Are you in need of funds to either build or start up a small business? Do you need the money in a hurry?Today I share with you 5 small business loans that may be new to you. But, first, I will share pertinent information you need to know regardless of which of the loans you ultimately choose.
Regardless of the reasons why you need to quickly borrow cash, there are several ways to go about this. There are many lenders to which the owners of small businesses may apply for a loan. They will differ in several ways. Some of the ways in which they may vary are as follows.
- Rate of Interest charged
- Credit history requirement cut-offs
- Some, but not all, loans are guaranteed by the federal government. This allows for longer term loans and lower rates
Do not let these 5 small business loans confuse you.
It is easy to become confused by so many choices. However, you can avoid confusion by asking the right questions. First, you need to determine how your bottom line will be effected by the ongoing interest payments and other borrowing costs.
According to a financial lecturer from the University of Texas ( Austin campus),“Just because capital can be borrowed doesn’t mean that it should be.” (The U.S. News & World Report quoted S. Michael Sury as saying) How do you know if you should accept a specific loan?
What do you really need to know before accepting any of these 5 small business loans?
No loan should be accepted until you have determined the level of risk you would be taking to borrow it. You also need to make sure that your investment will net a positive return. So, how do you do this?
What is a Debt Service Coverage Ratio (DSCR) and is there a formula to help calculate it?
You can easily calculate how much you can financially afford to borrow if you know how to calculate your DSCR. First, you must know your net operating income (NOI) and your total debt service (TDS).
Secondly, you simply divide the NOI as described below by your TDS, also detailed below.
https://www.investopedia.com/terms/n/noi.asp
https://www.investopedia.com/terms/t/totaldebtserviceratio.asp
Lenders vary in their required Debt Service Coverage Ratio. A few lenders may find a ration as low as 1.0 but most do not. Most of them strongly prefer to loan funds to a business with a NOI that is higher than their total debt. A DSCR of 1.35 or higher has a much better chance of receiving a loan from most lenders.
More Tips. Can you ever have too many?
- Here is one Tip you probably already know based upon old fashioned common sense. Your credit scores DO matter. This is especially true for sole proprietors and those starting up a new business. The bottom line is that the higher your credit s,core the lower the interest rate and better over-all terms of the loan.
Also, if your business is already in existence, they will check your business credit score as well. For this search they will use am agency that specializes in business credit such as Dun and Bradstreet. You can check them out here. https://www.dnb.com/
2. You need a solid business plan. All lenders will want to know how you plan on spending the funds they are loaning. They also want to see evidence of a profitable venture prior to risking any of their money on your business.
It is critical for any small business seeking a loan to present the lender wtih a plan that is
- organized
- well thought out
- presented in a professional manner
If you need help in learning how to develop and present a solid plan for your business, there are many resources available to you. You will fnd several topics dealing with this subject at Entrepreneur.com. Some of them are titles as follows.
- 7 Steps to a Perfectly Written Business Plan
- Business Plans: A Step-by-Step Guide
- How to Write a Business Plan
More FREE informational resources
- SCORE chapters are nonprofit and offer advice and services to small businesses
- SBA district offices
- NFIB
- Veteran’s Business Outreach Centers
- Women’s Business Centers
Finally, we get to the 5 Small Business Loans I promised to tell you about.
These are 5 of the best and quickest to obtain small business loans to consider. One of these 5 small business loans may be right for you! Obviously, you will need to perform due diligence when determining which, if any of these 5 small business loans, is the best for your particular business situation.
In no particular order, here are 5 small business loans for your consideration.
1. Business Line of Credit
Basic Loan Details:
- Loans typically range from $5,000 and $150,000
- Quick funding is one of its better points! Funds are usually dispensed between 1 to 5 days from day of approval
- Functions similar to a typical credit card
- Offers a lower interest rate than a typical credit card
- You may apply for a line of credit with either a bank or an online creditor ( who may have lower requirements BUT higher interest rates and lower lines of credit, so pay close attention to online creditors details)
- Lines of credit can be used many times without having to reapply for a new loan.
- You are given a maximum amount and can borrow up to that each time as long as you make the minimum payments and never exceed the maximum amout specified.
- There is a specified monthly interest on the amount you repay.
A Few “Brownie Points” For This Type of Loan
- Flexibility. There are fewer restrictions on what you can spend the the funds. Some common uses are for the purchase of equipment or inventory and marketing.
- They are usually have lower limits so can be dispensed unsecured. Not having to put up collateral such as inventory, real estate of accounts receivable is a big plus for many applicants.
Basic Requirements
- Credit Score of 500 or greater is the general rule.
- Must have a business history of revenue for a minium of 6 months and for having made at least $25,000 annually to apply.
- Larger lines of credit MAY require collateral which is at risk of forfeiture if you fail to make timely payments.
Documentation required
- Tax returns, both personal and business
- Business financial statements comprised of a balance sheet along with profit and loss statements.
- Credit scores both personal and business (if not a start up loan)
- Bank account information and business financial statements (profit-and-loss statements and a balance sheet).
Here are a few places you may wish to look over:
- Fundbox
- StreetShares
- OnDeck
- Kabbage
2. Microloan
Basic Loan Details:
- Designed for both startups and other small business
- Loans are for up to$50,000
- Most common loan term is for 40 months
- Frequently offered to disadvantaged communities
- Considered to be a short-term and low interest loan
- A couple of the better known nonprofit lenders of micro loans are Kiva and Excelsior Growth Fund (funded via its ImpactLoan program).
- SBA offers several programs with MicroLoans via nonprofit organizations that are state specific. Two of these are the SBA Community Advantage Program and the SBA Microloan Program
How to apply for a microloan
- Locate an intermediary microlender for your state. An example of this is LiftFund. It serves 13 states and has a few very specific requirements: >50% of full time employees are low income or if they live in either low or moderate income communities. Learn more about this loan at https://www.liftfund.com/loan-offerings/
More microloan programs worth checking out:
- Accion U.S. Network
- Business Center for New Americans
- Community Ventures
- Main Street Launch
3. Peer-to-Peer (P2P) Loan
Basic Loan Details:
- Application process is one of the more simple and straight-foward ones available
- Commonly, they have less stringent eligibility requirements
- An individual’s borrowing maximum is typically $35,000; the maximum for for businesses is $300,000
- There is a varied repayment period and is usually fixed at either a three-, five- or seven-year repayment period)
- Interest on loans is varied and depends upon either your credit score or risk grade
An Additional Pro
Peer-to-peer lending is popular largely because it gets rid of the middleman ( aka, the financial institution) and they have less stringent eligibility requirements.
Don’t Forget This Con
Although these loans are typically for borrowers needing a loan for less than %35,000 in a hurry, they also tend to require a higher rate of interest for these loans.
How do these loans work?
P2P Loans work via the online connection between lenders and borrowers. They often spread the risk of the loan between several investors.
One well known Peer-2-Peer organization is the Lending Club. After being in existence since 2007, it is well funded. Their basic process is as follows:
- Fill out an application for credit
- Upon approval, applicant is given a “Risk Grade” which is calculated by their own specific model of scoring and includes a FICO score and other credit associated details.
- The interest rate for the loan you are offered is based on your personal Risk Grade.
- The Lending Club uses what is known as a “notary business model”. It functions as an intermediary between investors and borrowers.
- Origination fees ranging from 1 to 5% are charged. They are determined by your Risk Grade. Other lenders’ policies may be slightly different and base their Closing fees based on your Risk Score.
Bottom Line
The P2P loan process is comparatively easier than applying to a bank for a loan. It is a completely online process and is greatly streamlined. A few of the outcomes are as follows:
- P2P loans have a higher approval rate than do traditional bank loans.
- Cutting out the “middle man” (the bank) allows for lower interest rates than from a bank.
Other factors to consider
Sometimes, in addition to your Risk Grade, Credit Scores and debt to income ration, your educational background may be considered as well. You need to carefully examine each lending site to determine the best one for you. Here are a few P2P sites with differing requirements for you to look into.
- Funding Circle
- Lending Club
- Prosper
- Upstart
4. SBA Express Loan
Basic Loan Details:
- Application process is fairly streamlined
- 50% guaranteed by the SBA and is one of two such loans with a 36 hour response time (to be discussed later)
- Rapid Response Time is an average of 36-hours
- Use of funds is flexible
- Loan maximum of $350,000
- A 10-year repayment period is the most common
- Interest levels range from 4.5 percent to 6.5 percent (above the prime interest rate)
Major points for this one of the 5 small business loans discussed today:
- Lighter documentation required
- Typically offers shorter time for approval (but can take as long as a traditional loan)
- Capped interest rates
- Use of loans is more flexible than some others (but NOT to pay off debt)
- Repayment period is most commonly 10 years but may vary
Basic Requirements of the SBA Express Loan
- Must have operations located within the United States
- Only for profit organizations will be approved and they must be registered
- Only for small businesses that qualify by these standards: https://www.sba.gov/size-standards
- Must have been operating for at least 2 years before applying
- Demonstrable need for the loan is required
- Said need for funds must be considered to be a qualified business purpose
- There must be no delinquent government debt
- There can be no delinquent debts to the government.
A few more possible requirements, depending upon your lender:
- To receive loans in the upper range, collateral might be required,
- For each SBA loan disbursed, the lenders are charged two fees (guarantee and servicing) and the lenders sometimes charge these fees to the borrower once the initial funds have been disbursed.
Final and major point:
The borrower must find an SBA-approved lender in order to apply for an SBA loan. Here is more information on that detail: https://fitsmallbusiness.com/sba-express-loans-7a/
5. SBA Export Express Loan (the last of the 5 small business loans discussed)
Basic Loan Details:
- The application process is simple and straight forward
- 36-hour response time is the most common
- Funds may only be used for a company’s export development*** There is NO FLEXIBILITY
- There is a $500,000 maximum
- The repayment period is typically 10 years but can vary
- The interest is 4.5 percent to 6.5 percent above prime interest rate and is capped
- These loans are guaranteed by the government.
- There may be collateral for loans greater than $25,000
- There will be guarantee and servicing fees charged for loans once they are both approved and disbursed.
***This loan is designed for small export companies wanting to expand and need a loan to do so. It can also be used for small businesses that want to create and develop an export business. Most banks consider these types of loans to be too risky so they rarely qualify these potential borrowers.
Some of the acceptable uses of these funds are:
- Purchase of equipment, inventory or real estate
- To finance business expansion
- The finance of explicit export orders
- To attend a trade show in another
- The finance of standby letters of credit
- Translation of product literature for use in markets in another country
Reiterating the requirements that applicants MUST meet in full.
- Evidence of being in business for a minimum of 12 months and have U.S, based operations
- Must be registered and operating for profit.
- Funds must be used ONLY for export activities
- Must satisfy the requirements of the SBA as a small business (https://www.sba.gov/size-standards)
- Can have no prior government debts with a history of delinqencies in payments
How to get the loan process started for this particular loan:
If you traditional lender is not an SBA Express Export lender, contact the local SBA International Trade Finance Specialist to identify an export specialist specfic to your state. They can start you on the right path. Further, you might wish to contact the SBA’s Office of International Trade. (https://www.sba.gov/about-sba/sba-locations/headquarters-offices/office-international-trade )
Two more articles you will find helpful:
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