As a small business owner, you’re probably full of ideas about how to expand and grow your business, but you don’t always have as much cash as you’d like to put all those plans into action.
It’s a common situation. We hear from our customers nearly every day that steady, reliable cash flow—while hard to achieve—isn't always enough to fund their goals. Sometimes, a small business loan is the answer to help you achieve your business goals.
Before you start filling out applications, though, you’ll want to have a basic understanding of the small business loan landscape: what financing options are available, which ones are popular, and how they work. In this guide, we’ll cover those basics and some alternatives worth considering.
Types of Small Business Loans
There are many choices available for entrepreneurs in search of small business funding. Here are the most common small business financing options.
- SBA Loans
Small Business Administration Loans, or SBA Loans, are partly guaranteed by the government which makes them some of the best options available for small business financing. The SBA partners with banks, credit unions and other lenders to provide financial aid to small business owners.
Lenders are often reluctant to give loans to small businesses as they find it risky. The SBA acts as the guarantor between the borrower and the lender. In return, lenders present their terms and conditions, interest rate caps and other criteria which require approval from the SBA.
The SBA offers different plans and you can choose any plan which might suit your business requirement—for example, buying inventory, paying debts or mortgages, expanding your business, or even for buying real estate. Some of the benefits of financing with SBA loans include simple repayment plans, flexibility, often, lower interest rates than term loans you access directly through a bank. SBA loans do require a thorough application process, a personal credit check, and collateral requirements, so they aren’t right for everyone.
If you want to learn all about SBA loans, you’re in luck: We’ve created an in-depth guide to SBA loans to answer all of the most common questions and give you a solid starting point.
- Conventional Term Loans from a Bank
When you hear the word “loan,” a term loan from a major bank is probably one of the first things that comes to mind. A term loan is defined as a lump sum, paid to a borrower with an agreement to repay it over a set period of time, with interest. These aren’t always the best choice for small business financing, however, because they’re not really designed with small business owners in mind, and they’re hard to get. Typically, banks see small businesses as a ”risky” investment, and a large majority of applicants are denied.
However, it is definitely still an option and some businesses do get approved for term loans from banks. Banks that provide small business financing usually require some sort of collateral, whether it’s an asset, equipment, or building that you own. Banks will also check your personal credit history prior to approving the loan.
Due to the strict approval process, it’s very tough for small business owners to get approved for a term loan from a bank. Even if you can get approved, a term loan may not be the best option for small businesses, because you must pay interest on the entire lump sum, even if you only really need a portion of it.
- Business Credit Cards
Business credit cards can provide small business financing more quickly than a loan, and they make a lot of sense for certain purchases. You can use your business credit card to purchase anything for your small business, up to your credit limit. All you have to do is to stay within that credit limit. Use your credit responsibly and make timely monthly payments, and you can use the credit amount as many times as you like while building a positive credit history for your business.
Business owners who do not have collateral or a strong enough credit history to acquire term loans can rely on business credit cards for quick financing. Although it is a good option for small business owners, there are a few pieces of information to keep in mind.
- Debt spiral danger: It is easy for balances and interest to pile up if you are unable to make your monthly payments on time. If you miss one payment, the unpaid balance rolls over to the next payment period, and you will be charged interest on the new amount, meaning your next payment will be higher. If you’re unable to pay in full quickly, this will continue indefinitely. This can quickly create an ever-increasing hole of debt and it’s very hard to climb out without a large infusion of cash.
- Credit limits: All business credit cards come with limits, and staying within your limit can sometimes prove to be a hassle. You might get around this by using multiple cards, or you may be able to negotiate higher limits over time.
- No fixed interest rate: Business credit card providers can change the interest rate or reduce the credit limit at any time they want. Unfortunately, when it comes to credit cards, you’re at the mercy of the credit provider.
- Can’t use it for all types of payments: Small business owners that need fast funding to make payroll or pay rent usually can’t use credit cards to make these specific types of payments.
- Based on your personal credit: Even most business credit cards are still linked to the business owner’s personal credit. If you think you won’t be able to repay your credit card quickly, the late payment could affect your personal credit score.
- Merchant Cash Advance
A Merchant Cash Advance, or MCA, is an agreement in which the lender gives the borrower advance cash up front. If you take an MCA, you’ll receive the funds if you agree to repay them, along with a certain fee, based on the daily sales generated by your business. Generally, an MCA provider will require you to make daily payments from your business credit card sales until you’ve paid back the full amount of the advance. Because of these, MCA providers look for applicants with a history of many credit card transactions.
One benefit of a Merchant Cash Advance is that it is relatively easy to obtain. Another benefit is that business owners can receive the money within a few days. However, it is not suitable for businesses which have few credit card transactions, because they won't have enough transaction volume to get approved.
- Invoice Factoring: In invoice factoring, the lender buys unpaid invoices from you and gives you most of the invoice amount upfront. The lender holds back a small percentage of the invoice until the borrower’s customer pays off the invoice, by making payments directly to the factoring company.
Invoice factoring allows you to receive the money that you need for your business without waiting for your customers to pay. The only issue with this type of small business financing is that a majority of your business income must come from slow paying invoices. You must also have solid credit history and a track record of consistently-paying customers.
To learn all about invoice factoring and how it works in more detail, check out our guide: Invoice Factoring.
- Alternative Lenders: Online lenders have become a popular alternative means of getting loans over the years.
- Lending Marketplaces: These are online investors that collaborate with investors to lend money to small business owners looking for loans, which means marketplace lenders do not directly lend their own money. Marketplace lenders usually make their profit from fees and commission received from both lenders and borrowers. Some examples of these are Lendio and Fundera.
- Online Lenders: Some small business owners are turning to online lenders in hopes of getting approved for their small business loans faster and with less hassle.
- Applying for loans through online lenders is indeed a fast-paced process when compared to the mounds of paperwork required by a major bank. Usually, online tools will run a thorough check of the borrower's credit history and business financial information. There is almost no paperwork to take care of, meaning that if you choose one of these online lenders, you can apply and receive a decision in hours or days.
Although getting small business loans from online lenders is fast and convenient, you’ll still need to provide your personal and business information. The application requirements and details will vary depending on the lender you choose.
- Fundbox - Alternative online financing
Fundbox is an online platform that gives approved business owners access to capital. If you’re hoping to grow your business, or you need funds to overcome cash flow gaps and pay your bills, payroll, or buy equipment. then Fundbox may be the answer for you.
Let’s take a thorough look at how Fundbox works in order to understand why it can be a good option for your business loan. Here are some things to know about Fundbox:
- Decision within hours: You can register online in seconds and receive a credit decision in hours. Once you decide to register, all you have to do is link your accounting software or business bank account with Fundbox. Fundbox securely analyzes your business to determine if you qualify for financing. Unlike paperwork for a bank loan, the application is quick and painless.
- Transparent Business History Requirements: Fundbox requires three months of business transaction history as part of your application.
- No Collateral Required: Unlike other lenders, Fundbox does not require any collateral or insurance from the borrower, which makes it highly convenient for business owners. Fundbox looks at invoice payments and account receivables instead.
- Simple, straightforward fees: Fundbox has a straightforward and transparent fee structure. There is no origination, maintenance or inactivity fee. There is no early repayment fee. You only pay for the amount you withdraw from your Fundbox account. That’s it. The fee starts at 4.66% on the amount drawn.
You can get funding for your business, on either 12 or 24 week repayment schedules, depending on your preference. The higher duration will have a higher fee amount. If you pay early then the later fees can get eliminated.
How to decide?
As a small business owner, you know that there are a lot of financing options out there. We hope this guide helps you start to choose which option makes the most sense for you.
Take into consideration the following data about your business before making your next move:
- Personal credit score: Take a look at your personal credit score. Business owners with high personal credit scores are more likely to get a small business loan from banks, the SBA, or most online lenders. If your credit score is average or low, then you will probably have to pay higher interest rates or you may be rejected completely.
- Business credit: Make sure that your business has a good credit score, as the lenders will take your business credit into consideration before approving it for a loan. By paying your suppliers on time, you can achieve good business credit.
- The age of your business: An older, more established business is more likely to get a loan from most lenders. It is harder for a brand-new startup to get approved for a loan, because lenders view them as higher risk.
- How urgently you need the money: How quickly you need money may affect the funding source you choose. Some lenders have lengthier application processes, and take more time to approve a loan, such as larger banks. If you can't wait, then choose a faster online small business financing option.
- Business revenue: The lending options will vary depending on the way your business generates revenues. By reviewing the revenues of your business, you can choose repayment and acquisition methods that work best for you.
Conclusion: Getting the Small Business Financing You Need
Most common small business financing methods are hard to acquire because of their strict requirements and low approval rates. You need to have a high personal credit score as well as a business credit score to get term loans and SBA loans. Some lenders require collateral and insurance which small business owners cannot supply.
Keeping all of this in mind, Fundbox is one option for small business financing that many small businesses prefer. Fundbox is extremely simple, with no lengthy application forms, and transparent, usage-based fees.
Connect your accounting software or business bank account to Fundbox and see if you qualify within hours. Get started and take your business to the next level.