The Ultimate Guide To Small Business Financing
Small business financing can be one tough road to go down, as funding your small business is no easy task. The decision to borrow funds is a major one, as is deciding which lender to work with. Today, we’ll discuss how to make the right financing decisions for your small business, as well as what factors to consider when borrowing money for your venture.
There are many different financing options to consider. You’ll need to keep in mind the application process for funds, as well as fees, rates, and requirements for each lender. Since your choice of financing can have such a huge and lasting impact on your business, it’s important to make the decision that’s right for you and your company.
Small Business Financing: Traditional Lenders vs. Online Lenders
Technology is changing the way businesses borrow money to finance growth, often for the better. Today, there are online lending options that can help you build your business in addition to the more traditional lenders. This means more options for businesses and more customizable loans, as well as more flexible lending criteria. It’s important to know the differences between a traditional lender and an online lender when deciding who to work with.
Traditional lenders tend to have a longer, more detailed application process. This is because they tend to lend larger amounts than online lenders, and therefore require intense documentation of every aspect of the loan. This means more significant paperwork and a longer application process than other lenders.
Traditional lenders often require very specific, high-value collateral when negotiating a loan, which can be difficult for new businesses to meet. They also tend to base their lending off of personal credit scores, meaning that if you have less-than-stellar credit, your application could be denied or you could receive a smaller loan with higher interest. Traditional financing types include:
- Bank term loans
- Bank lines of credit
- SBA loans
- Merchant cash advances
- Equipment financing
Online lenders, on the other hand, tend to have much shorter application processes. This is because they tend to lend smaller amounts of money than traditional outlets. They require less paperwork and can often take a blanket lien on an entire business, rather than requiring specific collateral. This means they are able to work with younger, less established businesses more easily than traditional lenders. They also take a more data-driven approach than the traditional credit score-based method, which could translate to more money for your business. Online financing options include:
- Online term loans
- Online lines of credit
- Loan matching sites
Small Business Financing: Minimum Requirements by Financing Type
Traditional business loans, such as bank term loans and SBA loans, tend to have the most stringent requirements. They typically require personal credit scores to be in the 650-680+ range to be considered. Furthermore, bank term loans require a business to be operational for 2+ years in order to be considered. SBA loans do not generally have such a requirement. Bank term loans typically start at $50,000, with the average loan size being $500,000. SBA loans start around $10,000, with the average loan size being $350,000.
To be eligible for a traditional business loan, you will likely have to demonstrate 2+ years of profitability, which is difficult for new businesses. SBA loans will require a detailed business plan and financial records that predict profitability. Bank term loans will require hard collateral such as real estate or equipment, while SBA loans may or may not, depending on the lender and the size of the loan. It also takes longer to receive your funding when using a traditional business loan: 30 – 90 days for SBA loans and potentially years for bank term loans.
Non-bank business loans, such as short-term or long-term online business loans, offer more flexibility in their requirements. Short-term loans tend to require a credit score of 500+, while long-term loans require something closer to 600+. They generally require that a business has been in operation for 1+ years and require $100,000 in annual revenue to be considered. Short-term loans are offered in increments from $5,000 – 250,000, while longer-term loans can be as much as $500,000. Funds are available much more quickly than with traditional outlets, typically within five days and often as soon as the same day.
Other non-bank loans can offer small businesses funds on more flexible terms. Merchant cash advances generally require a credit score of 500+ and stipulate a business must be in operation for 6+ months to be considered. They require a monthly revenue of $5,000 per month from credit card sales, but do not require the same collateral that more traditional loans do. Loans are typically given in increments from $5,000 – 500,000 and funds are often available in as few as two business days.
Factoring typically requires a business to be operational for 1+ years and a credit score of 500+. While the income requirements are less stringent than other loans, you must be able to prove a guaranteed and steady receivable cash flow in order to be eligible. Factoring provides much larger lending increments, from $100,000 – 2,000,000, and funds can be available as quickly as 5 days from application.
Equipment loans allow you to use the equipment you are purchasing as collateral and have much lower requirements for time in business, as low as 1+ months. They generally require a credit score of 600+ and $100,000 in annual revenue to be eligible. Loans are offered in $100,000 – 2,000,000 increments and can be available for use as few as five days from the date of application.
Small Business Financing: Understanding Loan Rates, Costs, and Fees
There are many fees and costs of a loan to consider before taking one out. Rates like AIR and APR are helpful, but often don’t tell the whole story. It is therefore important to ask lots of questions to make sure you have all the information you need to make a decision.
AIR, or the Annual Interest Rate, is the yearly interest percentage you owe based on your average loan balance. This rate does not include any fees, it’s just the interest on the loan that you owe based on your balance throughout the year. APR, or Annual Percentage Rate, is expressed as a yearly rate comprised of the annualized interest rate plus any fees that are conditional to receiving capital. It is important to know these two figures before taking out a loan.
There are some important questions to ask yourself when weighing your financing options. What business need will this loan satisfy? How quickly do you need the capital? What does your personal credit score look like? What about your business credit profile? The answers to these questions will help you determine what financing option is best for your needs.
There are also some key questions to ask your lender before you decide to apply with them. It is important to know the following information before taking out a loan:
- Is this a reputable lender? It is both acceptable and encouraged to ask for references to remove any doubt about the legitimacy of the lender
- What are the minimum requirements to receive financing?
- What is the application process like?
- Will the lender do a hard pull on my credit?
Once you’ve decided to work with a lender, you should ask the following questions before accepting a final financing offer:
- Will I get the amount of financing that I need?
- Is this offer a good fit for my business needs?
- Does my business have sufficient cash flow to make periodic payments?
- Will this lender report my good payment history to the credit bureaus? This is especially important if you are a newer, less established business or have less-than-ideal credit
- Are there any fees associated with this financing offer?
Navigating your financing options can be difficult and confusing when trying to make the right decision for your business. Take this information under consideration as you weigh your options and use it to find the best financing strategy for your business.
Small Business Financing: What’s Next?
There’s no doubt that financing a small business can be a difficult process. We’ve done our best to explain how smb financing should be approached and what typical options are.
What we haven’t mentioned is what comes next. When your business is up-and-running, making money, and tax time quickly approaches.
Small business taxes can be one of the most stressful pieces of business ownership, but it doesn’t have to be. If you plan ahead and track your expenses along the way you’ll be in a much better position. Not only will you have a clear picture of the financial health of your business, you’ll also save hundreds of hours vs. manual tracking & reporting.
With over 400,000 users, and over 1m+ miles tracked per day, the average Everlance user finds $6,500 per year in deductions! That’s a massive savings for a product that ranges from free to $5/mo for individual users. Think about the time & cost savings you’d have by tracking each mile you drive for business automatically. Or never needing to keep a shoebox with receipts, or try to remember how much a specific expense was 10 months later.
That’s the power of Everlance. Everything is automatic by default, and manual whenever you need it. You can sync your bank account and credit cards to automatically import your expenses, or manually add them as they happen. Every receipt. Every charge. Every mile you drive. it will all be available in your account to download and import into your favorite tax software or hand off to your tax preparer.
It’s really that easy!