Getting a business loan can be important for running and building your company, whether you’re expanding to a new location, preparing for a busy season, or dealing with an emergency repair. However, requirements, rates, and repayment terms can vary depending on the type of loan. If you want to align financing with your goals, you’ll need to understand and compare your options.
What is a business loan?
A business loan is a loan that a business takes out and uses to support its operations or to grow. Often, the business will need to apply and qualify for the loan based on its creditworthiness. For small business loans, the owners’ credit score could also affect eligibility, rates, and terms.
Types of business loans
Small business owners can apply for different types of loans depending on their qualifications and how they plan to use the funds.
Unsecured term loans
Unsecured term loans let you borrow a specific amount of money and then repay the loan, plus interest and fees, over a predetermined term. You’ll often repay the loan with fixed monthly installments, although some term loans have a variable interest rate, which could result in your monthly payment changing.
Because you’re not offering any collateral for the loan, your eligibility, rates and terms will depend entirely on your personal and business creditworthiness. If you have poor credit, you might have trouble qualifying, or only be able to get an unsecured term loan with high fees and interest rates.
Secured term loans
Businesses can also offer collateral to get a secured term loan. Because the lender can keep your collateral if you default on the loan, you may be able to qualify for a larger loan or more favorable loan terms. Sometimes, you can use the funds however you want, but there are also secured term loans that require you to use the funds to purchase the asset securing the loan.
Some common types of secured business term loans are:
- Asset-secured business loans. Depending on the lender, you may be able to offer machinery, equipment, real estate, or other assets as collateral for a secured installment loan.
- Equipment financing. You can use equipment financing loans to purchase specific pieces of equipment, in the same way you’d take out an auto loan to buy a vehicle. The loans could come from a bank or credit union, or from the manufacturer’s financing department.
- Commercial real estate financing. If you’re buying real estate, look into commercial real estate financing options. Once you own the property, you may also be able to use your equity to qualify for a commercial real estate equity loan or line of credit.
- Invoice financing. Also called accounts receivable financing, invoice financing lets you use your unpaid invoices as collateral for a short-term loan or line of credit. An alternative type of financing called invoice factoring lets you sell your unpaid invoices to a factoring company rather than using them as collateral for a loan.
Some business loans will also require you to secure the loan with a blanket lien. This type of lien gives the lender the right to claim any of your business’s assets, including accounts receivable and equipment, to satisfy an unpaid debt.
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Business lines of credit
A business line of credit is a flexible type of financing that gives you the option, but not an obligation, to take out a loan. When you open a line of credit, you’ll receive a maximum credit limit that you can borrow against with a single loan or series of loans (called draws). You’ll only pay interest if and when you borrow money, although there may also be account maintenance and financing fees.
Lines of credit can be set up in different ways. A revolving line of credit is similar to a credit card and lets you borrow, pay down your balance, and borrow again, as long as your total balance doesn’t exceed your credit limit. Non-revolving lines are less common and limit the total amount you can borrow. Once you reach the limit, you need to continue making repayments and can’t make additional draws.
The US Small Business Administration (SBA) partners with lenders and partially guarantees small business loans. The guarantee reduces the lender's risk, which can make it easier for small business owners to get financing with lower rates and fees.
There are several types of SBA loans, including:
- SBA 7(a) loans. This loan program is the most widely used and covers several types of loans, including standard, small, and express loans. The loan limits and terms vary depending on the specific type of loan, but you can borrow up to $5 million with the standard 7(a) loan.
- SBA 504 loans. These are long-term loans with a fixed interest rate. You can generally borrow up to $5 million and use the funds to purchase or improve assets that will help your business grow and create jobs. The loans have either a 10- or 20-year repayment term.
- SBA microloans. Under this program, small businesses can borrow up to $50,000 to use in various ways, including for working capital and to buy or repair equipment. The loans generally have an interest rate between 8% and 13%, and up to a six-year repayment term.
You must meet certain eligibility guidelines to qualify for an SBA loan, such as operating a for-profit business (although there are some exceptions) and doing business in the US or its territories. The business owner must also invest time or money and try to get financing from other lenders before turning to an SBA loan.
Six requirements to get a business loan
The specific requirements for a loan vary depending on the type of business loan and the lender. Even SBA lenders, who must meet the agency’s guidelines, can have a say in who they lend to and the rates and terms they offer. However, if you’re looking for a business loan, the following will be part of the criteria:
- Personal and business credit scores. As a small business owner, your personal credit score and history could affect your eligibility and loan terms. The business’s credit scores and reports, which are separate from your personal credit, can also be important.
- A personal guarantee. Regardless of the type of loan, small business owners may need to sign a personal guarantee—a promise to repay the debt if the business falls behind on payments. Larger companies that can qualify for a loan based solely on the business’s finances and credit might not need a personal guarantee.
- Annual revenue. Some lenders have minimum annual revenue requirements for borrowers, and you may need to share your business’s recent bank statements and tax returns.
- Years in business. How long you’ve run your business could also affect your eligibility. For example, a lender may require that your business be at least two years old to qualify for an unsecured business loan or line of credit. However, you may be able to qualify for a secured loan or certain types of alternative financing before that.
- Business industry and size. You don’t have a lot of control over these, but the size of your business and the industry you’re in also can affect a lender’s decision. After all, some industries are riskier or more heavily regulated than others, and some lenders prefer to work with small (or large) businesses.
- Business plan, financial statements, and loan proposal. You may also need to share a business plan, including a copy of your business’s financial statements, and what you intend to do with the loan proceeds.
Business loan requirements FAQ
What is usually required for a business loan?
Qualifying for a business loan usually requires an operating history of at least two years. Additionally, you need to meet minimum revenue, personal credit, and business credit requirements. If you’re applying for a secured loan, your assets will also have an impact on your eligibility.
What proof do you need for a business loan?
You may need to share copies of your business’s tax returns, bank statements, financial statements, and business plan when you apply for a business loan. You may also need to provide verification documents, such as articles of incorporation and lease agreements. And small business owners may also need to share documents confirming their identity and personal income.
Can I get a loan if I want to start a business?
Some lenders offer loans for starting a business, but many entrepreneurs need to rely on their personal credit and finances to secure the loan. You could also look into alternative ways of raising money, such as crowdsourcing and financing from outside investors in exchange for an ownership stake.