirements and repayment structure are different, depending on the product you choose.

How Do Small Business Loans Work?

The type of business loan you choose will determine interest rates, total loan cost, the loan term, and the repayment structure.

Here is a breakdown of the different types of business loans available to you:

Business Term Loan

This is the most popular form of business financing. You make fixed monthly payments plus interest over a set term.

  • Higher borrowing amounts
  • Lower interest rates
  • Longer terms
  • May require a personal guarantee or collateral
  • Borrowers usually need excellent credit and at least two years in business

SBA Loans

The US Small Business Administration doesn’t fund these loans, but they do guarantee at least 85% of them. However, that doesn’t necessarily make them any easier to access than bank loans. The repayment structure is the same as a Business Term Loan, though the terms depend on the intended purpose of the funds. Terms usually range from seven years for working capital to ten years for buying equipment and twenty-five years for real estate purchases.

  • Offers some of the lowest rates on the market
  • Offers high loan amounts (up to $10 million) with long repayment terms
  • Long/rigorous application/approval process
  • Usually requires collateral

Who Qualifies For SBA Loans?

The SBA’s most popular business loan product is the 7(a) loan. Here are the requirements for eligibility:

  • A minimum personal credit score of 650
  • Minimum FICO SBSS business credit score of 140
  • Less than 500 employees
  • Less than $7.5 million in revenue on average each year for the past three years
  • Personal net income of less than $5 million (after taxes and not counting carry-over losses)
  • A personal net worth of less than $15 million
  • Corporation or LLC with at least 10 employees
  • In business for at least 2 years
  • Annual gross sales of at least $360,000
  • No bankruptcies or foreclosures within the past 3 years
  • No defaults on government-backed loans
  • US citizenship or legal permanent residency
  • No outstanding tax liens
  • No outstanding collection accounts

Business Line of Credit

A business line of credit gives you a credit line that you can draw from at any time. You pay interest only on the funds you draw. And as soon as you pay back what you’ve borrowed, that money becomes available again.

  • Provides more flexibility than a Term Loan
  • Typically does not require collateral
  • Can carry additional costs, such as maintenance and draw fees
  • Requires strong credit
  • Best for short-term needs
  • Best for seasonal businesses or businesses with tumultuous cash flow

How Is a Line of Credit Different From a Credit Card?

A Business Line of Credit is essentially a credit card with a higher borrowing limit and lower interest rate. In other words, it’s best to use a Business Line of Credit for short-term needs that are too expensive to cover with a credit card. If you used a credit card for these purposes, your credit score would plummet, and your interest rate would skyrocket.

Merchant Cash Advance

You get a lump sum of cash upfront. But instead of making one fixed monthly payment, you pay in the form of a percentage of your daily credit and debit card sales, or by a fixed daily or weekly withdrawal from your bank account.

  • Gives you fast cash
  • Does not require collateral
  • One of the most expensive business financing options
  • Best for businesses with high and consistent debit/credit card sales
  • Best for companies that cannot qualify for other options and need funding quickly

Small Business Loan for Women

Statistics show that women have a significantly harder time obtaining business financing than men. There are three primary reasons for this:

  1. Women tend to start a business with less personal funding than men, which means women usually have a lower net worth. Lower net worth gives the impression that the borrower won’t be able to make payments should the investment not go as planned.
  2. Female-dominated industries, like retail or hospitality, are seen as risky and low-growth in nature. Traditional business lenders are less likely to work with these industries.
  3. Women tend to have lower credit scores than men, reportedly around 20 points lower. Credit scores have traditionally played a significant role in the approval process.

To combat unequal access to business loans, we have access to a suite of programs is available to female business owners who have faced these three disadvantages when seeking financing.

Equipment Financing

These loans allow businesses to purchase equipment by using the desired equipment as collateral. Terms typically coincide with the equipment’s life span.

  • Borrowing amount, rates, and terms depend on the value of the equipment
  • You may have to make a down payment
  • Best for a business that wants to own equipment
  • If you plan to use the equipment for at least three years, this option may be cheaper than leasing

Working Capital Loans

These short-term loans are designed to finance a business’s day-to-day operations and expenses such as payroll, rent, or existing debts.

  • Provides fast cash
  • Does not require strong credit or collateral

Revenue-Based Business Loans

This type of financing is similar to a Merchant Cash Advance, but instead of determining your funding and repayment amounts from only credit/debit card sales, the business lender factors in your total monthly revenue.

  • Gives you fast cash
  • Can qualify for more funding than a Merchant Cash Advance
  • Sometimes referred to as a “Business Cash Advance”
  • Best for seasonal businesses or businesses with tumultuous revenue

Accounts Receivable Factoring

A/R Factoring is a unique type of business financing. The business sells unpaid invoices (accounts receivables) to the business lender for a discount price. It is now the business lender’s responsibility to collect from your customer. When your customer pays the business lender, you receive the remainder from the first payment, minus fees.

  • Supplies fast cash for your business
  • Very easy to get approved since your customer’s creditworthiness matters more than your own
  • Can be costly when compared to other types of business loans
  • Best for a business with reliable customers with extended payment terms (30, 60 or 90 days)

Bad Credit Business Loans

Several types of business loans are available for borrowers with poor or little credit history. Interest rates are on the higher side, and terms usually do not exceed 18 months. The short terms and unorthodox repayment structure makes these loans very easy to repay without damaging your cash flow.

Examples of Bad Credit Business Loans include:

  • Business Line of Credit
  • Merchant Cash Advance
  • Revenue-Based Business Loans
  • Accounts Receivable Factoring

Do All Small Business Loans Require Collateral?

This depends on where you apply. Banks typically require collateral for all loans, even if you have excellent credit. Companies like United Capital Source, on the other hand, have access to programs that do not require collateral. However, if you can provide collateral, it may allow you to access higher borrowing amounts, lower rates, and longer terms. Collateral can also offset issues with credit scores or cash flow.

Small Business Loan Products Compared

Loan types Max Amounts Rates Speed
Merchant Cash Advance $7.5k – $1m Starting at 1.09 1-2 business days
SBA Loan $50k-$10m Starting at 5% 3-5 weeks
Business Term Loan $10k to $5m Starting at 5% 1-3 business days
Business Line of Credit $10k to $250k Starting at 8% 1-3 business days
Receivables/Invoice Factoring $50k-$10m Starting at 5.8% 1-2 weeks
Equipment Financing Up to $5m per piece Starting at 5% 3-10 business days
Revenue Based Business Loans $10K – $5m Starting at 9% 1-3 business days

Small Business Loan Funding Options

The funding options are seemingly endless — from traditional business loans to merchant cash advances. The reality is that whatever type of business loan or funding you decide on, it’s important to make sure the numbers work in your favor and the loan does what it is designed to do — grow your business.

Getting a Small Business Loan doesn't have to be difficult

Getting a small business loan doesn’t have to be difficult. Anyone can apply online for a business loan, get quick approvals and funding in a matter of days. You can actually start the process with a few clicks.

Of course, the first step on the road to funding your small business is to understand how quickly
you need the money, how the money will be used, and how you will repay the loan.

What Are The Advantages of Small Business Loans?

The two main alternatives to business loans are bootstrapping and equity financing. Bootstrapping refers to using only your own money to fund your business. Though you won’t owe any money, bootstrapping limits your ability to capitalize on expensive but lucrative opportunities and recover from unforeseen misfortunes. You might have enough savings to carry your business through one rough patch. But what will you do when this happens again?

Likewise, you won’t owe any money with equity financing, either. But you will have to sacrifice a portion of ownership and profits. In other words, you are no longer the sole owner of your business. And since the investor or venture capital firm has given you all this money, you aren’t exactly in the position to say “no” to their directions.

Business loans, on the other hand, allow you to use the money in almost any way you please. You retain complete control of your business. The business loan provider is your partner, not your superior.

Also, business loans are incredibly easy to access these days. As long as your business is alive and well, you don’t need excellent credit, massive annual revenue, or more than one year in business to qualify for several advantageous options. Most of these options can even be accessed in a matter of days. If you need money quickly, business loans are undoubtedly the way to go.

Lenders are in the business of lending money to get a return. When you take on debt for your business, you should expect to get a return for yourself. Jared Weitz, co-founder and CEO of United Capital, states:

“We have many repeat customers because we help our clients make the best of their business financing opportunities by embracing the concept of the Consultative Sale. If our clients thrive, we thrive. We’ve found success in building a culture, rather than solely focusing on building a company. That culture is about high integrity, it’s leaving money on the table if that’s what the right move is for the client, and it’s thinking about yourself last because you understand that if the client does well, they’re going to be your client for a long time.”

Jared Weitz
Jared WeitzCEO of United Capital Source

What Are The Disadvantages of Small Business Loans?

Many business owners avoid business loans primarily because they involve debt. Yes, it’s not uncommon for young businesses to unknowingly take on debt they can’t afford to pay back. The risk of this scenario may be even higher now that business loans are so accessible.

When banks were the only source of business loans, requirements were much more stringent. This is because older and wealthier businesses are logistically less likely to default. They have more experience with managing debt and probably wouldn’t take on loans for the wrong reasons. Nowadays, you can get a business loan with just six months in business. Younger businesses have less experience with managing debt and are more prone to premature growth. And since you can use the funds for a variety of purposes, it’s harder to tell which expenses should and should not be financed with debt.

Lastly, though businesses can access business loans with poor credit and rocky cash flow, these products will likely be costly. If you don’t choose the right product, high payments could put tremendous pressure on your cash flow.

Why Small Businesses Use
United Capital Source To Find Funding

There are many creative ways entrepreneurs and business owners use loans to grow their business.
Here are some of the most prevalent ways to use business loans to achieve your goals:

Small Business Loans to purchase inventory

Purchase Inventory

Many retailers use short-term business loans to purchase needed inventory. This can be a sound way to manage seasonal dips, replenish stock, or try out new products to sell.

Small Business Loans to purchase equipment

Purchase Equipment

Equipment can be one of a small business’s biggest expenses. Equipment financing programs can provide the funds to buy or update equipment NOW to help you increase profits quickly.

Small Business Loans to get working capital

Boost Working Capital

It takes cash flow to pay your employees, keep the lights on, or make debt payments. Working capital loans can be obtained to help you do just this.

Small Business Loans to refinance or pay off debt

Refinance or Pay Off Debt

Consolidating or paying off high-interest loans may be a priority for your small business. Refinancing is a smart way to restructure your debt, decrease your outflow, and increase your profits.

Small Business Loans to hire staff and employees

Hire Talented Staff

A small business owner has to wear a lot of hats; sometimes you just get spread too thin. Something will eventually fall through the cracks, and, frankly, you may just need a day off once in a while. Investing money in talent–someone to do your bookkeeping, marketing, or customer service–may be a sound business decision. The right employees can give you time to focus on the big picture, as well as help you increase your revenue. This may very well be worth the loan costs.

Small Business Loans to scale operations

Scale Operations

Almost every successful small business owner will see a chance to expand their operation. There are many potential ways to grow your business, such as a move into a new product line, or expanding your business site by relocating or opening a new location. Making these types of changes may require a small business loan so you can take advantage of these opportunities of growth.

Small Business Loans to cover unexpected costs

Cover Unexpected Costs

Small business owners are often surprised by sudden, unanticipated expenses. You may find you need extra insurance, permits, or licenses. An expensive piece of equipment may break and needs to be repaired. Inventory may get lost, damaged, or stolen, which makes a small business loan essential.

Small Business Loans to invest in marketing

Invest in Marketing

In order for a small business to be successful, investing money into marketing is essential. For example, new small businesses need to make prospective customers aware of their company and its products. Growing businesses must generate leads for their sales teams. Retailers need to boost sales by establishing a strong marketing posture. A small business loan may make good sense to a company’s bottom line: marking equals more sales.

Ready to grow your business? We’ll find the
right small business loans for you.

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How Much Small Business Funding
Do You Need?

For many, the answer to how much money to request from a lender is:
You can never ask for too much money.

This isn’t always the best answer. A business can ask for too much money and not qualify or the company can get the loan amount requested, and then realize there’s not enough cash flow to make the payments. Remember: Small business loans cost money. Answering the following questions will help you determine the loan amount that’s best for you:

What will the small business loan be used for?

What will the business
loan be used for?

This is the most central question, as the answer will affect all other parameters. There are many valid reasons for a small business to acquire a loan, but the most important caveat is: Make sure these funds will help you increase your profits in the future. Generally, funding ongoing losses is a bad proposition.

When do you need the small business loan?

When do you need
the money?

It can take months for some funding sources to approve a small business loan. You need to determine if a lender’s timing works for you. If you need money in February, but don’t receive approval until May, this obviously will not be an effective loan for you. Take note, there are a large number of lenders out there, many of which are flexible and can fund your business loan request in as little as one or two days.

How much will the small business loan cost?

How much will
it cost?

Small business loan interest rates vary greatly depending on the type of lender, type of funding program, and the term of the loan. You can check your payments online by simply using a business loan calculator. Just input the funding amount and interest/factor rate. And don’t forget about the closing costs your funding source may charge.

How long do you need the small business loan for?

How long do you need
the small business loan for?

How long will it take you to pay back the business loan? This is where your small business needs to put together a simple financial model on a timetable that will help you determine when your funded project will generate a positive cash flow.

It’s important to subtract the future loan payment from your company’s current profit to see if it can support the loan payment until you are able to show a return on your investment.

For example, your company borrows $500,000 at eight percent interest which results in a monthly payment of $6000. The question is: Can your company’s current profit repay at this rate? Further, you could also do an additional test by reducing your profit by 25 percent to see if the monthly loan obligation could still be met if your profits dip.

How much of a small business loan do you need?

How much can you afford?

Your funding source will have debt-to-income (DTI) ratio requirements. They will evaluate your company’s available cash to determine if you can afford to pay back the business loan. This is called your debt service coverage (DSCR). To calculate your DSCR, the lender will need your company’s annual cash flow profit and the monthly payment amount.

Some lenders will require a personal guarantee and will use any shareholder’s credit score to determine loan approval. A shareholder is generally defined as any person who owns more than 20 percent of a company.

Some funding sources may also require a shareholder’s personal DTI. They will calculate all shareholder’s total monthly income to their monthly debt.

What are your small business loan needs?

What are your future needs?

After you obtain a small business loan, will your company need more funds in the future? This is an important question.

Some small businesses take out the maximum business loan they can afford now, however, this may not be enough money to fund future needs. This can lead to insufficient cash to grow the company. Therefore, it’s advisable that to project cash flow needs over the next three years before a funding amount is determined.

This is the time to consider exploring unsecured business loans with flexible lines of credit. These types of funding can be used for debt consolidation, inventory purchases, operations expansion, or increasing working capital.

When searching for a small business loan, consider applying for 10 to 20 percent more than you actually feel you need, if you can qualify for the higher amount. Expenses are often higher than expected and revenue can take longer to generate than anticipated.

How To Apply For Small Business Loans:

The length of the application process depends on the product you choose. However, most products require very little paperwork and can be approved in just a few business days. Below, we’ll explain how to apply for each product, along with the documents they require:

Step 1: Choose the Right Product

The first step is choosing the right product for your needs and goals. This should require a decent amount of research, as each product is designed for different financial circumstances and cash flow cycles. Does your business experience occasional dips in revenue? Is your business highly seasonal?

You should also consider the purpose of the funds. How long will it take you to pay off the loan? This will help us determine the right borrowing amount and terms for you.

Step 2: Gather Your Documents

Here are the documents required for each type of business loan:

Business Term Loan

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months

SBA Loan

  • Driver’s license
  • Business license or certificate
  • Voided business check
  • Bank statements from the past three months (length of history varies)
  • Credit report/Statement of personal credit history
  • Credit card processing statements (length of history varies)
  • Personal tax returns from the past three years
  • Business tax returns from the past three years
  • Business Plan (Not in all cases)
  • Personal financial statement
  • List of real estate owned
  • Debt schedule
  • Deeds/Title/Ownership documentation for any collateral/security
  • Current Profit & Loss Statements and Balance Sheet Year-to-Date
  • A/R and A/P Reports
  • Lease/Rent documentation

Business Line of Credit

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months

Working Capital Loan

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months

Equipment Financing

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months
  • Invoice for equipment

Merchant Cash Advance

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months
  • Credit card processing statements from the past three months

Revenue-Based Business Loans

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months

Accounts Receivable Factoring

  • Driver’s license
  • Voided business check
  • Bank statements from the past three months
  • Business tax returns
  • Account Receivable Aging report,
  • Accounts Payable report,
  • Debt schedule

Step 3: Fill Out Application

You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

Step 4: Speak to Representative

Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.

Step 5: Receive Approval

If you’re approved, you’ll hear back from us within 24 hours. Funds for Business Term Loans, Business Lines of Credit, Working Capital Loans, Equipment Financing, Merchant Cash Advance, Revenue-Based Business Loans, and Accounts Receivable Factoring should then appear in your bank account in anywhere from 24 hours to one week. For SBA Loans, it usually takes 3-5 weeks to receive funding.

What If I’m Declined For a Small Business Loan?

Here’s what to do if you’ve been rejected for a small business loan:

1. Get an Explanation

Some business lenders are reluctant to do this. However, the law requires business lenders to mail a notice of explanation to all applicants. If the explanation isn’t clear enough, contact the business lender to obtain as much detail as possible. You must learn precisely what it is about you or your business that gave them the impression that you wouldn’t be able to pay off the loan.

If you need money right away, you must also determine if your next business lender will reject you for the same reason. That’s why this step is so crucial. Some reasons for rejection are universal, while others are specific to certain lenders.

To give you an idea of the areas where many potential borrowers fall short, here are some of the most common reasons for business loan denial:

Low Credit Score

If you’re applying through a traditional business lender, your credit score is the number one requirement for approval. And though some online business lenders have very low credit score minimums, don’t assume that every online lender works with borrowers with poor credit.

Little Credit History

Young businesses tend to have a short credit history. They haven’t had time to establish long records of timely payments. The business owner may have good credit, but only because the business isn’t carrying multiple debts or hasn’t accrued many expenses. Some lenders want to see that you’ve proven your ability to manage various forms of debt and that you know which costs should and should not be covered by debt financing tools.


Traditional business lenders might stay away from certain industries solely because they have a higher risk of failure, or they’ve never worked with them before. Online business lenders, however, are much less likely to discriminate based on this factor alone.

No or Insufficient Collateral

Many banks require collateral for all loans, even if you have flawless credit. For these lenders, your collateral must also be the right type and carry sufficient value. Certain types of collateral are easier to sell. Other business lenders might only require collateral for borrowers with subpar credit or rocky cash flow.

Your Debt Utilization Ratio is Too High or Low

Many lenders prioritize debt utilization ratio just as much as a credit score. If your ratio is way over 30%, you’ve probably used too much of your available credit. If your ratio is closer to 10%, you probably have minimal credit history and less experience paying back debt. Both scenarios make you a risky borrower. Regardless of where you apply, all businesses should strive for a debt utilization ratio of around 30%.

Poor Cash Flow

Business lenders want to see that you have enough money in the bank to cover your operational expenses, pay back your new business loan, and still have plenty left over. If your revenue suggests that you can’t make this happen, traditional products may be out of the question. Instead, you may have to accept a more expensive product that lacks fixed monthly payments. Examples of such products include a Merchant Cash Advance or Revenue-Based Business Loan.

You’re Not Asking for Enough Money

Traditional business lenders have little incentive to approve loans under $250,000. It would cost them just as much money as a larger loan, but they’d make less money from interest. Online lenders, on the other hand, specialize in smaller loans and rarely reject applications solely because the requested amount is too low.

Incomplete Application/Paperwork

Bank loans require a ton of paperwork. In addition to universal requirements like bank statements and financial statements, banks want a business plan, personal tax returns, business tax returns, legal documents, and more. For this reason, it’s very common for loan applicants to forget to include certain documents or pieces of information.

If you don’t have the time to compile this paperwork, you’re not alone. Thankfully, most online lenders require just a few documents at best.

2. Improve Cash Flow

You may find out that your application was declined because of cash flow-related issues. This is among the most common reasons for rejection. Thankfully, there is always more you can do to improve your cash flow. It’s time to cut expenses, boost sales, chip away at outstanding debts, etc. Not sure which area to focus on most? You can answer this question by figuring out which changes (expenses, sales, debts) would have the most significant impact on your debt service coverage ratio (DSCR). After all, this number shows you how much debt your business can afford to pay off based on its current financial standing.

But no matter which action you take, you can’t be sure it’s working if you don’t keep close tabs on your finances moving forward. This way, you can give your next business lender a detailed explanation of the improvements you’ve made since your last application.

3. Consider Alternative Business Financing

Businesses that need money right away don’t have time to make the improvements mentioned above. In this case, it’s probably best to pursue alternative business lenders that have products for these types of situations. Many of them frequently work with businesses with rocky cash flow, subpar personal credit, and just six months in business. No, you might not be able to access the most favorable rates and terms. But you’ll get the money you need in a matter of days. And if you choose the right lender, paying back the loan won’t damage your cash flow even further.

On the other hand, your needs and financial circumstances might be better suited for another financing tool, like a business credit card or even a personal loan. Both options can be accessed through UCS and are usually much easier to qualify for than business loans.

If your credit score is preventing you from accessing financing, you should consider our credit repair services. We can help you identify the issues that are keeping your score down and develop practical solutions for eliminating them.

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Business owner researching the different costs of business loans

How Do You Compare The Costs of Different Business Loans?

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For most business owners, the first thing they look at when shopping for business loans is cost. Unfortunately, different business lenders present the cost of their products in different ways. And not every business lender displays their fees on their website. So, when speaking to business lenders, you must know which numbers to ask for to learn the product’s actual cost. This will make it much easier to compare the costs of different options.

Here are those numbers:

1. APR

This is arguably the most vital metric to know when comparing business loans. The APR (annualized percentage rate) represents the interest rate combined with all other fees attached to the option at hand. So, whichever option has the lowest APR will cost you the least amount of money within a year. In most cases, the lowest APR is your cheapest option overall. And while different business lenders may present their costs in different ways, the option that is displayed with the APR next to the amount will most likely be your cheapest. An offer that tries to skirt around its APR, on the other hand, is probably more expensive than it appears. For example, you might see two options presented in this manner:

  1. $25,000 loan. 30% APR.
  2. $25,000 loan, 23% interest rate. 4.2% origination fee.

Confusing, right? Why can’t every business loan option just be presented with its APR? The second option might come with its advantages, but in terms of cost, option one will most likely be your best bet. Since business term loans typically carry the lowest APRs, you might see a Merchant Cash Advance or Accounts Receivable factoring presented with several features attached to it, like option number two. It’s always a good idea to compare APRs because certain options may seem very cheap due to features like “0% interest.” The APR is designed to be much less deceptive.

2. Total Cost Of Capital

The Total Cost of Capital (TCC) refers to the cost of receiving the funds you are borrowing. It incorporates interest and any other fees to reveal a total dollar cost, rather than a percentage. How is this different from an APR? The two are very similar, but APR represents the total cost of the business loan within a year. TCC refers to the total cost of the business loan throughout its entire term. This makes TCC extremely useful when comparing two options with similar interest and fees.

Sometimes, the option with the lower APR has a higher TCC. The option with the lower APR might have smaller monthly payments, but another option might cost less overall. Your current cash flow scenario and future projections will tell you which advantage would be more beneficial for your business.

3. Total Fees Charged

Fees are used very deceptively in the business financing industry. Unlike interest, the total amount of fees attached to a business loan decreases the amount of money you end up receiving. For example, if you take out a $25,000 loan with a low interest rate but $2,000 in fees, you are technically only receiving $23,000. This can have a significant impact on APR. Business loans with low interest rates tend to have higher fees, which makes a $1,000 difference in fees more critical than a $1,000 difference in interest. So, if you are presented with two options that are $1,000 apart in interest as well as fees, the option with the lower fees will most likely be cheaper.

4. Average Monthly Payment Obligation

You have your monthly payment, and then you have your Average Monthly Payment Obligation. The former refers to how much money you will pay the business lender every month. The latter refers to the impact of repaying the business loan on your monthly cash flow as a whole. This is yet another valuable metric for unveiling the true cost of a business loan that might initially seem cheaper or more expensive due to an unconventional repayment structure, like daily payments instead of monthly. Your Average Monthly Payment Obligation reveals how much your monthly payment will affect revenue, operational funding, and other components of cash flow.

When the time comes that you need a loan for your small business, there are lots of choices available: you can borrow money from a family member, get a cash advance on a credit card, obtain a traditional business loan from a bank, or acquire funds from a more flexible online funding source.

When choosing a loan that’s the right fit for your business’s specific needs, you will probably have questions about secured and unsecured business loans. It’s important to know the difference between the two, and which one will best meet your needs. Below are explanations of both secured and unsecured business loans.

Business owner contemplating his business loan fees

What Are The Most Common Fees for Business Loans?

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Here are the most common fees attached to small business loans:

Application Fee:

This is a fee for checking your credit score and processing your application. It is sometimes referred to as an “Origination Fee” and would theoretically be included in your APR. Some institutions split this into two fees: An Application Fee and a “Processing” Fee.

Document Preparation Fee:

Some institutions charge a fee to pay for the cost of drafting documents related to the business loan. This would theoretically be included in your APR.

Prepayment Penalty:

The institution loses money when you pay off your loan early and may, therefore, charge a fee to make up for the loss. This wouldn’t be included in your APR since it only applies to borrowers who pay off the debt in full before the agreed-upon due date. Some institutions charge prepayment penalties while others do not.

Late Payment Fee:

This is a fee for making your monthly payment later than the agreed-upon due date.

Check Processing Fee:

This fee is charged when you make a payment via check.

Small business owner learning about the factors that determine a business loan interest rate

Which Factors Determine Your Interest Rate?

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When comparing business term loans, one of the most important factors (if not the most important) is interest. For this reason, it’s a good idea to know what kind of rates you should expect business lenders to offer you. You can get a clearer picture of the best interest rates available for you by understanding how interest is determined. Remember: There are a lot more options to choose from these days, so one offer might have a wildly different interest rate than another.

Here are five factors that determine your small business loan interest rate:

1. Business Lender

Though many lenders offer several products, the type of lender should give you a pretty good sense of the kind of rates they offer. The lowest rates come from banks, which isn’t a surprise considering bank loans are the most difficult to qualify for. Slightly more expensive are business loans from credit unions, followed by peer-to-peer lenders and online lenders. The highest rates come from online lenders because they are the most accessible loans to qualify for.

2. Relationship with Business Lender

Business leaders have been known to offer lower rates for borrowers they already have a relationship with. Establishing a payment record with a lender shows that you will be able to repay a business loan on time. So, if you believe your business is going to need a substantial loan in the not-so-distant future, you might want to initiate that relationship as soon as possible.

3. Credit Score

An excellent credit score gives you access to the best interest rates on the market. Banks typically require perfect (or nearly perfect) personal credit scores, whereas online lenders often work with borrowers with credit scores as low as 500. But depending on the lender you choose, poor credit doesn’t necessarily mean you’ll face absurdly high interest rates. Some online lenders may be willing to overlook credit issues if your cash flow is in great shape.

4. Type of Business Loan

The lowest interest rates are attached to Business Term Loans, which is the most prominent option offered by banks. SBA Loans are technically Business Term Loans, though they often carry lower interest rates than standard bank loans. Higher rates are usually attached to products with shorter terms, like Working Capital Loans or Merchant Cash Advances.

5. Fees

Some companies like to trick unsuspecting borrowers into expensive loans by advertising low interest rates, or even 0% interest. What they don’t tell you (unless you ask) is that the loan carries very high fees, like closing fees, origination fees, or prepayment fees. These fees can even be so high that they offset the low interest rate, and make the loan more expensive than another option at a significantly higher rate.

Two small business owners who are looking at what they need to apply for small business loans

What Do You Need To Apply For a Traditional Business Loan?

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The information and documentation you’ll need for the application depend on the business lender. Traditional business lenders like banks typically require a great deal of paperwork, whereas most online business lenders require just a few documents at best.

Here’s every document and piece of information you may need to apply for a business loan:

1. Loan Amount

Your desired borrowing amount will determine if you should apply to a traditional or non-traditional business lender. Banks prefer to issue business loans in the six and seven-figure range. If you’re not looking for more than $250,000, a bank probably won’t be too interested. Online business lenders, on the other hand, specialize in smaller loans.

It’s also important to know your exact borrowing amount so you can avoid the dangers of asking for too much or too little. Though every expense naturally creates additional costs, you shouldn’t ask for more money than you can afford to pay back.

2. Loan Purpose

With traditional business lenders, your intended purpose of the funds may play a massive role in your approval. These lenders heavily favor companies that use the borrowed funds to increase revenue dramatically. If you plan to use the funds for another purpose, you should probably pursue an online business lender.

Many online business lenders won’t even ask you to disclose the purpose of the funds. However, revealing this information will help them figure out the best repayment structure and terms for your needs. The use of the funds has a direct impact on how long it will take you to pay off the debt.

3. Personal Credit Score

This is undoubtedly the most critical requirement for a bank loan. If you don’t have excellent credit, banks won’t even bother looking at the rest of your data. The only way to access a bank loan with subpar credit is with collateral, which we’ll explain in just a bit.

Though online business lenders frequently work with borrowers with poor credit, your credit score still plays a role in your interest rate and terms. Thus, you should do anything you can to raise your personal credit score before applying for any sort of business loan. However, borrowers with subpar credit may be able to access reasonably favorable rates and terms from online business lenders with outstanding cash flow.

4. Business Credit Score

Your business credit score reflects your business’s creditworthiness. The primary criteria are your business’s payment history, length of credit history, the size of your business, and risk factors in your industry. Three major agencies track and score business credit: Dun & Bradstreet (D&B), Equifax, and Experian. D&B and Experian use a 0 to 100 scoring scale, while Equifax supplies three different scores, each with a varied range. There is one more score called the FICO Small Business Scoring System (SBSS), which has a scale of 0 to 300.

The FICO SBSS is the score that most business lenders look at because it’s based on a combination of the scores supplied by the three agencies mentioned above, along with the business owner’s personal credit score and business financials. While some business lenders won’t even check your business credit score, others might give it the same significance as your personal credit score. For this reason, you should check if your desired business lender considers your business credit score before applying.

5. Time in Business

Many banks will not lend to businesses that are under two years old. Most online business lenders, on the other hand, will lend to companies that haven’t even been operating for over one year. But much like credit score, older companies are more likely to receive advantageous borrowing amounts, rates, and terms, regardless of where the loan comes from.

6. Industry

Banks tend to favor industries with high potential for growth or industries they’ve worked with before. Specific sectors are known for turbulent cash flow, extreme seasonality, or unpredictable demand. If your industry fits these criteria, getting a bank loan may prove excessively tricky.

Online business lenders are less likely to discriminate based on industry alone. They regularly work with businesses that are highly prone to cash flow issues. However, certain online business lenders might have policies that restrict them from working with certain industries. One example is auto dealerships, which many online business lenders won’t work with. So, before choosing a business lender, make sure they work with your industry.

7. Entity Type

There are four primary business structures: sole proprietorship, partnership, limited liability company (LLC), or corporation (C-Corp). Some business lenders will not work with sole proprietorships. Most are more comfortable working with LLCs or corporations because they have more legal protection and are less likely to implode if the owner faces a lawsuit or a financial setback. If you do have an LLC or corporation, you may need to provide documentation to prove that you are registered in your state.

8. Annual Business Revenue

Every business lender has its minimum for annual revenue. Though some lenders have smaller thresholds than others, they all want to see that your revenue has either remained stable or is on an upward trajectory. Business lenders might also want to know your average monthly revenue, or how much your revenue has grown since last year. You should make sure you know this information very well before applying.

9. Employer Identification Number (EIN)

An EIN is like a social security number for a business. Not all companies require an EIN, but if you have one, it needs to be on your loan application. Businesses that require an EIN include corporations, multi-member LLCs, LLCs that are taxed as a partnership or corporation, and any company with employees. If your business does not belong to any of these groups, you can simply enter your social security number on your application instead of an EIN.

All businesses can obtain an EIN, regardless of their structure. Since getting an EIN denotes a separation between personal and business finances, business lenders may favor companies with EINs.

10. Business Plan

Traditional products like Business Term Loans and SBA Loans may require business plans. A business plan is at minimum a 12 to 15-page document that includes an executive summary, market analysis, financial projections, marketing strategy, and of course, an explanation of how you plan to use the borrowed funds and how it will increase your revenue and profitability.

As you can see, business plans take a lot of time to compose and may turn out to be the most tedious part of the entire application process. Many business owners probably choose to pursue online lenders solely because business plans usually aren’t required.

11. Business Debt Schedule

Most traditional business lenders and some online business lenders require Business Debt Schedules. The debt schedule highlights all outstanding debt, monthly payments, and payment dates. Business lenders will use this information to calculate a business’s debt service coverage ratio (DSCR). DSCR is the ratio between current debt and interest payments and current incoming cash flow. Lenders often decline applications primarily because the applicant’s DSCR is too low.

12. Balance Sheet

This is an outline of the businesses’ assets, liabilities, and stockholders’ equity. In other words, a Balance Sheet shows what your business has (assets) and what it owes (liabilities). A strong Balance Sheet denotes that liabilities + stockholder’s equity is equal to the combined value of current and fixed assets. All business lenders require balance sheets since they are one of three elements of a Financial Statement. The other two components are your Profit and Loss Statement and Cash Flow Statement.

13. Profit and Loss Statement

Also known as an Income Statement, a Profit and Loss Statement contains an overview of revenues, expenses, net income, and earnings per share. This allows you to project sales and operating expenses. All business lenders require Profit and Loss statements.

14. Cash Flow Statement

This is broken down into three sections: Operating activities, investing activities, and financing activities. Operating activities involve cash flows from sales and day-to-day operations, and investing activities involve the buying and selling of assets. Financing activities include cash-flow related to debt and equity. The statement’s primary purpose is to reveal how much money is coming in and out of your business.

15. Accounts Receivable Aging and Accounts Payable Aging Reports

Some business lenders (mainly banks) will ask for current accounts receivable (A/P) and accounts payable (A/P) aging reports. These documents show how competent your business is at receiving payments for goods/services and paying your bills. The A/R report details the number of invoices you’ve sent to overdue clients and how long these accounts have been late. If you have too many accounts on this report, it suggests you may not be as effective as you should be in collecting payments. Your A/P report shows just the opposite; it highlights the number of invoices your company hasn’t paid. Ideally, you should have only a few (or zero) outstanding/overdue accounts.

16. Credit Card Processing Statement

This is a summary of your business’s monthly credit card transactions. It is only necessary if you are applying for a Merchant Cash Advance, which requires these statements from the three most recent months.

17. Business Licenses and Permits

Depending on your industry and your home state, some business lenders may ask to see the documentation that proves that you are legally permitted to operate your business.

18. Proof of Collateral

Many banks require collateral for all loans. Though most online business lenders don’t require collateral, providing it may offset issues with credit score, cash flow, or time in business. Collateral gives the lender something to sell should you default on your loan. Thus, providing collateral decreases the lender’s risk of losing money.

Popular examples of collateral include real estate, equipment, vehicles, and inventory. It’s important to note that the value of your collateral won’t automatically allow you to borrow the same amount of money. Business lenders usually discount the value because they aren’t 100% sure they’ll be able to sell it for the same price later on. For example, if you provide $10,000 worth of collateral, it may only help you access a $6,000 loan.

19. Bank Statements

All business lenders require bank statements because they reflect your capacity to make payments. Your bank balance shows how much cash you have available to make payments after covering operational expenses. Business lenders will likely use your most recent statements to calculate your average bank balance. While online business lenders usually ask for the past three or four months’ worth of statements, traditional business lenders might ask for at least six months since their loans carry longer terms.

20. Personal and Business Tax Returns

Most banks will require two years of personal tax returns. This information is particularly crucial for sole proprietorships, partnerships, or S-corporations, as these entities report business profits and losses on their personal tax returns. If your business is a corporation or an LLC that is taxed as a corporation, the bank might require two years of business tax returns as well.

21. Copy of Your Commercial Lease

If you have a brick and mortar business, you may need to include a copy of your lease with your business loan application. Lenders want to see that your business will be able to use the leased property for the entire term of the lease, no matter what happens to the landlord.

22. Ownership and Affiliations

Applying for a business loan when there are multiple owners can get a little complicated. Traditional business lenders usually require contact information for every owner. They’ll also ask for any affiliations you may have with other businesses, like serving as a board member or consultant. This information exposes any potential conflicts of interest. If you’re applying for an SBA loan, you may need to provide personal financial information of anyone who owns 20 percent or more of the company. Each owner will also have to give a personal guarantee.

23. Legal Contracts and Agreements

Depending on the business loan purpose and type of business, lenders may ask for some of the following:

  • Contracts with major suppliers or other third parties
  • Corporate bylaws
  • LLC operating agreement
  • Franchise agreement
  • Commercial real estate purchase agreement or equipment purchase agreement

Small business owner wondering if he could get a small business loan with bad credit

Can I Get Approved For Small Business Loans With Bad Credit?

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Thanks to online lenders, several types of business loans are available to borrowers with personal credit scores below 630. They include:

  1. Short Term Business Loans
  2. Short Term Business Lines of Credit
  3. Invoice/Receivables Financing
  4. Equipment Financing
  5. Merchant Cash Advances
  6. Revenue Based Business Loans (Business Cash Advance)

If you have bad credit, the business lender will look at other elements of your business to see if there’s any reason to diminish the risk of approving the loan. These elements include your cash flow, annual revenue, time in business, and the ability to provide collateral. If you can fulfill one or more of these requirements with flying colors, you may be able to access more convenient products, rates, and terms.

If your credit score is very low (i.e., below 550), you could also pursue online business lenders with no minimum credit score requirement. Companies like United Capital Source offer special Bad Credit Business Loans that are not only accessible to borrowers with bad credit but can also be repaid very quickly and easily without damaging cash flow. Some of these products can dramatically raise your credit score with just a few months’ worth of timely payments.

However, it’s crucial to remember that credit score will always impact the borrowing amount, cost, and terms of your loan. If you have bad credit, you will almost certainly face high rates and shorter terms. But if you pay off this loan on time, you will likely be able to access better and more affordable products.

Two small business owners deciding whether it's a good time to take a small business loan

When Is a Good Time To Take Out a Business Loan?

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Sometimes, the need for a business loan isn’t as apparent as a broken piece of equipment or a cramped office. Most small business owners are so used to stress, mishaps, and financial constraints that they fail to realize that the only practical solution to specific problems is additional funding. This is a crucial realization. It means their business is ready to grow and prove that it has the foundation to pay off debt.

Here are four signs your small business could use a loan:

1. You Don’t Have Time To Grow Your Business

Time is among the most valuable sources of revenue a loan can buy. The more available time you have, the more focus you can dedicate to growth-related investments or initiatives. Many business owners, however, cannot afford to take time away from day-to-day responsibilities. They need to generate a certain amount of revenue per month to keep their business running.

Operations will likely slow down when you devote more attention to taking on new hires, marketing campaigns, developing new products, etc. With a loan, this slowdown wouldn’t jeopardize your ability to pay your bills or cover payroll at the end of the month.

2. Unusually Rough Slow Season

Virtually every industry experiences some degree of seasonality. To ensure a successful busy season, preparation must begin months ahead of time. This includes investments like marketing campaigns, recruitment of new hires, and bulk inventory. But some slow seasons are so devastating that you can barely pay your bills, let alone cover significant investments. Maybe this period lasts a little longer than expected. Maybe your freezer breaks or your employees need new uniforms, on top of your other mounting expenses.

Business loans prevent these circumstances from ruining your plans for a strong busy season. If your business is highly seasonal, your busy season is where you earn the majority of your annual revenue. With a business loan, you can have an excellent performance when your current finances only allow for decent performance at best.

3. Game-Changing Opportunities

Maybe you’ve come across a fabulous offer for a new space in the perfect location. Perhaps a significant retailer has asked to sell your products, but they want a massive quantity as soon as possible.

These opportunities are simply too rewarding to pass up. And this time, you’ve got the data to support the investment. Business loans allow you to take advantage of game-changing opportunities while continuing to run your business.

Here are some popular uses for small business loans:

  • Increasing staff
  • Purchasing equipment
  • Adding property/Expanding your physical space
  • Ordering bulk inventory
  • Covering operational expenses during a temporary slow period/elongated payment cycle
  • Taking on a large project requiring many/expensive resources
  • Paying off other outstanding debts
  • Developing a new product/service
  • Renovations
  • Launching an expansive marketing campaign

If you are looking to use a small business loan for another purpose, contact a reliable business lender who can tell you if that purpose is justifiable.

The two main advantages of a small business loan are as follows: One, you gain the ability to act now, as opposed to waiting until you have earned money yourself. Two, you obtain a sum of money you would likely not be able to make with your current means.

So, when you ask yourself if a small business loan is the most sensible way to finance your expense(s) or investment, what you are asking is if you need to act now and if you should be able to come up with this amount of money on your own.

4. Business is Booming

Demand is on the rise, but you don’t have the resources to meet it. There’s not enough space, people, or inventory to satisfy your growing customer base, and you don’t want to lose their business to larger competitors.

This is the ideal scenario for a business loan. You know precisely what you need to do to meet demand, and the incoming revenue will provide the means to pay off the debt. And since your success depends on productivity, taking funds from other areas of your business would jeopardize your operational capacity.

Small business owner thinking about rules to follow when applying for small business loans

Which Rules Should I Follow When Applying For Business Loans?

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There is a stigma attached to small business loans, and that’s that applying for them is not worth the trouble. The application process becomes infinitely easier, however, when you know what business lenders pay most attention to while deciding whether or not to approve.

Here are five essential rules to follow when applying for a small business loan:

1. Be Detailed

Business plans are typically only required by traditional business lenders like banks. But no matter where you apply, your chances for approval will be much higher if you clearly outline how you plan to use the funds, how the loan will increase revenue, and how long it will take you to pay it back. Detailed knowledge of your business’s financial future shows that you take this responsibility seriously. You can support your request by citing research on the demand for your industry as well as statistics from previous years to prove that your business has been consistently improving.

2. Be Honest

On that note, the only claims you make about your business’s future or current state must be supported by evidence. If you sound overly-optimistic with no evidence to back you up, business lenders will suspect that you have an inflated ego and cannot be trusted. Overestimating your business’s financial health will also lead you to look for business loans in the wrong places and ignore products that are better suited for your circumstances.

For this reason, you must be 100% truthful when you are asked how much you want to borrow. Do not present a figure that is lower or higher than what you need just because you think it will help your chances of being approved. Borrowing too little ignores the likelihood of the attached expenses. Borrowing too much will give you more debt than you can afford to pay back.

3. Choose the Right Business Lender

With so many business lenders at your disposal, choosing the right one can seem nearly impossible. However, it’s very easy to narrow your search. First off, consider how quickly you need the money. Traditional business lenders like banks can take weeks (or even months) to approve applications. Online business lenders can approve applications in just a few days. Some can even approve and distribute funding in a matter of hours.

Then, consider your business’s strong points. Do you have a high monthly revenue? Do you have spectacular business credit? Different business lenders place various levels of emphasis on specific strong points. This will also tell you what to highlight when speaking to each company on the phone.

Finally, ask each business lender if they have significant experience in your industry. Business lenders that have worked with companies like yours will likely be more understanding of cash flow issues that stem from industry-related challenges.

4. Get Your Documents in Order

This is arguably the most tedious aspect of applying for a business loan. The business lender you choose will determine the number of documents required for the application. For example, while online lenders might only require financial statements and bank statements, banks might also ask for a lengthy business plan, business tax returns, personal tax returns, etc.

5. Have Money in the Bank

Many business lenders base their decisions almost entirely on bank statements and financial statements. They want to see that you can pay off debt while covering rent, payroll, inventory, and other regular expenses. The only way to prove that this is the case is by showing that more money is coming into your business than going out. You might think that any profitable business would have no problem proving sufficient cash flow. Still, bank statements are often recorded right after companies pay third-party suppliers, as opposed to right after the company gets paid or pays itself.

So, before applying for a business loan, it is crucial to make sure your bank statements show that your business does not have a tight monthly margin. The more money you have in the bank, the less risky the business loan becomes.

Business owner learning what to watch out for when shopping for small business loans

What Should I Watch Out For When Choosing a Business Loan?

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A common reason for not looking into business loans is “I don’t have the time.” But it’s not the application itself that the business owner doesn’t have time for. It’s the undeniably stressful process of looking out for hidden traps and making sure certain options aren’t too good to be true. Unfortunately, it is indeed very to overlook crucial information when shopping for business loans. Your chances of choosing the wrong product are much lower when you know which questions to ask.

Here are four things to be wary of when shopping for small business loans:

1. Reserve Bids

Ever heard of this? You should ask business lenders about reserve bids while discussing how the business loan is paid back. A reserve bid is a contractual term that is most frequently added to business loans in which payments are directly tied to sales. Instead of the typical monthly payments of a business term loan, your payments are a percentage (usually fixed) of your daily, weekly, or monthly sales.

With a reserve bid, a slow period allows the business lender to take a more significant percentage of your sales to compensate for the increased “risk” you have put on the business lender. If this sounds ridiculous, it’s because it is. The whole point of tying payments to sales is to pay less when sales are down. Reserve bids should, therefore, be avoided in most cases.

2. UCC Filings

You’ve probably never heard of this either, and that’s just fine. Business leaders are more than familiar with tasks or regulations that make their lives unnecessarily complicated, and a UCC filing is yet another one of them. You only have to worry about a UCC filing if you plan on taking out a secured business loan, or a business loan that requires collateral. A UCC filing is merely the official documentation, which states that until the debt is paid off, the business lender technically owns the asset has been put up as collateral (real estate, equipment, etc.).

Why is this so annoying? For some reason, all UCC filings last five years, even if the term of the business loan is less or more than five years. Let’s say the term on your loan is three years, and you pay it off without trouble. Since the UCC filing is still intact, you have to contact the business lender and ask them to terminate the filing.

You’d think the business lender would do this automatically after seeing that you paid off the loan. But nope, this is yet another thing you have to remember to do at the end of the repayment process. If you don’t contact the business lender and try to take out another secured business loan shortly after, you might be denied because the second business lender would see that the UCC filing is still intact.

3. Prepayment Penalties

When a business loan is paid off in full earlier than the due date, the business lender may lose money it would have made from interest. Prepayment fees offset these losses and can significantly increase the loan’s overall cost. Plenty of business lenders, however, have no issue with borrowers paying off a loan early to save money. So, even if you don’t think you’ll be able to pay off the loan early, you should ask business lenders about any additional fees or charges associated with prepayment.

4. Credit Reporting

Many borrowers have made the mistake of assuming that all reputable business lenders report payments to major credit bureaus. But some business lenders do not report payments for any of their products, while others only report for some products. Thus, you should not assume that just because one business lender reports payments for one product, another business lender will also report payments for the same product and vice versa.

Small business owner learning about financial ratios

Which Financial Ratios Should I Know Before Applying?

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Before applying for a business loan, you must assess your financial health to know what you can qualify for. Unfortunately, you can’t always gain an accurate picture of financial health by only looking at sales or revenue. Sometimes, you have to do some math to determine if your business is indeed in good shape and on an upward trajectory.

Here are six financial ratios to calculate before applying for business loans:

Profitability Ratios

Profitability ratios tell you how effectively your business generates income. They provide a clear picture of your business’s financial health by comparing your earnings and expenses throughout a certain time frame. In most cases, the higher the ratio, the healthier the business will be. The three the most valuable profitability ratios are your gross margin ratio, profit margin, and of course, your ROI (return on investment).

1. Gross Margin Ratios

Your gross margin ratio factors in gross profits and net sales to determine how well you sell inventory. Gross profits refer to your total earnings minus the cost of goods sold, or the expenses that go directly towards the cost of operations. To calculate your gross margin ratio, divide gross profit by total revenue.

Let’s say you have $80,000 in gross profits and your cost of goods sold is $60,000. $80,000 – $60,000/$80,000 = 40% Gross Margin.

This means you sell your items for 40% more than their cost. So after paying for these items, you will have 40% of your total revenue left over.

2. Net Profit Margin

This is the percentage of earnings left over after all business-related expenses have been paid. Subtract these expenses from total revenue and then divide this number by total revenue to find your net profit margin.

$120,000 in total revenue and $100,000 in total expenses, for example, gives you a net profit margin of 20%. In other words, 20% of your business’s earnings turn into profit, and the other 80% goes towards business expenses.

3. ROI

Gain from Investment – Cost of Investment/Cost of Investment = ROI. Instead of just a percentage, it might be more helpful to think of ROI as somewhat of a “success rate” to see how successful your investment was. Spending $800 on a campaign that made $900 gives you an ROI of 20%. It’s safe to say a 20% success rate sounds a lot more alarming than a 20% profit.

Financial Leverage Ratios

Financial leverage ratios are used to gauge your ability to manage debt. By examining how much business capital comes from debt and how well your business pays its debts, you can see if a small business loan is effectively growing your business. The three most valuable financial leverage ratios are your debt to asset ratio, debt to service ratio, and interest coverage ratio.

1. Debt to Asset Ratio

This is the percentage of assets financed by borrowed capital. Business lenders prefer a lower debt to asset ratio since small business loans are designed to increase revenue, not to keep your lights on. Simply divide your total debt by total assets to reveal your debt to asset ratio.

2. Debt Service Coverage Ratio (DSCR)

Business lenders place great importance on your debt service coverage ratio because it shows how much cash your business has on hand to pay off a business loan after recurring expenses have been accounted for. You can use this number to figure out how much funding you should ask for since it should be as precise as possible.

Divide monthly cash flow by your hypothetical monthly or annual loan payment to reveal your debt to service ratio. The payment section should include interest and principal. A debt service coverage ratio above 1 indicates that you will be able to make your hypothetical payments without impeding your ability to cover regular business expenses.

3. Interest Coverage Ratio

Your interest coverage ratio is another way to compare debt expenses to profits. You want this number to be on the higher side because that reflects your profits’ capacity to cover outstanding debts.

To reveal the interest coverage ratio, you must first calculate earnings before interest and taxes by adding net profits and tax expenses. Then, divide this number by the amount of interest you’d be paying on a hypothetical small business loan. If your interest coverage ratio is two, that means your business’s profits could pay your debt expenses two times over.

Two small business owners learning the differences between secured and unsecured business loans

How Are Secured Loans Different From Unsecured Loans?

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Secured business loans require collateral, whereas unsecured business loans do not. However, this is far from the only difference between the two options, each of which carries additional pros and cons. Even if you can provide collateral, unsecured business loans may be more appropriate for your needs.

Here are the primary differences between secured and unsecured business loans:

Secured Business Loans

Secured business loans require collateral, which is an asset that the business lender can sell in the event of a default. Popular examples of collateral include real estate, vehicles, equipment, or inventory. The value of the asset directly impacts your borrowing amount.

Things to keep in mind when looking for a secured business loan:

  • Interest rates are usually lower on a secured business loan.
  • You might not need excellent credit to access lower rates because collateral diminishes the risk of repayment.
  • When considering a secured business loan, make sure that your collateral is something you’re willing to lose. If you default on your loan, you’ll lose the asset.
  • Make sure you get an accurate assessment of your asset’s value before requesting funding.
  • Be aware that business lenders usually give a lower value to your collateral because they need to liquidate it quickly. Therefore, your collateral will be sold at a lower price.
  • Any interest paid in association with a secured business loan can be written off on tax returns.

Unsecured Business Loans

Since collateral is not involved, the size and cost of unsecured business loans are determined through other factors like credit score and cash flow. If you’re pursuing a traditional business lender, the lack of collateral automatically increases the risk of repayment. Because of this increased risk, be aware of the following:

  • Unsecured business loans tend to have higher interest rates.
  • The term will be shorter than that of a secured business loan.
  • Lower interest rates for unsecured business loans require a strong credit score.
  • Because there is no collateral, you won’t be able to write-off any interest paid on your tax returns.

Small business owner thinking the differences between asset based lending and cash flow lending

How Is Cash Flow Lending Different From Asset-Based Lending?

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Shopping for business loans is much less stressful when you know your business’s strong points. Your strong points are reasons to decrease the risk of lending to you. Knowing this information will tell you whether you should seek financing on the strength of your cash flow or the value of your assets.

A cash flow-based loan allows you to borrow funds supported by your projected cash flow. An asset-based loan enables you to borrow funds supported by the liquidated value of assets on your balance sheet.

Here’s how these two lending methods stack up:

Cash Flow Loans

Borrowing amounts and terms for cash flow-based loans are derived from revenue projections, which come from historical performance data. Your revenue projections ultimately determine how much debt you are capable of paying back and how long it will take you to pay off the loan in full.

Cash flow-based loans are best suited for companies with rising profit margins and few hard assets to offer as collateral. However, the lack of collateral may result in higher interest rates. Borrowing amounts are usually on the lower side, but you can get the funds you need very quickly.

Business lenders may also consider your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). This allows lenders to assess any risk brought on by sector and economic declines.

During an economic decline, your company may experience a dip in its EBITDA. This may reduce your company’s available credit capacity for cash flow-based loans.

Asset-Based Loans

Asset-based loans require collateral, and your borrowing amount is based on the collateral’s liquidation value. Popular examples of collateral include real estate, vehicles, equipment, and inventory.

It’s important to remember that the asset’s liquidation value is usually lower than the price you originally paid to acquire it. This is especially true with inventory and manufacturing equipment. With these assets, you might only be able to borrow up to 50% of their value. The business lender will have to sell them as quickly as possible, to make any money back at all.

Collateral decreases the risk placed upon the lender. Thus, cash flow will be a secondary concern.

Asset-based loans also have strict rules in regards to the use of collateral:

  • If you have another existing loan, the asset cannot be that loan’s collateral.
  • If the asset is already pledged to another lender, this lender must subordinate its position to the new lender.
  • Before the business loan agreement, the borrower must address any concerns with the asset that could affect the lender’s ability to secure and sell it in liquidation (e.g., accounting, tax, or legal issues).
  • These business loans usually require a lengthy due diligence process, which includes the inspection of the balance sheet, ledgers, and assets to help the lender determine the company’s borrowing capacity. There may be additional fees attached to this process.

Business owner learning about small business loan myths

What Are The Most Common Business Loan Myths?

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The business financing industry is rife with myths and misconceptions. Many business owners faced unexpected rejection or did not apply at all solely because of this misinformation.

Let’s clear the air and debunk some of the most common myths about business loans:

Myth #1: Small Business Loans are a “Last Resort”

No business lender works with failing businesses. If your financial records show that your business is on the decline, you will not get approved. Yes, many companies use loans to cover operational expenses. But only for temporary periods, or in response to unforeseen misfortunes. Needing a loan to cover costs is not the same as “failing.”

Anyone who subscribes to this myth does not understand the unpredictability of the business world. One of the most popular functions of loans is recovering from sudden expenses that were impossible to prepare for. And as luck would have it, these expenses tend to come in groups. As the saying goes, “when it rains, it pours.”

And before these expenses arose, the business was alive and well. They have great products or services, and they know how to manage their finances.

Sometimes, business owners have no choice but to use their own money to recover from sudden expenses. This causes their credit score to plummet. When you have poor credit, there are only so many options you can qualify for. But does that mean the business is “failing?” Does poor credit automatically mean the business owner is irresponsible? Absolutely not.

Myth #2: I Can Use My Business Loan for Anything I Want

No business lender will approve a loan without knowing how you will use it and that you’re a responsible business owner. Having a clear plan is one of the most critical requirements for approval, regardless of where you apply.

Some online business lenders don’t require applicants to disclose the exact purpose of the funds. But they can gauge your aptitude as a business owner by examining your financial records. If your business is in good shape, you’re probably not going to use a loan for the wrong reasons. After all, you can’t build a successful business without knowing which expenses you should and should not finance with debt.

Myth #3: Online Lending is Scary – You Don’t Know Who You’re Dealing with

With so many online lenders out there, it’s only natural to assume that some of them are illegitimate. But it’s very easy to distinguish the legitimate lenders from malicious or predatory ones. You can look up their profile on the Better Business Bureau (BBB), or call them on the phone and ask them any question you like. Reputable lenders have spectacular customer service and will quickly make you feel comfortable about working with them.

If you’re worried about scams, these are very easy to spot as well. No legitimate lender charges upfront fees before any service has been performed. And they only contact people who have expressed interest in their products (clicked on an ad, fill out a form, etc.). Lastly, it’s important to remember that the best business loans on the market are reserved for borrowers who can meet the strictest requirements. No legitimate lender makes offers without first establishing that you can qualify for them.

Myth #4: All Lenders Care About is Your Credit Score

If you apply for a bank loan, your credit score is the number one requirement. Online lenders, however, tend to prioritize other factors like cash flow and sales volume. If you apply for alternative products like a Merchant Cash Advance or Accounts Receivable Factoring, your credit score is nearly irrelevant.

Yes, online lenders cannot offer the same rates and terms as banks. Their products are much easier to qualify for and, therefore, more expensive. But, if you’re looking for the lowest rates and most extended terms on the market, excellent credit is mandatory.

Myth #5: Who Needs a Bank? You Can Get a Loan from the SBA

This is a widespread misconception. Contrary to popular belief, the US Small Business Administration is not a lender. The SBA does not loan money directly. SBA Loans come from banks, credit unions, and some alternative or online business lenders. Each of these lenders has its criteria for approval.

The SBA guarantees at least 85% of the loan. But 85% is not 100%.

For most banks, their SBA Loans are just as difficult to access as their standard loans. Other lenders might have slightly looser requirements, but you’ll still probably need excellent credit, collateral, and at least two years in business. The application requires significant paperwork, too.

In summary, the fact that the SBA guarantees at least 85% of the loan doesn’t necessarily make it more accessible.

Myth #6: It’s Smart to Borrow as Much as You Can

One of the most common business loan mistakes is borrowing too much money. It’s only natural for business owners to believe they should borrow as much as they can get. After all, significant expenses tend to create other costs. And since financial emergencies can arise at any moment, you might as well be prepared.

But borrowing too much money can be very dangerous when you’re repaying the loan. Remember: The more you borrow, the more you have to repay. Excessive payments could essentially undo the improvements you made to your cash flow. If you are borrowing money to increase revenue, your borrowing amount should directly reflect the amount of new revenue you expect to generate.

Trying to borrow as much as possible suggests that you don’t have a clear idea of how you plan to use the money. If you did, you’d know exactly how much you can afford to repay after executing your initiative or investment. Yes, you can factor in additional expenses, but only if you’re realistic about their cost. When you have a plan for how you’ll use the money, you’ll have a clearer idea of the new expenses you’ll face in the near future.

Myth #7: Banks are the Best Place to Get a Business Loan

Banks carry the most advantageous loans on the market. But only if you can qualify, and you’re looking for a large amount of money. Also, borrowing from a bank often requires mountains of paperwork. Once you apply, you’ll probably have to wait several months just to learn whether or not you’ve been approved.

If you’re not sure you can qualify for a bank loan and you need a smaller amount of cash right away, online lending may be the way to go. In our experience, most business owners are only looking to borrow around $25,000. Banks prefer to work with borrowers asking for at least $250,000, which is considered low by their standards.

In a perfect world, banks would have looser requirements, and they’d be able to approve loans in a matter of days. This is why online lenders exist. They work with the countless business owners who regularly need smaller amounts right away. Odds are, you have more in common with this group than the bank’s target clientele.

Myth #8: I Don’t Need a Written Plan, it’s All in My Head

First off, most bank loans and SBA Loans require written business plans. Composing this 12-15 page document may turn out to be the most tedious part of the application process.

Online lenders might not require written business plans. However, writing out your intended purpose of the funds can provide much-needed clarity when it comes to your borrowing amount and terms. Putting this plan on paper allows you to visualize how you’ll use the money and how long it will probably take you to pay it back. Thus, even though a written plan is not required, it is still constructive to write out your ideas to determine just how realistic or accurate they are.

Myth #9: All Online Lenders are Pretty Much the Same

On the surface, most online lenders seem precisely alike. They offer similar products, charge similar rates, and work with the same types of businesses.

But when you look closer, you’ll discover that each one is very different. For example, many online lenders can approve loans in a few business days. Some of them, however, can put money in your bank account in a matter of hours. And every day counts in the business world.

Also, though two online lenders might offer the same product, the repayment structures could be completely different. One of them might require weekly payments as opposed to monthly payments. One of them might allow you to save money by paying off the loan early, while the other might need you to pay the same amount of interest and fees, regardless of when you pay off the loan.

You have to look deeper into each lender’s policies to see what sets them apart.

Myth #10: More Debt is Bad

Many business owners are so fearful of debt that they avoid business loans altogether. They might subscribe to the notion mentioned above that business loans are a “last resort” for failing businesses.

Yes, taking on debt is a risk. But so is starting a business! The risk of starting a business diminishes when you have a plan. Well, business loans are no different. As long as you take the time to develop a concrete plan, paying off a business loan can be completely stress-free.

Also, when you know how to manage debt, you become less fearful of growing your business in general. You know how much debt you can afford to take on, and how different levels of debt affect your cash flow. Being afraid of debt makes any remotely expensive investment seem like a recipe for bankruptcy.

Myth #11: You Always Have to Ask for Large Amounts

This myth stems from the fact that banks do not prefer to loan smaller amounts. They prefer to loan larger amounts so they can maximize their return on investment (ROI).

But banks are no longer the only reputable sources of business funding. Online business lenders specialize in smaller amounts because that’s what the average business owner needs. Asking for less than $50,000 (or even $25,000) will not affect your eligibility.

Also, asking for more than you need poses several risks. What if you can’t afford to pay it back? You’ll have to dig into operational funding or even your savings. That’s cash you should be using for something else, like paying your employees.

Myth #12: You Need a 40-page Business Plan

Business plans are only required for bank loans and most SBA Loans, and the expected length is 12 to 15 pages. This is because a business plan has 12 sections, though a few of them are expected to be over one-page long.

And it’s not the length that banks are most concerned with. It’s the quality of the content and the use of data to support your funding request.

You must also put a great deal of thought into your Executive Summary. This is the first page of the business plan, so it needs to create interest. However, it’s essential to keep your Executive Summary short and sweet. You can go into more detail when discussing your marketing plan and financial projections, which should be rife with historical and industry-related statistics.

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