Descriptions Of Small Business Loans
Different Types of Business Loans Available
Business Commercial Property Loans
There are many different types of business loans available today. Commercial Property Loans (CPL) are income-producing properties used solely for business (rather than residential) purposes. Examples include retail malls, shopping centers, office buildings, complexes, and hotels. Financing, including the acquisition, development, and construction of these properties, is typically accomplished through commercial property loans: secured by the commercial property.
What is a Commercial Property Loan?
Like home mortgages, banks and independent lenders actively involve themselves in making loans on commercial real estate. Also, insurance companies, pension funds, private investors, and other sources, including the U.S. Small Business Administration’s 504 Loan program, provide capital for commercial property.
Loan Repayment Schedules
A residential mortgage is a type of amortized loan which repays the debt in regular installments over time. The most popular residential mortgage product is the 30-year fixed-rate mortgage. However, residential buyers have other options as well, including 25-year and 15-year mortgages. More extended amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan. While shorter amortization periods generally entail larger monthly installment payments and lower total interest costs. Over the life of a residential, amortized loan gets fully repaid at the end of the loan term. The buyer of a $200,000 home with a 30-year fixed-rate mortgage at 3%, for example, would make 360 monthly payments of $1,027.
After which, the buyer would fully pay the home loan. These figures assume a 20% down payment. Unlike residential loans, the terms of commercial property loans typically range from 5 years (or less) to 20 years, and the amortization period is often longer than the term of the loan. A lender, for example, might make a commercial loan for a time of seven years with an amortization period of 30 years. In this situation, the investor would make payments for seven years based on the loan getting paid off over 30 years. Then it would be followed by one final “balloon” payment of the entire remaining balance of the loan. For example, an investor with a $1 million commercial loan at 7% would make monthly payments of $6,653.02 for seven years, followed by a final balloon payment of $918,127.64 that would pay off the loan in full. The length of the loan term and the amortization period affect the rate the lender charges. Depending on the investor’s credit strength, these terms may be negotiable. In general, the longer the loan repayment schedule, the higher the interest rate.
Commercial Real Estate Loan Interest Rates and Fees
Interest rates on commercial loans are generally higher than on residential loans. Also, commercial real estate loans usually involve fees that add to the overall cost of the loan, including appraisal, legal, loan application, loan origination, or survey fees. Some costs must get paid upfront before the loan is approved (or rejected), while others apply annually. For example, a loan may have a one-time loan origination fee of 1%, due at the time of closing. Then, an annual fee of one-quarter of one percent (0.25%) until the loan gets fully paid. A $1 million loan, for example, might require a 1% loan origination fee equal to $10,000 to be paid upfront, with a 0.25% fee of $2,500 paid annually (in addition to interest).
A Business Line-Of-Credit (LOC) is a revolving loan that allows access to a fixed amount of capital, which can meet short-term business, needs. A LOC is one of the tools a company can use to finance short-term working capital requirements, such as:
- Purchasing Inventory
- Repairing Business-Critical Equipment
- Financing A Marketing Campaign
- Bridging A Seasonal Cash Flow Gap
A business line of credit can be a valuable financial tool to help business owners approach financing strategically and thoughtfully. Having access to a credit line to help take advantage of opportunities or meet other short-term capital needs can help you build a thriving business. A business line of credit can be a valuable tool for companies that take a strategic approach. Ensures the company has access to the resources they require to meet day-to-day working capital needs and fill other short-term financial necessities. It allows them to apply and qualify today for borrowed capital they may need down the road. Many businesses use a line of credit as part of a more effective capital access approach, including short-term and longer-term financing to fuel growth and fund other revenue-generating projects.
Secured Business Line of Credit
This type of LOC requires the business to pledge specific assets as collateral to secure the line. Since a line of credit is a short-term liability, lenders typically ask for short-term assets, such as accounts receivable and inventory. To secure a LOC, lenders don’t often require capital assets, such as real property or equipment. Suppose the borrower cannot repay the line. In that case, the lender will assume the ownership of any collateral and liquidate it to pay off the balance.
Unsecured Business Line of Credit
This type of LOC does not require specified assets as collateral. However, a general lien and personal guarantee will likely be necessary because there is no specified collateral associated with this type of credit line. The business will probably need a stronger credit profile along with a positive business track record to qualify. Additionally, interest rates may be slightly higher; and unsecured credit lines are often smaller.
Like a term loan, most lenders will want to see financial records and documents that demonstrate a track record and demonstrate creditworthiness. Traditional lenders like banks and credit unions will require some additional documentation that online lenders might not require. So it’s a good idea to find out what paperwork they need before your first meeting with the lender. Some of the essential information you’ll need to apply could include:
- Business License
- Tax Returns
- 2-3 Months Of Bank Statements
- A Business Bank Account
- Standard Financial Documents Like P&L, AR, AP, Cash Flow, ETC.
It would be best to prepare yourself to discuss the specifics of the business’s financial position with the lender. If you’re unfamiliar with any documents, you should consult with a trusted advisor like your accountant or CPA. Make sure you understand everything that the documents suggest about the financial health of your business.
Business Term Loans
Business Term Loans are a great way to acquire working capital, expand your business operations, purchase equipment, hire additional staff, or whatever else it is that you may need for your business. This type of financing product has been popular among entrepreneurs for many decades. If loans were cars, they would be a Toyota or Honda. Yes, they’re not the flashiest loans on the market. But they’ve been a top-seller for decades and are known for their reliability. The loan amounts can range from $5,000 all the way up to $2,000,000, and you can often see that money in your account in just a couple of days. Plan on your business term loan repayment terms to be somewhere between 1-5 years. Better yet, the interest rates start as low as 6%. These loans have a fixed interest rate or flat fee, so the payments will never go up during the loan’s lifetime. A significant benefit of this loan is that it’s easier for you to identify how much you can afford to borrow while also making it less stressful to pay off.
(STL) – Short Term Loans
(STL) Short Term Loans for many entrepreneurs are outstanding because they can use them when they need quick solutions to pressing circumstances. So whether you need to pay for unexpected expenses, hire new employees, get through a sales slump, replace a broken piece of equipment, or take action on an exciting business opportunity. A short-term loan can be a solid option for you. After applying and getting approved, you can have the money in as little as 24 hours. Yeah, that’s right, you can obtain an (STL) Short Term Loan in roughly one business day. Because they’re built for speed, the amounts for these loans only go up to about $500,000. You’ll also need to pay that amount off quickly, generally within 1-3 years. The interest rates can be quite favorable, starting as low as 8%. The qualification requirements aren’t too strict for these types of small business loans. As long as you’ve got a healthy credit score and have been in business for at least two years, you’ll be in good shape. In some cases, lenders may require you to secure the loan with some personal collateral. A few common examples of collateral include a house, truck, or real estate property.
Equipment Financing Loans
Equipment Financing Loans are types of financing can be used for less obvious equipment, such as solar panels, or accounting software for your office. The point is, if the purchase will help to equip your business for its needs, it probably meets the criteria. With amounts available up to $5,000,000, you can use them to purchase any kind of equipment your business might need. And that’s where the name is a little deceiving. When most people hear the word “equipment,” they think of things like backhoes, trucks, forklifts, tractors, cubicles, refrigerators, trailers, conveyor belts, and trash compactors. One great thing about this type of small business loan is that you can access the money quickly. In some cases, after submitting your application, you may see funds in as little as 24 hours. Another strong point is the interest rate, which can start as low as 7.5%. Qualifying for equipment financing is less difficult than many other types of loans. If your business has been running for a year or more, brings in $50,000 or more in annual revenue and has equipment of 650 or above, you should be sitting pretty good. However, if your credit score is below 650, don’t worry. As long as you can prove you’ve got steady cash flow and provide revenues for the previous 3-6 months, you could still get approved. With equipment financing, you usually don’t need to worry about a down payment or collateral because the equipment you’re buying will serve as the collateral, allowing you to move forward with a purchase without draining your liquid cash or putting your personal assets in jeopardy. The loan amount your lender approves will depend on the type of equipment you plan on purchasing. If the equipment is in excellent condition and has a strong lifetime value, you’ll obviously be approved for more than if it’s currently rusting in a salvage yard somewhere.
Interest Only Loan Programs
When it comes to fast business funding, an interest-only business loan is not always the best option. If it were, everyone would get one. The only thing your business needs is a great product, loyal customers, and the ability to access a quick business loan. However, an interest-only business loan should not be your first choice. It is wise to get the facts before deciding what is right for the unique needs of your business. An interest-only business loan is a loan in which you only pay the interest for the first five to seven years. When the interest-only term is over, you will begin paying off the principal plus the interest. This type of business loan is best if you believe your income will be significantly higher in a few years. For example, if you are just starting out in law or medicine, it may work for you. You can use the money you save on other things. Those with uneven cash flow or bonus-based businesses might also benefit from an interest-only business loan. It allows you to keep more cash in your pocket. Then, when business picks up, you can pay down some of the principal in a lump sum. The loan payments can jump tremendously after the term is over. As a result, they are not for everyone.
Invoice Factoring Loans
Invoice Factoring Loans are a form of business financing, in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Technically, invoice factoring is not a business loan. Invoice factoring provides an advance on payments for outstanding invoices. This way, you can have working capital to reinvest in operations and growth sooner than you could if you waited for your customers to pay you.
(MCA) – Merchant Cash Advance
(MCA) Merchant Cash Advance allows business owners to borrow against their future earnings to secure the financing they need. Once you’ve been approved and the funds are advanced to your account, you’ll begin repaying the loan by having an agreed-upon percentage of your daily credit card deposits withheld for the lender. Your advance can be used for any purpose, so this type of financing has earned a reputation among entrepreneurs for being very flexible. Like short-term loans, merchant cash advances are known for speedy delivery. You can apply for anywhere from $5,000 to $200,000, the time to receive the funds can be as fast as 24 hours. This type of convenience comes at a premium rate, and you can expect the interest rates to start around 15+%. Qualifying for a merchant cash advance is surprisingly simple because the nature and terms of the loan make the risk lower for a lender. So you probably won’t need to submit much paperwork in the application process and the lender won’t ask for collateral. In fact, you might not even have your credit pulled. A lender will usually just want to check out your past 4-6 months of bank statements or receivables.
(SBA) – Small Business Administration Loans
SBA Loans are partially guaranteed by the government (The Small Business Administration), which eliminates some of the risk for the financial institution who is issuing the loan. The SBA works with a network of approved financial institutions (typically, traditional banks) that lend money to small businesses more frequently and with better terms because the SBA partially guarantees the loans that these lenders extend to small businesses. This means that they will back up a part of the loan that a small business receives, so if you’re unable to pay back your SBA loan, the lender know that the SBA will cover the portion that they guaranteed. Without this partial guarantee—which can cover up to 85% of a loan’s amount, traditional banks will often consider lending to small businesses “too risky.” As such, small business who don’t secure loans guaranteed by the SBA often qualify for less-than-ideal terms, if they’re even able to qualify for a bank loan at all. However, because SBA loans involve a government entity, their application process is notoriously thorough and often restrictive. If you’re hoping to apply for an SBA loan, you’ll need to prepare a lot of documentation and even more patience. Depending on your business’s qualifications and which lender you choose to work with, the terms you’ll be able to access with an SBA loan will vary. Just like any other type of loan, SBA loans come in all shapes and sizes. SBA loans can range in size anywhere from $500-$5 million and can offer APR’s as low as 6.5%. Additionally, repayment terms for SBA loans can range from 5 to 25 years, but 10 years is a standard SBA loan repayment term length. With all that said, even at their quickest, you can only fund your small business with an SBA loan if you have at least 3 weeks to spare. Bureaucracy and paperwork can really gum up a process, and if your business needs cash quick, then an SBA loan isn’t a feasible option. If your business fulfills the following minimum requirements, then you should seriously consider applying for SBA funding:
- 2+ years of business history under your belt
- A 640+ personal credit score for the business owner
- $100,000+ in annual revenue for your business
If you fulfill these minimum requirements, the answer to “can I get an SBA loan?” isn’t necessarily an automatic “yes.” It’s more like a “it’s possible”, as many different things can affect your loan eligibility. The answer to that question will only be a concrete “yes” once you have an SBA loan in your business’s bank account
Secured Business Loans
Secured Business Loans are different from unsecured business loans because you need to offer some type of collateral to the lender in case you default on your payments for the loan. Basically, collateral is something that you can held as a security for repayment of a loan. Some examples of collateral include a home, a car, investments, or other assets that can be liquidated. Because the loan is “secured”, interest rates are usually lower on a secured business loans. They are also easier to get because they are a lower risk for the banks. If you apply for a secured loan, make sure the assets that you put up for collateral are something that you are willing to lose. There’s always a chance that you may default and you will lose everything you put up as collateral. Also, make sure that you get an accurate estimate of your collateral’s value before you speak with a lender. Lenders usually give lower values to collateral because they have to liquidate the collateral very quickly to recoup their money. In order to do so, they sell the collateral at very low prices. So, if you have a more recent assessment estimate of what your collateral is worth, you can easily persuade the lender that your items have value.
Startup Loans are often harder to obtain as you have to start somewhere. The most common problems that entrepreneurs run into is that some types of small business loans require a substantial business history to qualify. If you’re just trying to get your business up and running, you lack the tenure and revenue a lender may require. Some business owners get around this by seeking loans from their family and friends. This approach can be solid, but it can be very challenging. Seeking investors outside of your inner circle can potentially require you to surrender too much equity. This stage is where a startup loan can save the day. This type of financing is meant for new businesses and can provide funds as low as $500 on up to $750,000. You’ll receive the money in just a few weeks. The interest rate varies wildly based on the details of the loan, so you can expect anything from 0-17%. The loan terms can last as long as 25 years. It’s always tough to start and build a business, but you don’t have to worry. A startup loan gives you the capital necessary to lease office space, build inventory, purchase equipment, hire and train staff, and cover your other regular expenses. You’ll have multiple options when looking at startup loans, including SBA loans, equipment financing, lines of credit, short term loans, and business credit cards. The payments will be based on the amount of the loan, as well as the interest rate, term, and collateral. To qualify, it’s usually necessary to have a credit score of 680 or higher. A lender will also want proof that you have experience in the industry related to your small business. Some lenders will also request collateral to secure a loan. This assurance might include personal assets like a house, car, or boat.
Unsecured Business Loans
Unsecured Business Loans are given without any kind of collateral from the borrower. They are made on the basis of your credit rating and other methods to determine your creditworthiness. Because these risks are unsecured and there is no collateral, there is a greater risk for the lender. Because of this, they usually have higher interest rates than secured loans and they are also harder to obtain than secured loans. Keep in mind that sometimes the interest rates on unsecured business loans can be higher than the interest rates on your business credit card. Usually, the interest rate for this type of loan is fixed but it is possible to have an unsecured loan with a variable interest rate. Regardless, the unsecured business loan will always be higher than the secured business loan because of the lender’s risks. It is also important to note that the term of an unsecured business loan is shorter than the term of a secured business loan. When there is no collateral to reduce the bank’s risk, the bank wants the money to be paid back as soon as possible. This is to lessen the risk to the bank. This is also the reason why there are more secured business loans given out than unsecured business loans. Secured business loans provide less risk for financial institutions. Furthermore, most lenders require that you have a great credit rating and that you have been in business for at least two years. Basically, the unsecured business loan works best for established business borrowers with an excellent credit history. They are not good for startup companies or people with not-so-good credit ratings.