What does your business need to qualify for a loan? The answer depends on who you're talking to. There are several different types of business loans and lenders with their own separate requirements. But what are the different types of business loans? Here's an explanation, along with what you need to apply.
Bank and Credit Union Financing
Banks and credit unions generally have the toughest standards for accepting business loans. In order to qualify, you will likely need to provide:
- A strong personal and business credit score.
- A business plan showing how you'll use the money.
- A proven business track record and history of revenue, shown by your tax returns and bank statements.
- Collateral, which are valuable assets you put up to secure the loan.
- Your company's legal information like the entity type, licenses, ownership structure and contracts.
Since these lenders need to review many documents, the application process is fairly long and can take weeks, if not months. However, if you can meet the tougher standards for these types of business loans, you could qualify for a lower interest rate versus some of the other lenders on this list. It's a tradeoff.
Small Business Association Grants and Loans
The Small Business Association (SBA) helps American businesses qualify for financing. The SBA doesn't set up the loans themselves, but instead partially guarantees repayment of the money so participating banks and credit unions are more willing to lend.
Since a bank or credit union is still the one setting up your loan, the application requirements are similar: established credit score, collateral, business plan, etc. However, thanks to the SBA's guarantee, you could qualify with slightly weaker application such as with a lower credit score or less annual revenue.
The SBA could also help you qualify for a grant, which gives your business money that you don't need to pay back. Grants typically have additional requirements—like if you're conducting scientific research or creating jobs in a low-income area. You can check the specific requirements for different grants through the SBA's website as well as with the federal government on grants.gov.
Online Lenders
Online lenders also offer small-business financing and they typically have easier standards than a brick-and-mortar bank or credit union. The online lender may just ask to see proof of revenue from your bank statements and/or tax returns to make sure you have money coming in to back the loan.
By understanding what you need to apply for different types of business loans, you can focus your energy on the ones that best fit your situation.
Thanks to this simplified application, you can qualify for this type of financing more quickly. In exchange for this convenience, online lenders likely will charge a higher interest rate. Despite the higher cost, they can be useful types of loans to start a business and build your credit score so you can qualify with other lenders in the future.
Lines of Credit and Credit Cards
Lines of credit and credit cards both use a similar system where you can borrow money, pay off the debt, and then borrow again. But qualifying for a line of credit is usually more difficult. You can apply for one from a bank or credit union, the SBA, or online lenders, and the standards will be like if you were taking out a regular loan.
It can be easier to qualify for a business credit card. One of the most important factors will be your credit score. If you don’t have a business credit score, you may be able to guarantee the account with your personal credit score, which means you’d still be responsible for the debt even if you close your business.
The credit card company could also ask about your annual revenue, years in business and whether you have any other debts. So long as you have some revenue and a decent credit score, chances are you should qualify. By paying off your card balance each month, you can build your credit history for other types of business loans.
Equipment Loans
If you’re borrowing money to buy, replace or upgrade business assets, you could take out an equipment loan. Rather than giving cash, these loans finance your purchase. The loan will be partially secured by the equipment, which counts as collateral, so that can make it easier to qualify and receive a lower interest rate than a regular business loan.
The lender may ask you to make a down payment on the purchase, such as 20 percent of the equipment cost up front. Then, you will need to meet similar conditions as if you were taking out a regular business loan. Once again, you can get equipment loans from banks, the SBA and online lenders, so the exact standards will depend on who you are dealing with.
Crowdfunding
Crowdfunding is another way to raise money online, except rather than dealing with one lender you're raising money from many individuals (the crowd.) One system is through peer-to-peer lending, where many individuals make small contributions to fund your business loan.
Expect to provide the same type of information as you would with a bank like your credit score, revenue and business plan. But since you're dealing with nonprofessionals looking to invest, they may be more willing to accept a weaker application in exchange for a higher interest rate.
Another option is to use a Kickstarter or Indiegogo type of campaign, where people donate to your business because they like the product or idea. To help your chances of gaining interest, you could offer incentives to your supporters such as early access to your product or clothing with your logo.
Friends and Family
Friends and family would likely have the easiest standards of all types of business loans because they know you personally. Depending on your relationship, they may even lend you money just on a handshake agreement without asking for any of the other requirements.
Even if that's the case, you should keep things professional. Be sure to set up an official loan document showing the repayment schedule with interest. You should also provide your friends/family members with your business plan, financial statements and credit score to show that you'll use their money responsibly.
The key here is to protect your personal relationships along with your business. Make sure that people know that when they lend your business money, there's always the chance they won't get it back.
Investors
If your business has taken on investors, they may also be willing to loan your company money to get you through a cash crunch. After all, they'll only see a return on their investment if your business succeeds, so they would be more motivated to lend than a bank. But for these types of business loans, the investors may have other requests on top of you repaying the debt, like they also receive more equity or have a larger say in how you manage the business going forward.
Factors and Merchant Cash Advances
Another other way to raise money is by factoring invoices or taking a merchant cash advance. With these methods, you are not quite borrowing money but instead getting an advance payment on your future revenue. As a result, you could possibly qualify with a weak or no credit score.
With factoring, you convert unpaid invoices into cash early. For this to work, you need to have unpaid invoices and agree to transfer them to the financing company so they can collect from your clients. With merchant cash advances, you receive an upfront payment of your expected credit card sales. You'll need to prove several months of past customer credit/debit card receipts to set this up.
When your business needs to borrow money, there's no time to waste on options where you likely won't qualify. By understanding what you need to apply for different types of business loans, you can focus your energy on the ones that best fit your situation.
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