It’s Simple to Start Your Business Loan Search
Whether it’s to help with cash flow, pay for new equipment, or fund some other business-related expenses, business loans and startup business loans are designed to provide financial assistance for businesses as needed. Similar to other loan types, such as personal loans, business loans involve creating debt and then repaying it with interest.
Luckily, finding the right financing for your business’s needs has never been easier. The scope for borrowing has extended far beyond traditional banks to include a wealth of online lenders— providing businesses with a wider range of business loan options and, in some cases, looser requirements and more flexible terms.
Let’s take a look at a few of the most popular business loan types, important requirements that will get you qualified, and some of our favorite online lenders that can help get you started.
Explore Your Options: Types of Business Loans
“Business loan” is something of an umbrella term and encompasses a whole range of financing types, such as SBA loans, cash advance loans, lines of credit, invoice financing, and more to cater to a borrower’s specific needs.
Keep in mind that the below business loan amounts, terms, and requirements can all vary depending on the lender and your business’s financial profile.
Small Business Loans
Before diving into the various business loan types, what is a small business loan, anyway, and how does it work?
A small business loan, also referred to as a commercial loan, is a powerful financial tool that can help businesses improve their cash flow, replenish inventory, update equipment, and so much more to keep a business constantly growing and thriving.
Getting a business loan is similar to how you would get a personal loan—find and compare lenders to secure the best small business loan, pay attention to terms and APR, and submit an application. One key difference when applying is the requirements and qualifications needed for a small business loan, which we’ll review for each type.
SBA Loans
A Small Business Administration (SBA) loan is a type of small business loan that is less of a risk to the lender since it’s partially guaranteed by the government, meaning better terms for the borrower. While the SBA used to only work primarily with traditional banks, they now work with a large network of approved lenders who will lend that money to small businesses.
- Amount: SBA loans are larger business loans that typically range from $5,000 up to $5 million.
- Terms: Since the government is backing up this loan type, businesses can secure lower APRs and longer repayment terms of up to 25 years.
- Qualifications: These loans are a bit harder to qualify for and often have a general minimum for businesses, such as 2+ years in business, a 640+ credit score, and at least $100,000+ in annual revenue. Again, these numbers vary depending on the lender and the loan amount desired.
- Good For: This type of loan is a great option for borrowers who don’t need super quick funding and are able to wait a bit longer than other loan types.
Cash Advance Loans
Also known as merchant cash advance loans, this type of business loan is actually not quite a loan. How it works is a lending institution will give you a cash advance in exchange for a piece of your future sales.
As a result of this setup, it’s common to see lower payments when sales are low and higher payments when sales are high. Typically, the lender will determine a factor rate based on a few different risk factors (such as credit score and business performance). This will be the fees you pay on a cash advance loan.
- Amount: Cash advance loans typically range from $5,000 up to $250,000.
- Terms: The loan term for a cash advance is normally up to two years.
- Qualifications: This loan type is known for being less strict to qualify for than other loan types. Lenders may require that a monthly credit card transaction minimum or financial statements to validate past sales.
- Good for: Businesses with high credit card sales and borrowers who need fast financing.
Business Line of Credit Loans
A line of credit is another popular and flexible method for businesses to receive financing. It allows you the ability to borrow up to a certain limit and pay interest only on the money you actually borrow. It works very similarly to a credit card, which lets you draw money and repay it as you go with interest.
The difference between the two is that lines of credit often come with much higher credit limits and lower rates than credit cards. Additionally, credit cards are always unsecured whereas with a line of credit, it can be secured or unsecured.
- Amount: Can be as low as $1,000 or as high as $1 million.
- Terms: Terms will vary depending on the lender, but are often around 6 months to 5 years.
- Qualifications: Lines of credit loans are also a bit lenient on credit score, but they will typically require a business history of at least 6 months or even a year. Lenders will also look at annual revenue and may have a minimum of $50,000 or more.
- Good for: Borrowers who want flexibility.
Business Term Loans
A business term loan is a lump sum a lender will provide you which will be paid back monthly and with a fixed interest rate. The “term” in business term loans refers to the repayment term length and typically ranges from one to five years.
This loan type works the same way a personal loan does, but it’s designed specifically for businesses in that it allows a borrower to limit their personal liability in the case of default or business hardship. It also helps a company build financial credibility.
With that said, business term loans are harder to qualify for than a traditional personal loan. They will sometimes require collateral, a minimum number of years in business, and a minimum annual revenue.
- Amount: Up to $1 million
- Terms: 1 – 5 year loan term
- Qualifications: Requirements are stricter since term loans tend to be longer. Lenders will often require at least 1 year in business and an annual revenue minimum of $50,000.
- Good for: Borrowers looking for larger loans which they can repay over a longer period.
Invoice Factoring
Also known as business factoring loans, invoice factoring is a means by which businesses can improve their cash flow by borrowing money against the amounts due by clients. Instead of having to wait idly by for money to come in from client invoices, businesses can be proactive, continue reinvesting in their operations and move forward through invoice financing.
This form of short-term borrowing works most commonly through factoring. This is where a business will sell their unpaid invoices to an invoice factoring company who will then pay them anywhere between 70% – 85% of the amount up front. Once the factoring company receives the invoice money from a client, they will remit the difference to the business who will have to pay a fee or interest for the service.
- Amount: Since invoice factoring is more similar to a cash advance than a traditional loan, the amount will vary greatly depending on the lender.
- Terms: Up to 24 weeks
- Qualifications: Requirements are typically more loose for invoice factoring and many lenders will only require a minimum credit score of 530.
- Good for: Borrowers looking for steady cash flow for their business.
Construction Loans
A construction loan is a short-term loan designed for funding renovations and homebuilding. It works a bit differently from a traditional loan in that the lender sends the money directly to a contractor rather than the borrower. Another difference is that the funding is sent in installments–rather than as a bulk amount–as construction milestones are reached. Once renovations and building are complete, the loan can be paid in full or transformed into a permanent mortgage.
If you’re considering taking out a construction loan, be aware that there are a few different types available:
- Single-close (or Construction-to-permanent) loan: This type turns into a permanent mortgage once the construction phase is finished and has a locked interest rate at closing.
- Two-close (or Construction only) loan: This type means the loan will be paid off once the construction phase is finished and requires the borrower to be qualified and approved.
- Renovation construction loan: This type means that the total cost of renovations are incorporated into the mortgage instead of being financed when closing. A renovation construction loan is based on the value of the home once repairs are finished.
This loan types cover a few things, such as land, labor, materials, plans, permits, fees, closing costs, contingency reserves, and interest reserves.
- Amount: The amount will vary greatly depending on the lender, but you can find construction loans ranging from $1k up to $1 million or more.
- Terms: Up to 1 year
- Qualifications: Some lenders will require a down payment of 20-25%, proof of income and good credit, a property appraisal.
- Good for: Borrowers making large home renovations or homebuilding.
Learn About Our Recommended Business Loan Providers
Kabbage has been around for over a decade providing qualifying businesses with lines of credit loans of up to $250,000. Instead of worrying about interest, businesses will pay a flat monthly fee rate—an amount that is pre-established and based on your business’s performance.
This is a great option for borrowers looking for fast cash and who may have poor credit and need a bad credit business loan. There is no minimum credit score, but minimum qualifications include being in business for 1 year or more and having an annual revenue of $50,000.
Lendio is a business financing platform that matches borrowers with their large network of reputable lenders. This makes searching for a business loan quick and easy, with a variety of loan types available, including business line of credit, SBA loans, short-term loans, merchant cash advance, and more.
Borrowers can apply for free and without harming their credit score. The preliminary application only takes 10-15 minutes and will immediately show you what you qualify for.
OnDeck is an online lender since 2007 that has served over $12 billion to businesses. They provide two business loan types for borrowers: term loans and lines of credit. Their term loan is a great option if you need fast cash. It requires a 600+ credit score, in business for 1 year or more, and at least $100,000 in annual revenue.
Their lines of credit loan has the same requirements but is a better option for businesses with unreliable cash flow and who need something more flexible.
Most Important Requirements for Business Loans
If you’re new to shopping around for business loans, you should be aware that what it takes to qualify isn’t quite the same as other loan types, such as personal loans. Business loans often come with their own set of requirements, such as:
- Credit Score: Lenders use your credit score to determine how risky you are as a borrower. They’ll often have a credit score minimum you must meet.
- Annual Revenue: How much revenue your business makes each year is a big indicator of its overall performance and how likely you are to pay back a loan. Many lenders will have an annual revenue minimum of around $50,000 – $150,000, depending on the loan type and amount.
- Time in Business: Lenders feel more comfortable lending to businesses that aren’t brand new, and may require a minimum of 1 or 2 years in business before lending you anything.
- Collateral: Some, but not all, business loans will require collateral, making the loan secured and less risky for the lender. This can be a valuable asset such as inventory, equipment, or real estate.
Conclusion
Business loans and all the different types can be tricky to navigate for new borrowers, but the variety of options available make it easier than ever for business owners to get what they need. Instead of staying tethered to the limited products available from traditional banks, venture out and see what kind of financing and rates you can get with online lenders to ensure you get the best business loan.
