Getting a loan for your small or medium-sized business can be the catalyst for taking your entrepreneurial dreams and turning them into a reality. Whether you want to launch your company, buy inventory, expand your business, or something else, understanding the options you have is critical. Business loans from lenders come in varying sizes and shapes, and each works to meet different goals or needs.
In this guide, you’ll find out the business loans and lenders available to you. You’ll also learn what to look for with these lenders and how to choose the best partner for your business. The goal is to give you all the knowledge you need to make an informed decision and launch your business to a new level.
Understanding Business Loan Types
You may not know it, but there are several loan types available for small or medium businesses, and some have unique uses while others are more broad. Some of the most common options include:
Term Loans
A term loan is a traditional financing tool where you get a lump sum of money from a lender upfront and slowly repay it over a fixed time while paying interest. These types of loans are good for large investments or if you want to fund a long-term project.
Lines of Credit
Business lines of credit give you flexible borrowing power, and they let you draw the money as you need it to a set limit. You’ll only have to pay interest on the money you draw, and it helps cover emergencies or manage your cash flow in slower periods.
Working Capital Loans
A working capital loan is one way to pay for your company’s day-to-day operational expenses. They’re usually more short-term choices, and they help you manage temporary shortfalls or seasonal fluctuations.
Merchant Cash Advance
A merchant cash advance gives you a lump sum in exchange for a percentage of your future credit card sales, and this is a solid choice if you have a business that does a lot of credit card transactions.
Online Business Loans
Online business loans come from digital lenders, and they usually have faster approval and funding times. They’re nice if you’re looking for fast access to cash.
Invoice Factoring
With invoice financing, you’re essentially selling your unpaid invoices to a lender to get a discount for immediate access to cash, and it helps you improve your cash flow if you have longer revenue cycles.
Equipment Financing
Equipment financing business loans from lenders go toward buying new business equipment, and the equipment acts like collateral. If you need to buy new machinery or upgrade your existing ones, this is a viable option.
Key Factors to Consider When Choosing a Lender
Choosing the right lender for your business loan is crucial for your financial health and long-term success. As you browse different business loans from lenders, you’ll want to keep the following i mind:
Interest Rates and Fees
The interest rate and fees attached to a loan plays a large role in your loan’s total cost. You have to compare rates from different lenders to ensure you’re getting the best option possible, and you want to look for hidden fees, like:
- Prepayment penalties
- Origination fees
- Late payment charges
Remember, a lower interest rate can save a decent chunk of your money over the loan’s life, but watch out for offers that are too good to be true because they may have sneaky, hidden costs.
Repayment Terms
You won’t be able to effectively manage your loan if you don’t understand the repayment terms. Consider the monthly payment amounts, loan duration, and if there’s any payment schedule flexibility. Some lenders have more flexible terms that you can adjust to match your company’s cash flow, while others are very strict.
Customer Service and Support
The customer service the lender offers will influence your borrowing experience. Ideally, you’ll want a lender with excellent customer service ratings, clear communication options, and easy support access. Read reviews and ask for recommendations to gauge any lender’s reputation.
Top Business Loan Lenders to Consider
When you’re thinking about getting a loan, you should look at the big lender categories to help you find the best fit. They include:
Bank Lenders
Bank lenders are the traditional financial institutions that have different loan options. They are a popular pick because they offer comprehensive services and usually have a well-established reputation. Bank loans also usually have lower interest rates and longer repayment terms, and this makes them good for long-term projects or large-scale investments.
However, they typically have a rigorous application and demand a large amount of documentation with a strong credit history. The approval times can be longer, so they’re not a good fit if you need fast money.
Online Lenders
Online lenders have had a popularity surge due to their speed and convenience. They operate 100% online, giving you a streamlined application process with quicker approval times. They’re great if you need quick access to capital or if you don’t qualify for a traditional bank loan. You’ll usually enjoy more flexible credit requirements, and this makes them more accessible to small or medium sized businesses or startups.
The downside is that they tend to come with higher fees and interest rates than you’ll get from a traditional bank. This is why it’s crucial to compare different online lenders and carefully review the terms to find the best deal.
Alternative Lenders
Alternative lenders offer non-traditional financing options, such as merchant cash advances, invoice factoring, and equipment financing. There is much more flexibility with this option, and they may offer funding based on your business company’s performance instead of your credit rating.
They also come with higher costs due to the increased risk they face. You’ll want to take a hard look at the specific conditions and terms the loans have before you accept anything. However, for businesses that need quick access to funds and have limited options, alternative lenders can be a valuable resource.
How to Apply for a Business Loan
Applying for a business loan can seem daunting, but breaking it down into manageable steps can make the process smoother. To get you started, you’ll want to:
Preparing Your Documents
Having everything you need organized and ready to go is critical for the application process. You’ll typically need to have:
- Financial Statements: These include balance sheets, income statements, and cash flow statements for at least the past two years.
- Tax Returns: Lenders typically like to see the past one to two years of the business’s tax returns.
- A Business Plan: Your business plan should clearly outline your business model, market analysis, and how you intend to use the loan funds.
- Personal Identification: You’ll submit a driver’s license or other government form of ID, like a passport.
These documents may speed up the application process and make you look more credible. Everything should be up-to-date and show your company’s current financial health.
Understanding the Application Process
The application process for a business loan varies depending on the lender, but generally follows similar steps, starting with filling out the application online or in person. You will have to upload or attach your supporting documents for the lender to review and wait for the lender to contact you if they need more information.
The lender will look at the application, supporting documents, and your business’s credit history when they weigh if giving you a loan is a good idea or not. This step may involve a background check and an evaluation of your business’s ability to repay the loan. If approved, they’ll send you a loan offer to review that you sign if you agree before they disperse the funds into your business account.
Frequently Asked Questions About Business Loans and Lenders
Applying for a business loan can raise many questions. Some of the most common inquiries to help you better understand the process include:
1. What Credit Score Do You Need?
The required credit score varies by lender and loan type. Traditional bank loans typically require a score of 680 or higher, while online and alternative lenders may accept lower scores. Note that a higher score usually entitles you to better terms.
2. How Long Does Approval Take?
Approval times can vary significantly depending on the lender and loan type. Traditional banks may take several weeks to process applications, while online lenders can often provide approval within a few days. Alternative lenders, such as those offering merchant cash advances, can sometimes approve loans within 24 hours.
4. What Is Collateral?
Collateral is an asset you pledge to secure a loan. If you default on the loan, the lender can seize the collateral to recover their losses. Common types of collateral include real estate, equipment, inventory, and accounts receivable.
Ready to Get Started With Your Business Loan?
Now that you have a clearer understanding of the different types of business loans and how to choose the right lender, you're ready to take the next step. Securing the right financing can launch your business to new heights. At BusinessLoans.com, we dedicate ourselves to helping you find the perfect loan tailored to your business needs.
Contact us today to discuss your financing options and get personalized assistance. Let’s work together to make your business goals a reality. We're here to support you every step of the way!
