Best Loans for a Small Business in 2024
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Introduction
The last couple of years have been challenging, especially for small business owners. The coronavirus pandemic aggravated economic instability in many economies. This is 2024 and businesses are still recovering. If your small business falls in the recovering category, taking a loan can help you get back on your feet faster and stronger. Business loans give you access to small business financing to run your business optimally and profitably.
There are some important things to understand before applying for a small business loan. for example, you need to understand the differences between secured and unsecured business loans. Also, understand how taking a small business loan rather than a personal loan to finance your company’s needs can affect your credit score. We put this article together to offer you the best advice to guide you through your small business loan application process in 2024.
Determine Which Type Of Small Business Financing You Need
A business owner may ask, why not just take out personal loans and divert the funds to your business? We answer that it keeps your personal finances separate from your business’s. This is a smart move that increases your accountability and helps ensure that financial challenges in small businesses don’t directly affect your personal assets. Now that you know why small business loans are better for small business financing, how do you know what type of loan to apply for?
There are different types of small business loans used for different business purposes. Some business loans are great for starting up a new business, others are better used to purchase equipment and property. There are financing options that allow you to meet unexpected expenses like repairs and others that are used as working capital. A small business loan can even provide you with cash flow while you wait on unpaid invoices.
When choosing a small business loan, remember that you would pay interest so take your time to choose financial products with the best interest rates. You must also carefully consider the repayment plan. Can your business pay back within the stipulated timeframe? This is important because failure to pay back loans as of when due can damage your credit score and prevent you from exploring other financing options in the future.
Figure Out If You Qualify For a Small Business Loan
Online lenders and government loan programs have eligibility requirements. The criteria for eligibility usually consider what the business does for profit, where the business operates, and the nature of its ownership.
How Is Your Credit Score?
An excellent credit score increases your chances of getting a business loan. But if you don’t have a great credit history or have bad credit, you can still get small business loans with competitive interest rates. You can get your credit report for free from Equifax, Experian or TransUnion. Many credit card issuers or personal finance websites can also help you calculate your credit score for free.
How Many Years Has Your Business Been Open?
The number of years your small business has been in existence matters to lenders. Any financial institution will want the assurance that you are committed to the business. And it signals commitment if you have been in business for a year or two. Of course, business startup loans exist but it’s easier for established businesses to get small business loans.
What's Your Company's Revenue?
It is always advised that small business owners should only take business loans that their company’s revenue can pay back. So that business debt does not damage personal financial stability. Lenders consider this as well and may judge a business’s creditworthiness by revenue records.
Choose The Best Lender For Your Business Needs
Every lender has terms and conditions for disbursing loans. Small businesses need to be sure to read the fine print and understand possible consequences before securing a loan. Some of the factors to consider before you start your application process include the following:
Loan Terms:
Some small business loans have repayment terms of months while others can stretch as far as 25 years. Lenders ultimately decide how long loan terms are and you don’t want the pressure of a too short term. An overly long term can also result in accumulating high interest and fees eventually.
Flexible Payments:
Choose a lender that is considerate with their repayment schedule and policies. Do they charge exorbitant late payment fees or will push back payment back a month if the company is struggling. Also, watch out for exit fees that some lenders charge you for repaying early, sometimes the exit fee makes early repayment cost more.
Interest Rate:
It’s important to remember that the interest rate displayed on the lender’s website is an average estimation. The actual interest rate you will be charged depends on your credit score, what kind of funding you’re getting, and the financing term.
Response Time and Funding Circle:
If you’re faced with an emergency and need funds in a hurry then you’ll need a lender that can match the time frame. Usually, online lenders tend to disburse loans faster than traditional lenders. Also, growing businesses mat need a considerable amount that would require multiple disbursals. In this case, consider the disburse schedule and see how it fits into your plans.
Other things to consider are the credibility of the lender, and choosing a lender with a reputation of trustworthiness. Also, your lender should be willing to provide you with the necessary documents to keep your finances in check when you take out your loan. Of course, a lender with great customer service is always great. You don’t want to deal with a lender who never responds to your questions and queries.
What Are The Different Types Of Small Business Loans?
Term Loans
One of the popularly used small business loan options, it is used as a working capital loan by a business owner. A term loan can be given by a traditional bank, credit union or online lender.
The amount can be up to $500,000 or even more. The time for fixed repayment depends on the lender and the amount borrowed but you can get up to a 10-year loan term.
The Annual Percentage Rate (APR) for term loans begins at 9% normally. Good personal and business credit scores can help you get competitive rates from traditional lenders like banks. The application and approval period is shorter compared to SBA loans.
Careful though, you may need to sign a personal guarantee agreement, which means your personal funds will go towards the loan repayment if the business defaults. So if you are not the sole owner of your business, this requires some thought.
SBA Loan
The Small Business Administration (SBA) of the United States allows a small business owner access to financing options backed by the SBA. This backing guarantees that should the borrower default the Small Business Administration will pay back up to 85% of the loan. Under the SBA loan program, we have different SBA loans of which SBA 7(a), SBA 504, and SBA micro-loans are the most popular. Read more here.
SBA 7 (a) loans are great for small businesses that want to expand or operations, acquire a company or secure working capital. It also works for refinancing debt and making extensive equipment purchases. Read more here.
SBA 504 loans are tailored towards purchasing business assets like real estate or equipment. If you want to renovate and upgrade an existing property, you should consider these types of SBA loans. The maximum funding amount for SBA 7(a) and SBA 504 loans is $5 million for qualifying small businesses. Read more here.
SBA micro-loans can lend a small business owner up to $50,000 for purchasing inventory, business supplies, working capital, or small equipment purchase. SBA funding is one of the most affordable small business financing options. The interest charged is between 2.7%-13% and the time between application and approval can take weeks or months. How the loan terms are sometimes up to 25 years.
Business Line Of Credit
A business line of credit is a type of small business financing that lets you borrow money on an as-needed basis. It works pretty much like a credit card, you get an approved credit limit on the credit line and take out only the amount you need. Your business only pays interest on the amount taken out and not the whole approved credit limit.
Revolving credit lines allow you to draw from them, pay back, and get the same credit paid into the line repeatedly as long as the account remains open. You do not have to fill out fresh loan applications, every time you max out your credit line and pay back, you are automatically credited.
Business credit lines are short-term financing options, great for managing hiccups in cash flow, buying inventory, or for unplanned expenses like repairs. It is not restricted to any particular business need and can even be used as working capital loans. It is one of the best loan options for business owners who run a cyclical business as it allows them access to off-season working capital.
Lines of credit have varying interest rate and may be secured or unsecured. Unsecured lines of credit range from $10,000 to $100,000. Amounts greater than $100,000, usually require collateral.
The amount withdrawn begins to accumulate interest fees immediately, so paying back quickly is important for keeping costs down.
Equipment loan
Purchasing machinery to aid production and increase revenue is great but can be extremely expensive. So if your business can not finance equipment purchases without negative consequences on other aspects of the business, an equipment loan is the right financing option.
The essence of equipment financing is that the equipment purchased serves as collateral for the loan. In case of a default, the lender is allowed to repossess and auction the equipment to make up for losses.
You can get equipment loans on any type of equipment, from forklifts, food processors, and office furniture to accounting software.
What Are The Costs Of a Business Loan?
There are several costs associated with taking a small business loan apart from the interest. We highlight some of those costs below.
Interest Rate
This is the most obvious cost of any loan. it is what the lender charges you for using their money. It is usually calculated as a percentage of the total amount borrowed. The rates are regulated by industry standard
The interest is not the same as the APR. The APR is an annualized percentage rate that represents the interest rate along with any fees associated with any small business loan.
Due Diligence Costs
Conducting an appraisal of your assets or auditing your personal and business finances falls under due diligence. So also is pulling a financing report or signing a pre-packaged funding agreement. There are generally three types of costs associated with due diligence: time, legal, and disbursements.
Administrative Fees
Lenders typically charge a fee to cover the costs of administering and monitoring the loan. This fee is charged monthly. The fee is usually between $50 and $100 monthly on loans less than $250,000. The higher the loan amount, the higher the administrative charges. Some lenders will also charge a fee for annual review or renewal fee.
Transaction Fees
Lenders may charge you the cost of sending money to you. The cost depends on the transaction method used. Fund wiring can cost from $25 to $60 for the outbound wire, a fee that will be passed on to you. Your bank will also charge you $10 for any inbound wire, regardless of the amount received.
Exit Fees
If you pay off your loan earlier than agreed, the lender may not make as much interest as originally intended. This is why some lenders include early repayment fees when additional payments are made and an exit fee when you pay the loan off at once.
Late Fees
Loan programs often than not will charge you for late payments. The interest on late payment fees can increase daily or monthly.
What Documents Are Required To Apply?
Some of the important documents required to close the best small business loans include:
Proof Of Identity
To curb money laundering and terrorism funding, the Office of Foreign Assets Control (OFAC) publishes a list of sanctioned individuals U.S. lenders can’t lend money. Lenders are therefore required to verify that you’re not on that list. A driver’s license, proof of legal residency or social security card will do.
Loan Application Form
Provides the lender with information on your background. Also helps them understand why you are applying for the loan and if you have any other ongoing loans. complete application sets the right tone of transparency. It helps the lender vet the opportunity as low risk and process the request diligently.
Income Tax Returns
Most business loan options require you to provide personal and business income tax returns for three years before your time of application. Providing returns helps establish creditworthiness through financial transparency which smoothens the approval process.
Collateral
Ideally, the collateral should be something easily convertible into cash if needed. Lenders usually require collateral value at least equal to the loan amount. Providing proper supporting documentation helps establish the collateral’s worth upfront to simplify the loan process.
Resumes
For startup loans, some lenders require evidence of management or business experience and competence.
Other documents include credit reports, business licenses, articles of incorporation, franchise agreements, and commercial leases.
Requirements For Each Type Of Financing
To qualify for term loans you need to have good personal and business credit scores. personal credit score and a business credit score are calculated using different scoring systems. A business credit score between 80–100 is considered excellent and a personal credit score of 620-720 should qualify you for a term loan. however, you will get a better deal with a score of 720 or above for good business loan terms.
Another factor considered is how long you have been in business, most lenders require at least 12 months. If you are applying for secured loans collateral documents are also required. All lenders will need your company’s profit and loss (P&L) bank statements.
Lenders that work with the SBA will have some eligibility criteria unique to them but the SBA has some general standards. First, the business must meet SBA size standards and qualify as a small business. Next, it must be a for-profit business registered and operating physically in the U.S or its territories. The business must have the necessary permits and licenses to legally operate.
The business owner or owners must have invested their own time or money into the business and own equity. Typically you need a personal credit score of 680 but even those with bad credit may qualify for startup funding. It depends on the lender they find.
Personal credit scores of 580 to 680, qualifies but scores close to 680 stand a better chance of approval. Lenders require business revenue to be between $10,000 per month to $250,000 per year. Although online lenders usually have lower revenue requirements compared to traditional banks.
Most banks will only consider businesses that have been in operation for at least one to two years, but online lenders may sometimes require just six months. A business that has been around for a long time implies stability and attracts a lower interest rate. For the best deals, you need collateral. If you want an unsecured credit line, you might also have to sign a personal guarantee.
Equipment loans usually require credit scores of 600 minimum. Good credit increases the chances of approval although some lenders will consider those with bad credit. Because the equipment can serve as collateral. Apart from the regular loan application documents, you will need to present a quote from the supplier that shows how much it costs. Soft costs like moving the equipment should be added.
How Are Business Loans Repaid?
Business loans are paid back in installments, it can be daily, weekly, or bi-monthly but it’s typically with monthly payments. Most times, your loan repayment terms start counting from the day the funds are released to you. So for monthly payments, you make your first payment 30 days after getting the loan.
The exception is lines of credit that do not expect repayment until after the drawing window has closed. A lot of lenders use an automatic repayment system, that takes money out of your bank account once payment is due. Some allow you to make deposits from your account to a set repayment bank account.
Repayments can either be fixed or variable. Fixed repayment allows you to pay the same amount every time payment is due but with variable repayments, the amount can change. For example, if repayment deducts 12% of your cash flow, the amount of money removed changes with how much revenue your business get
How Do I Apply For a Business Loan?
Find out what type of financing you need
Check if your business is eligible for it
Find lenders who offer the financial product you want
Fill in the application form and follow the lender’s prompt to complete your application.
Conclusion
Our small business financing team at Upwise Capital is here to assist you with every step of the way to secure your business loan in 2022. For assistance and inquiries, please call our team at 77-55-UPWISE or email [email protected]. You can also apply online for Small Business Financing, so you can take your business to new heights in 2024.
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