SMALL BUSINESS LOANS

Do You Really Want a Loan?

Whatever your reason is for needing a small business loan, it’s important to know that not all loans are created equal, and that not all are appropriate for your company. To help you make the most comfortable and appropriate decision for your company, we’ve researched dozens of small business loan providers.

You may be totally, unquestioningly sure that you need money for your company, but is a small business loan the best way to do it? Maybe a small business line of credit will be a better option for your needs? Maybe there are ways you can cut costs to cover your debt? Or perhaps you can raise your prices to enhance your bottom line? You can also consider specific loan types such as equipment loans or construction loans if you have a specific goal in mind. These loans may offer better terms for your company. Lastly, you may want to think about a merchant cash advance if your business has good credit.

If you’ve determined that you have no option but to borrow money that will cover your business’s debts or expenses, you should strongly consider how the borrowing costs will impact the company’s ongoing bottom line. In 2013, Mark Cuban, billionaire investor and owner of the Dallas Mavericks, publicly commented that only “morons” start a business on a loan. Cuban has been an extremely successful entrepreneur – could there be merit to these harsh words? On the other hand, Kevin O’Leary, Cuban’s fellow Shark Tank investor and the founder of the O’Leary Group, has said that “[small business loans] can have a huge payoff for companies that know how to use it to their advantage.”

So which philosophy is right? Is there even a right answer? We like to think that the right small business loan can be right for the right business owner. In other words, we’ve seen firsthand how an influx of cash can bring an influx of confidence and comfort as well as the financial flexibility you need for your company to succeed. But you should not take this decision lightly. Before you sign on the dotted line, make sure that you’ll be able to repay the loan according to the terms and that the extra outlay won’t disrupt your cash flow too much in the future.

Our Loan Review Process

A small business lender is the entity that will fund your loan. If you’re taking out a private small business loan, the lender may be one of dozens of private lenders. If you take out an SBA loan, the lender will be a bank or non-profit that will be backed by the Small Business Administration. Of course, you may be lucky enough to get a small business loan from your bank, but most financial institutions prefer not to grant small business loans, which is why private small business loans have become so popular. It’s worth noting that if for any reason you are unable to secure a loan from more traditional lenders you can look into peer-to-peer lending opportunities.

To help you make the right decision, we’ve reviewed dozens of small business lenders, and weighed factors that will be most important during the decision-making process. We started by listing the requirements that each lender demands in order to approve your application. This will give you a bird’s-eye view of whether a specific lender is a good fit for your business. Then we researched the types of loans offered, loan rates and fees, maximum loan available, and rates and fees for each lender. We’ve also evaluated the ease of the application process, the time it takes to process the application, and the customer service offered by each small business lender. Finally, we’ve read hundreds (if not thousands!) of reviews left by real users to see what others are saying about each lender. Sure, our professional opinions are important – but why trust us alone, when you can get a cross-section of user reviews without having to spend the time reading them all? We’ve done the work for you so that you can spend more time focusing on your business and less time focusing on your business loan.

Do Your Homework

Before a lender turns over its cash to you, it will do thorough research about you, your company, and your goals. Shouldn’t you do the same research about your potential lender? You may feel pressured for money, but don’t let financial stresses rush you into making a decision without first doing your homework. Remind yourself that there are dozens of small business lenders to choose from and you shouldn’t feel pressured to borrow money from any lender that doesn’t make you feel 100% comfortable.

We’ve answered most of the most pressing questions in our thorough small business loan reviews. However, if there are questions that you’re still not sure about, the time to ask is before you commit to a small business loan, not after. Ask potential lenders the following questions:

• How long is the application/approval process?
• What documents are required for the application process?
• Has the lender lent money to businesses in your industry before?
• What are standard repayment terms?
• Are interest rates fixed or variable?
• Is there an early payment penalty?

We also recommend that you consult with a financial advisor or small business mentor who can help you determine which type of loan and which terms will be best for a company with your specific criteria and needs.

How to Identify the Right Lender for Your Business

What would make a lender highly rated or recommended? What would make a different lender less relevant? Every company will have a different reason for choosing its small business lender, so we recommend that you make a list of what your most important criteria is before starting the process. Are you worried about having the most favorable repayment terms? Are you expecting to repay early, and you’re seeking to avoid prepayment penalties? Are you looking for a lender that has experience lending to companies in your industry? Or maybe you need a specifically big loan, and are looking for a lender that will provide more generous funding? Are you in a specific rush to get the money, and you want a lender that will provide the funding quickly and hassle-free?

No matter what your needs are, we want to help you find the right lender for your small business loan. That’s why we’ve taken all of these criteria into account and have compiled a list of the best small business loans on the market. Keep in mind that just as there isn’t one business model that works well for every business, there isn’t one small business lender that is ideal for every single small business.

Requirements to Secure a Small Business Loan

Congratulations, you’ve decided to take out a small business loan! Now what? The good news is that applying for a small business loan has never been easier. The abundance of online opportunities means that you can shop around for loans and then apply for them from the comfort of your home or office. You can also take time to get your documentation in order so that the application process should be relatively painless.

Lenders usually prefer to lend money to companies that meet the following requirements:

• Good to excellent credit scores (don’t despair if you don’t have good credit – there are some small business loans that are specifically geared towards companies with bad credit)
• Lenders will likely check the business owner’s personal credit history as well as the company’s credit score, so both should ideally be in good standing
• Proven cash or income flow that can be used to repay the loan
• A minimum time in operation (many lenders require a minimum one year of operation, but there are some lenders that will extend loans to younger businesses)
• A valid reason for the loan

Some lenders may also require collateral to secure the loan. We recommend carefully researching all required loan criteria for any of your ideal lenders before applying so that you’ll have the best chances for getting your request approved. You should also be aware that while applying for a small business loan should not directly impact your credit score, there are some cases in which your score may be affected, so you should check this carefully before applying for any loan.

How to Apply for a Small Business Loan

Most online small business lenders have an online application that is easy to follow, but the potential lender may require some documentation in order to grant your request. To expedite the process, it’s a good idea to have all of your paperwork in order before submitting the application. Some of the paperwork you may need is:

• A business plan the outlines your current business goals as well as how you plan to use the money from the loan
• The company’s tax returns
• Financial figures from the life of the company (or, if the company is more than five years old, from the past five years). This may include revenue, expenses, cash flow and future financial projections
• The company’s credit information
• The credit score of the business owner
• Company bank statements
• Personal bank statement from the business owner/s

You may also be asked to provide supplemental documentation such as professional information about your management team or executive board. If you own a franchise you may also need to submit franchise information or details relating to the chain’s business model.

Understanding Your Business Credit Score

Business credit scores are usually rated on a scale from 0-100, with 100 being the best possible credit score, while personal credit scores tend to run on a scale from 300-850 (with the higher score being better than a lower score). It’s very important to understand that if you’re trying to secure a small business loan, there’s a good chance that potential lenders will look at both your business credit score and your personal credit score when considering your application.

Having a good business credit score will not only help you secure a small business loan, but it will also allow you to get better rates and terms for your loans. For this reason, if possible, you may want to wait to secure your small business loan until you can improve your business credit score.

How to Check Your Credit Scores

You can check your personal credit score with one of the three major credit bureaus in the U.S. – Experian, TransUnion or Equifax. There are thousands of websites that offer free credit reports, and these will give you a good idea of your personal credit score. You can request a personal credit score once per year from each credit agency, for free. Make sure to check your credit score only on a website that is reputable as your credit score, like all personal financial information, should be accessed in a secure forum only. Interestingly, all personal credit agencies grade your personal credit score on the same factors. This means that your personal credit score should be the same (or nearly the same) no matter which agency provides your personal credit report. As mentioned earlier, it is imperative that you only check your credit score in a place that will not impact your score.

When it comes to business credit scores, however, there is no standardized algorithm to create a credit score. You can check your business credit score with one of three agencies: Experian, Equifax or Dun & Bradstreet. Business credit searches can be done for free, but you’ll be required to pay for your business credit report. Because every company verifies information differently, you may find significant fluctuations in your business credit score between the different agencies. You may also find that some of the data used to create your credit score was incorrect. If this happens, you should be able to submit a correction to get your credit score updated.

Some of the factors that a ratings agency will look for when considering your business credit score are the length of time in business, the size of your company, your available credit limit, late or delinquent payments and other financial history. If you have concerns or knowledge that may impact your business credit score you may want to work on improving it some before applying for a credit report or a small business loan. Having a better credit score will increase your chances of getting a small business loan and will enable lenders to provide you with better terms on the loan if they do accept your request. If you still need a loan and can’t improve your credit score, check out our recommended bad credit small business loan options.

It is possible that in requesting a business credit score an agency won’t have your company on record and will be unable to perform the necessary credit checks. If this is the case, you may need to take additional steps to have your company registered as a proper entity. You will need a federal tax identification number (TIN) as well as a business bank account (if you don’t yet have one). Once you’ve set up these things you can submit another request for a business credit score.

Understanding Your Debt Service Coverage Ratio

In the business world, the Debt Service Coverage Ratio (DSCR) is the measure of the company’s cash flow that is available to pay existing debts. The ratio measures net operating income as a multiple of debt obligations within a year period, including interest, principle and lease payments. On the simplest level, your DSCR can be calculated as Net Operating Income / Total Debt Service. It should be noted that some lenders calculate DSCR slightly differently, so it’s worth asking potential lenders exactly how they calculate this ‘magic’ number.

A DSCR ratio of 1 or higher is a strong sign that a business is generating ample income to cover its annual debt and interest payments. A DSCR ratio over 2 indicates that a company is financially stable and would be an ideal candidate for a small business loan. A company’s DSCR is a good indicator to the question of whether a small business will be able to pay back its loan on time. A DSCR is an important criterion for small business loan funders when they are evaluating your loan request, but it isn’t the only determining factor.

Understandably, having insufficient cash to cover your loan payments isn’t a great sign that you’re an ideal loan candidate. Funders want to see that your business can thrive – not just survive. For this reason, funders are looking for companies that have an ample cash flow to cover your debts and other emergencies that may arise.

Does Your Lender Use a Global DSCR?

Some small business lenders use a global DSCR instead of a DSCR specifically for your business. In this case, the lender would compute your DSCR based on personal income and personal debt as well as your company’s income and debt. The lender may even look at your credit card debts, student loans, and other personal loans as a way to determine whether you’d make a good candidate for a small business loan. This calculation should hardly be surprising, as many lenders also look at the business owner’s personal credit rating when determining whether to lend to a loan applicant.

If your personal finances are in order you should have nothing to worry about – in fact, your personal financial history may actually be helpful to you when trying to secure a small business loan. However, if your own financial status is in disarray or if you have outstanding debts, you may face additional hurdles when trying to get approved for a small business loan. In this case it would be a good idea to work on getting your personal finances in order before submitting your final small business loan application.

Fees Associated with Your Small Business Loan

Did you know that there may be some “hidden” fees associated with taking out a small business loan? If you didn’t, now’s the time to get up to date on all the possible fees that you may face during the borrowing process. You may be a bit disheartened by this news but knowing about these fees in advance will ultimately make the borrowing process smoother and less worrisome. For starters, consider the repayment terms that you’re looking at. Is the interest calculated on a daily basis? A weekly basis? Is it monthly or quarterly? The interest rate could even be annually. For this reason, it’s very important that you understand exactly what the terms are before committing to the loan.

Administrative fees are one thing that borrowers don’t often consider when applying for a small business loan. However, it’s not entirely uncommon for a lender to charge fees for processing your application or for managing your loan (or both). This fee may be referred to as a processing for an origination fee. Make sure to ask all potential lenders about these fees in advance because hidden fees can make an attractive loan seem instantly less attractive.

Your lender may also charge prepayment fees, which are avoidable if you don’t prepay, but may cramp your style if you just want to get the loan over with. At times the prepayment fee may still be cheaper than paying off the loan with interest but is important to know your options and expenses before getting started, especially if you have intentions to pay the loan back early.

If you’re never heard of an SBA loan, don’t make another decision without reading this section. SBA loans (also known as Small Business Administration 7(a) loans) are small business loans that are guaranteed by the Small Business Administration and are usually issued by banks (though sometimes private lenders may be involved with SBA loans). SBA loans are guaranteed by the SBA and they usually have flexible terms and lower interest rates than standard small business loans. SBA loans also tend to have longer repayment terms than most other small business loans. These advantages can make a big difference for small business owners.

But before you get too excited, take a minute to realize that getting an SBA loan is extremely difficult. There are many, many small businesses competing for these coveted loans. Still, with a bit of planning and understanding what the SBA is looking for, you may be one of the lucky chosen few.

Is an SBA Loan Relevant for You?

If you’re never heard of an SBA loan, don’t make another decision without reading this section. SBA loans (also known as Small Business Administration 7(a) loans) are small business loans that are guaranteed by the Small Business Administration and are usually issued by banks (though sometimes private lenders may be involved with SBA loans). SBA loans are guaranteed by the SBA and they usually have flexible terms and lower interest rates than standard small business loans. SBA loans also tend to have longer repayment terms than most other small business loans. These advantages can make a big difference for small business owners.

But before you get too excited, take a minute to realize that getting an SBA loan is extremely difficult. There are many, many small businesses competing for these coveted loans. Still, with a bit of planning and understanding what the SBA is looking for, you may be one of the lucky chosen few.

Types of SBA Loans

There are several different types of SBA loans, so think carefully about which one is right for you before applying. A standard SBA loan is federally guaranteed for loans up to $5 million. The loans are generally provided for company expansion, the purchase of equipment or to provide a small business with working capital.

If you’re looking to purchase land, facilities or machinery for your business, a 504 small business loan may be what you’re looking for. These loans are also available for sums up to $5 million.

An SBA microloan is a loan up to $50,000 which can be used to start a business, purchase additional equipment or inventory or to provide working capital to a struggling small business. As compared to the 7(a) loans described above which are usually processed through banks or credit unions, both microloans and 504 loans are generally processed through not-for-profit (NFP) organizations.

Lastly, if your business has fallen on hard times due to an emergency or natural disaster (tsunami, wildfire, flooding, etc.), you may qualify for an SBA disaster loan up to $2 million which can be used to help you recover from the damage inflicted by this emergency.

SBA loans are provided by approved lenders in any given geographical district. Each bank has its own underwriting criteria through which it evaluates applicants, but each lender is required to adhere to SBA guidelines when making their decisions.

Finally, there is an SBA Express Loan which is typically approved in around 30 days as compared to the 90 days a standard SBA loan takes. This type of SBA loan requires less documentation than a standard SBA loan, and it has an interest rate which cannot be more than 6.5 percent above the prime interest rate on loans above $50,000 or 4.5 percent above prime on loans below $50,000. SBA Express Loans cannot be used to pay off existing debt (as other SBA loans can), but they can be used for projects related to the company’s growth, including the purchase of supplies, inventory or real estate. SBA Express Loans are available for U.S.-based companies in business for more than two years that can demonstrate the need for financing. The applying company must have no existing government debt.

How Long Does it Take to Get A Small Business Loan

As in many things in life, once you decide to move forward, you probably wish you had started yesterday. Or you would like the loan to come through by tomorrow. Unfortunately, as you’ve probably discovered by now, that’s not exactly how things work in the business world. A small business loan, like any other type of loan, can take some time to get sorted and processed. If you’re applying for an SBA loan, expect the process to take up to 90 days. If you’re applying for a bank loan, the process may be even longer. Fortunately, there are many private small business lenders that are designed to help you get funded faster. The terms may not be as good as an SBA loan, for example, but if you’ve got a need for speed, a private lender may be the best option for your company.

Services like Lendio and Bluevine boast fast funding directly on their websites, a note that should make you feel comfortable if you have looming financial deadlines. In fact, many private lenders claim to provide small business loan approvals within a day! Still, it’s important to remember that it’s better to do things right than to do them rushed – make sure you’ve found the small business loan with the best terms for your business before confirming your loan.

It’s Time to Get Started

There are many, many worthwhile and valid reasons to take out a small business loan. Taking out a loan doesn’t mean that your business is failing or that you haven’t succeeded enough to make it without assistance. A small business loan may be just the step you need to take your small business to the next level. Perhaps the loan will enable you to create more of your product in a shorter amount of time. Perhaps it’ll allow you to hire more people who can achieve more of your professional goals. A small business loan may be what you need to purchase or rent a larger work space or warehouse. If your company is struggling with cash flow problems, a small business loan can provide the cushion that you need to move forward without feeling the strain every time you pay a vendor. Don’t let the application process get you down – think of it as an opportunity that will be the first step towards greater success. Once you’re in the right frame of mind you’ll be able to research your small business loan options with optimism rather than anxiety.

Remind yourself that many of today’s biggest, most successful companies started off with a small business loan. But don’t take our word for it – check the startup stories of Nike and Chipotle and you’ll see that these business icons once took out SBA loans to fund their growth. So did Under Armour and Chobani yogurt! Apple’s famous founders Steve Jobs and Steve Wozniak needed to borrow $250,000 from banks to get their now-behemoth company off the ground. Amazon founder Jeff Bezos started his success story by borrowing $100,000 from his parents. American Apparel founder Dov Charney borrowed $10,000 from his father to start his clothing empire. GoPro was founded with a $235,000 loan from founder Nick Woodman’s father. An there are dozens (if not hundreds) more successful businesses whose founders knew that they needed some help to get to the next level. If these savvy entrepreneurs saw the benefits of these loans, surely a small business loan can’t be all bad, right Mark Cuban?

Consider the benefit that taking out a loan and making the payments on time will build up your business’s credit score and help you create a stronger springboard for future loans and financing opportunities in the future. Remind yourself that taking out a small business loan will not be a great solution for getting out debt unless you have other plans for making your company more financially stable in the future. You may need to reconsider your business plan or make some hard changes or cuts before a loan will really help you get your company back on its feet.

Once you’re confident that taking out a small business loan is right for you, do your research, gather your paperwork and roll up your sleeves. There’s no harm in applying for multiple small business loans and to comparing which one can offer the best terms for your business. Don’t feel pressured or rushed into choosing the first available opportunity. As the old proverb says, “good things come to those who wait.”