Unfortunately, it’s not always easy to qualify for a business loan, business credit card, or other types of business credit. According to the Federal Reserve, 30% of businesses were denied financing after March of 2020. 

Yet there are things you can do to stack the deck in your company’s favor. Read on for an in-depth business financing guide. You’ll learn about the many different business financing options, the costs of borrowing, and how to determine the best choice for your small business. 

Business Financing Basics: Debt vs. Equity

Most business financing options fall into one of two categories — debt financing and equity financing. You can use either option to access capital for your business, and each has its advantages and disadvantages. 

Here’s a deeper look at the differences between debt financing and equity financing.

Debt Financing 

Debt financing is something you’re probably already familiar with as a consumer. If you have ever taken out a mortgage or applied for a car loan to purchase a vehicle, you have used debt financing.

With debt financing, you borrow money and repay it according to the terms of your credit agreement — usually with interest.

There are several advantages to this type of financing. First, you retain full control of your business. Any interest fees you pay may be tax deductible as well. 

On the negative side, debt financing can be expensive. Interest rates on a small business loan can range from 2% all the way up to an exorbitant 99%. Monthly debt payments can also impact your business’s cash flow.

As a business owner, you might have to sign a personal guarantee for the money your company borrows. This means that if your company can’t repay its debt, you could be personally liable for the balance, and your personal credit might suffer too. 

Equity Financing

Equity financing is the process of selling a portion of your company in exchange for business capital from one or more investors. If you’ve ever watched the television show Shark Tank, you have seen equity financing negotiations in progress.

On a positive note, there’s no debt to repay when you use equity financing to secure funding for your business. High interest rates and other borrowing fees aren’t an issue either.
business
The negative aspect of equity financing, of course, is that you no longer have full control over your company. In addition to sharing the profits your business earns, you also have a partner you must consult when you need to make future decisions. 

14 Types of Business Financing

Now that you understand the two main business financing categories, you can dig deeper into individual financing options. There are many different ways for your business to try to secure the funding it needs to launch, expand, or cover pressing expenses. 

Some financing options feature lengthy repayment terms. This might cause you to pay more interest in the long run, but it could lower the size of your monthly payment. 

Other financing methods might allow you to borrow money for your business, repay it, and borrow again by reapplying for a new account. 

Finally, some business credit choices may feature easy approval and fast funding while others might require a more in-depth application process. Of course, there are tradeoffs you’ll need to consider too. In general, easy and fast don’t equal competitive or affordable pricing. 

Below is an in-depth look at 14 types of business financing. You can use these details to determine which borrowing method is the best fit for your business. 

Traditional Bank Loans

Traditional bank loans are what many business owners think of first when it comes to business financing. You can find these types of loans at your local or online business bank or credit union.

Traditional bank loans include the following: 

• Installment loans or term loans that may require your business to repay the money it borrows over a fixed period of time.
  
• Your business receives the money it borrows up front in a single lump sum.
  
• Interest rates are typically fixed and don’t fluctuate up or down with the market.
  
• You may be able to secure an attractive interest rate, depending on your company’s creditworthiness and other factors. 

Business Lines of Credit

A business line of credit offers companies a more flexible way to borrow money over and over again. However, the interest rates with this financing option may not be as competitive as a traditional bank loan.

Business lines of credit: 

• Are like credit cards in the sense that you can borrow up to a set credit limit, make a payment, and borrow again as long as the account remains in good standing.
  
• Interest rates can vary based on the market.
  
• Your credit rating (business and personal) can play a role in the interest rate a lender offers your business.
  
• Your business might need to supply collateral to open an account. 

SBA Loans

Business loans backed by the Small Business Administration are some of the most attractive business loans available. But in return, they also feature strict approval criteria your business will need to satisfy. 

SBA loans are:

• Partially guaranteed by the federal government, lowering the risk involved for lenders.
  
• Available for a wide range of borrowing needs, from SBA 7(a) loans for working capital and more to SBA 504 Loans for fixed assets like equipment or property.
  
• Often one of the most affordable ways for eligible businesses to borrow or refinance existing commercial debt.
  
• Harder to qualify for and require a lengthy application and funding process (often spanning months). 

Commercial Real Estate Loans

Commercial real estate loans represent another traditional borrowing option available to business borrowers. If your business wants to build or purchase real estate property, this type of financing is worth considering. 

Commercial real estate loans:

• May be available for up to 80% of the value of the property you wish to purchase.
  
• You can use these loans to purchase or refinance business real estate, renovate existing commercial property, or build something new.
  
• Loan amounts may range from $50,000 to $5 million.
  
• Repayment terms can be as short as 12 months or as long as 30 years. 

Online Loan

An online lender may be more likely to approve your business loan request. However, this easy qualifying process can come at a cost. 

The Federal Reserve study mentioned above reveals that over half of the business borrowers that use online lenders report receiving high interest rates. Nearly a third were unhappy due to unfavorable repayment terms. 

Online loans:

• Are convenient and easy to apply for online.
  
• Are available from reputable lenders, but you have to watch out for bad actors.
  
• May give your business fast access to cash, especially compared with other funding choices.
  
• Often feature higher interest rates depending on the lender, your credit rating, and other factors.
  
• May come with steep origination fees, potentially as high as 8.9% of the loan amount.

Invoice Financing

Invoice financing, sometimes called accounts receivable financing, lets your business borrow against the value of unpaid client invoices. 

A key benefit of invoice financing is that it tends to feature easier approval criteria compared with other options. But lenders usually charge high rates and fees for this funding option. 

Invoice financing details:

• Your business may be able to borrow up to 100% of the value of outstanding invoices.
  
• The approval process is generally easy, without intense documentation requirements.
  
• May be an option even with less-than-perfect credit.
  
• Interest rates and fees can be extremely high. 

Equipment Financing

Equipment financing is another business funding option that typically features an easier approval process. Interest rates can vary widely depending on your creditworthiness and other factors the lender deems relevant. 

Equipment financing details:

• The equipment your business purchases serves as collateral for the loan.
  
• Interest rates could range from 8% to 30%.
  
• You may be able to secure financing with no down payment.
  
• You might be able to bundle the cost of sales tax and installation into the loan, if applicable. 

Merchant Cash Advance

Businesses that accept credit card payments may be eligible to take a merchant cash advance. 

The amount your business can borrow depends on your average daily credit card sales. Qualification tends to be much easier with this type of business credit, but once again the cost can be steep. 

Merchant cash advance details:

• You may have to pay high APRs between 15% to 80% (assessed in the form of “factor rates”).
  
• Lenders may approve your business with no collateral and bad credit.
  
• Funding is speedy, often arriving in your bank account within a couple of days.
  
• The lender may withdraw funds from your account to repay the advance on a daily or weekly basis. 

Note that a merchant cash advance should probably be a last resort due to the expense. 

Microloans

Microloans of $50,000 or less may be a worthwhile option to pursue for certain businesses. Veteran, minority, or female-owned businesses (among others) may be able to qualify for this type of business financing. 

Microloans details:

• Available through SBA lenders, nonprofit Community Development Financial Institutions, and some online lenders.
  
• Startups may be eligible for funding.
  
• Your business may qualify even with no credit or bad credit.  

Crowdfunding

With crowdfunding, you convince a large number of people to invest small amounts in your business. Collectively, the funds may add up to enough to help you reach your business goals. 

Depending on the type of campaign you design, you may offer investors equity in the company, rewards, or a debt to be repaid in the future. Meanwhile, some crowdfunding campaigns merely request donations. 

Crowdfunding points:

• Requires an excellent marketing strategy to succeed.
  
• Features popular online crowdfunding platforms that can be highly competitive.
  
• Involves fees that can vary based on the platform and type of crowdfunding campaign you select. 

Unfortunately, most crowdfunding campaigns don’t reach their financial goal.

Grants

Grants represent a desirable form of business capital that your company does not have to pay back. But your business project will need to stand out among a crowded and competitive field of applicants. 

Grant details:

• They are available from the federal government via the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs.
  
• Nonprofits, local community organizations, and private companies may offer small business grants as well.
  
• The research and application process can be tedious and time consuming.
  
• Beware of scams that charge fees.
  
• If your business operates in certain industries (i.e., scientific, technological, health advocacy, urban restoration, etc.), you may have a better shot.  

Family and Friends

The people who care about you may be willing to back your business goals with financial support. Often, this type of business funding falls into the equity financing category. However, some family members or friends might offer you a loan or a gift instead. 

Whatever the arrangement, make sure the terms are clear up front. Otherwise, you risk damaging an important relationship over money and business-related challenges. 

Angel Investors

Angel investing is a type of equity financing where you trade a portion of your company in exchange for business funding. While you don’t have to repay this cash infusion into your business, you do have to share both profits and decision-making capabilities. 

Angel investors:

• Tend to perform a detailed analysis before deciding to invest in a business.
  
• Are typically attracted to businesses with the potential for rapid growth.
  
• Can be difficult to locate, and may take a long time to negotiate with once you do.
  
• Often offer valuable advice and guidance that could help your business succeed.

Venture Capital

A venture capitalist is another type of investor that may provide equity financing in exchange for ownership shares in your business. 

However, unlike angel investors, when you work with a venture capital firm, you tend to receive business funding in rounds (i.e., Series A, Series B, etc.). 

Venture capital:

• Is typically only available to businesses deemed to be “disruptors” with the potential to grow fast and shake up their market.
  
• Often favors businesses in technology or finance industries or other companies poised for rapid growth.
  
• Will typically move your business through its seed rounds of investment with the goal of taking the company public.
  
• May offer the right company millions of dollars worth of funding. 

Factors Affecting Chances of Getting Approval

Anytime you borrow money from a business lender, your business needs to come across as a good risk. Lenders and banks only loan money to those they deem to be a sound investment. 

Below are some common factors that a lender may consider when you apply for business financing. These factors impact not only your ability to qualify for funding, but can also affect your interest rate, fees, loan amount, loan term, and more.  

Personal Credit Scores

As a small business owner, your business is an extension of you in the eyes of a lender. If you have good personal credit, it may reassure a lender that you’re likely to be responsible with your commercial credit obligations too. 

Good personal credit scores can make it easier to qualify for business financing, like loans or business credit cards. And, of course, the opposite is true as well. 

If you need help establishing good personal credit, a Credit Strong credit builder account is worth considering. There’s no minimum credit score requirement to qualify, and no upfront security deposit. 

Credit Strong accounts start with payments as low as $15 per month. With this option, you can open a $1,000 installment account and add up to 120 months worth of positive payment history to your credit reports with the three major credit bureaus. 

Business Credit Scores

Good business credit scores can be a tremendous asset for your company. When you work to establish and maintain good business credit, it tells potential lenders that your business is likely to repay its debts as promised. In other words, your company is a good credit risk. 

Most lenders rely on credit scores to evaluate loan applications. So, it’s wise to start building business credit as soon as possible. There’s just one problem. Finding companies willing to help you build business credit from scratch can be a challenge. 

Credit Strong Business is one solution that could help you establish business credit. This business credit builder account is a cash-secured installment loan that features easy approval criteria and has the potential to help you build your business credit profile. 

There is no upfront deposit required. And you have the option to select five or ten-year repayment terms. On top of the potential to establish good payment history (with on-time payments), account holders also enjoy free monthly access to their business credit score.

As you manage your business credit obligations well and the tradelines on your business credit reports age, you will put your company in a better position to qualify for funding.  

Cash Flow

Good credit can help you qualify for business financing, but it’s not the only factor lenders consider. A lender also needs to know that your company has sufficient cash flow to pay its monthly debt obligations. 

To assess your company’s cash flow and overall financial wellbeing, a lender may want to examine the following documents when you apply for financing:

• Business Bank Statements
  
• Business Tax Returns
  
• Other Financial Statements (Profit and Loss Report, Accounts Receivable and Payable Records, Etc.) 

Current Debt Levels (Balance Sheet)

A business lender may also want to review your current debts to make sure your business can afford to borrow more money. Your business balance sheet can help answer these questions. 

A balance sheet provides a potential lender with a bird’s eye view of your company’s financial health. It breaks down assets and liabilities in clear terms — aka how much your business earns versus how much it owes. 

Number of Years the Business Has Been Running

Your company’s time in business can also influence its ability to qualify for business financing. For certain types of business loans, your company may need a minimum of two years in operation underneath its belt. 

Yet even as a startup, your business may have some borrowing options. Just be prepared to provide more collateral, a bigger down payment, a personal guarantee, or to accept some other adjustment that brings the lender’s risk down to an acceptable level. 

Industry

In addition to all of the approval factors outlined above, the industry in which your business operates can also impact your ability to qualify for business financing. Businesses that operate in high risk industries may struggle to qualify for traditional business financing. 

With an SBA loan, for example, businesses that operate in any of the following industries are ineligible for financing: 

• Gambling
  
• Investment
  
• Lending
  
• Charities
  
• Religious Institutions
  
• Non-Profit Organizations
  
• Etc.

Determining How Much Financing You Need

You should also be prepared to tell a business lender how much money your company needs to borrow (and why). You may want to prepare a detailed report with cost estimates breaking down how your business will use the money it borrows when and if it’s approved. 

Try to answer questions like:

• What is the cost of the equipment or materials the company needs?
  
• How much additional payroll do you need to hire new team members for expansion?
  
• What amount does your business require to refinance existing high-interest debt? 

The amount of money you request will vary based on your borrowing needs. Over half of businesses that sought funding in 2020 requested more than $100,000 in financing, according to Federal Reserve data. Yet 15% of businesses asked for less than $25,000. 

Keep in mind that the maximum amount a lender is willing to loan your business may be more than you need. It’s generally not a wise move to borrow extra money just because you can. 

Understanding the Costs of Financing and Making a Choice

As you compare one small business financing option to the other, consider how much it will cost to borrow money. Pay attention to annual percentage rates, of course. But remember that fees, repayment terms, and monthly payments should all factor into your decision.

Take the time to rate shop and consider offers from multiple lenders as well. Interest rates and fees can vary widely. Spending a little extra research upfront to find the best deal could potentially save your business thousands of dollars or more in the long run. 

The post Business Financing Basics: Reviewing Your Options and Requirements appeared first on Credit Strong.

SBA loans come in several different varieties. The reason your business wants to borrow money and the loan amount you’re requesting can both have an impact on the type of SBA loan your company might be eligible to receive. 

Below is an overview of seven different business loans backed by the Small Business Administration. You’ll also find interesting stats about how much funding the SBA issued under these programs in 2020. SBA loans can be hard to qualify for, but not impossible.

Each SBA loan features different qualification requirements and eligibility standards. So, if an SBA loan is on your radar, you should be aware of these important details.  

Qualifications for the SBA 7(a) Loan Qualifications

The SBA 7(a) loan is the flagship loan backed by the Small Business Administration. In the year 2020, around 42,000 of these loans were issued to small businesses throughout the United States. Collectively, those borrowers received $22.55 billion in loan proceeds. 

Your business may be eligible for the 7(a) loan program if it: 

• Operates as a for-profit business.
• Qualifies as a small business according to the SBA’s size standards.
• Does business or intends to do business in the United States or its territories.
• Is not past due on existing credit obligations owed to the U.S. government.
• Will apply the funds it borrows toward a sound business purpose.
• Can demonstrate a legitimate business need to borrow the requested loan amount.
• Has a sufficient amount of capital invested in the business.
• Has used other financial resources, including personal assets, before applying for financing.
• Is not an ineligible business according to the SBA.

Credit Requirements

On top of the eligibility requirements above, your business typically needs to be able to satisfy an SBA lender’s business credit requirements to qualify for a 7(a) loan as well. 

Most SBA lenders use FICO Small Business Scoring Service scores to evaluate potential borrowers. FICO SBSS scores are based on a hybrid of both your personal and business credit reports. 

FICO SBSS scores range from 0 to 300. If you hope to qualify for an SBA 7(a) loan, your business needs a minimum FICO SBSS credit score of 155. 

Qualifications for the SBA 504 Loan 

The SBA 504 loan is another popular financing option among small business owners who want to borrow up to $5 million for major fixed assets. In 2020, lenders issued over 7,000 of these loans totaling more than $5.8 million to eligible small businesses. 

Businesses that are eligible for 504 loans need to: 

• Be a for-profit, U.S.-based business (or be based in a U.S. territory).
• Possess a tangible net worth that does not exceed $15 million.
• Have an average income (net) that does not exceed $5 million after taxes for at least two years preceding its loan application.
• Show a plan to use the funds for a 504 Program-approved purpose.
• Avoid participating in rental real estate investment or speculation. 

Credit Requirements

The Small Business Administration doesn’t set a minimum credit score requirement for 504 loans. However, it does state that borrowers will need to demonstrate “good character” and a historical willingness and ability to repay their debts.

Qualifications for the SBA Express Loan 

SBA Express loans are available to eligible small business borrowers for up to $350,000. The primary benefit of this type of loan is the fact that the SBA will review and respond to your loan application within a short 36-hour or less time frame. 

To qualify for an SBA Express loan, your company must: 

• Be a for-profit business.
• Do business in the United States or its territories (or propose to do so).
• Have a sufficient amount of owner equity to invest in the business. 
• Show that it has used alternate financing methods (personal assets included) prior to applying for an SBA Express loan. 

Individual lenders make the call on SBA Express loans when it comes to minimum credit score requirements. So, you may want to ask your SBA-approved lender about these details before you fill out a loan application. 

Additionally, if you’re borrowing less than $25,000, the SBA doesn’t require you to put up any assets to secure the loan. But if you’re borrowing more than that amount, you should be prepared to supply collateral to back your loan. 

Qualifications for the SBA Microloan 

The SBA Microloan program is designed to help small businesses in underserved communities. In 2020, SBA lenders issued more than 5,800 of these loans for nearly $85 million— with 34% going to Black-owned small businesses. 

SBA Microloans cap out at $50,000. Borrowers can use the funds for working capital, supplies, inventory, equipment, furniture, and similar purposes. 

Small businesses owned by entrepreneurs in the following categories may be able to qualify for an SBA Microloan: 

• Women
• Low-Income
• Veteran
• Minority
• Other

In addition to being an eligible small business owner, you may need to complete business training or planning requirements for a lender to consider your application. You also cannot owe delinquent or defaulted debt to the federal government when you apply for new financing. 

Finally, your business will need to pass a “no credit elsewhere” test. In other words, there needs to be a reason why your company won’t qualify for financing via an alternative route. 

Credit Requirements

The Small Business Administration doesn’t set a minimum credit score requirement for Microloans. Instead, individual lenders set their own credit and underwriting guidelines. Therefore, it’s wise to ask a lender about its qualification requirements before you apply. 

Qualifications for the SBA Disaster Loan

The year 2020 was historic for the SBA disaster loan program. The agency issued $211 billion in disaster loan funding through the COVID-19 EIDL program — triple the number of funds it issued in the previous 67 years combined. 

SBA disaster loans come in four different varieties: 

• Physical Damage Loans
• Mitigation Assistance Funding
• Military Reservist Loans
• Economic Injury Disaster Loans (EIDLs) 

Here’s a closer look at the eligibility requirements for the disaster loans above. 

Economic Injury Disaster Loans

Your business may be eligible for the COVID-19 EIDL if it can prove that it lost money due to the pandemic. The loans are available until the end of 2021, or until funding runs out. 

Additionally, a COVID-19 EIDL advance of up to $15,000 may be available to businesses operating in eligible low-income communities. These loan proceeds don’t have to be repaid. 

The EIDL program does feature the following minimum personal credit score requirements for small business borrowers: 

• 570 minimum credit score for loans of $500,000 or less
• 625 minimum credit score for loans of $500,000 or more

Finally, you will need to provide collateral for loans over $25,000. And if your business is borrowing more than $200,000, a personal guarantee is necessary too. 

Other SBA Disaster Loans

If your business or private nonprofit organization operates in a declared disaster area, it might be eligible for one of the SBA’s other disaster loans. 

Qualifying disasters may include: 

• Flooding
• Hurricanes
• Wildfires
• Areas Experiencing Civil Unrest
• Etc. 

Homeowners and renters might also be eligible for financing assistance under an SBA disaster loan program. However, you would need to prove that you incurred losses not covered by insurance or Federal Emergency Management Agency (FEMA) funding to qualify. 

For disaster loans over $25,000 ($50,000 for Military Reservist Loans), be prepared to supply acceptable collateral. However, if you don’t have any collateral available, you may still qualify. 

Qualifications for the SBA Export Express Loan 

The SBA Export Express Loan offers up to $500,000 worth of funding to eligible businesses via a streamlined process. You can apply for this loan directly from an SBA-approved lender, which will use its own application forms and procedures to see if your business qualifies. 

Businesses eligible for an SBA Export Express Loan must: 

• Have been in business for 12 months or more.
• Prove that funds will be used for eligible export development projects.

Once you apply for this loan with an SBA Express Lender, your business can expect an answer (aka approval or denial) from the Small Business Administration within 36 hours or less. 

Qualifications for the Community Advantage Loan 

The Community Advantage program is a new SBA pilot program that aims to be a credit resource for small businesses in underserved areas. 

The program makes 7(a) loan guarantees available to “mission-oriented” community leaders that might not be able to qualify for traditional business financing. 

Your business might be able to borrow up to $250,000 through the Community Advantage program if it: 

• Can satisfy the SBA’s size standards. 
• Is able to prove that it has a viable business idea. 

The Community Advantage program stands out among other SBA loans for another reason. A limited balance sheet or limited collateral will not automatically exclude your business from funding. 

Credit Requirements

To qualify for a Community Advantage loan, your business needs a minimum FICO SBSS credit score of 140. 

Build Your Business Credit with CreditStrong

No matter which type of business loan you’re seeking — SBA or otherwise — having good business credit can work in your favor. One potential way to build business credit is to open business tradelines that report to the business credit reporting agencies. 

The trick, of course, is finding lenders that are willing to work with your company when you have no established credit. Net 30 accounts are one option that might help you here. Additionally, you may want to consider opening a business credit builder loan. 

The CreditStrong Business Credit Builder account gives eligible business borrowers the chance to establish business credit using an EIN. If you qualify, your business will receive an instant bank loan with the funds locked in an FDIC-insurance business savings account as collateral. 

Your company can then make small monthly payments on its credit builder loan for up to 120 months. So, when you pay on time, you could establish up to 10 years worth of timely payment history with major business credit bureaus. 

On top of these perks, the loan is flexible. If you desire to do so, you can cancel the credit builder account at any time with no penalties. In short, there’s little risk and a big potential upside for businesses that want to establish a solid credit rating.

The post How to Qualify for an SBA Loan in 2025 appeared first on Credit Strong.

But whether you’re accepting a business loan, line of credit, merchant cash advance, or any other type of financing, it’s crucial that you read the fine print in your loan documents.

One of the things you’ll want to look out for is a clause known as a confession of judgment. Regardless of how much you need the money, if you find one of these in your loan agreement or promissory note, your best bet is to decline the offer and walk away.

Here’s what you need to know.

What Is a Confession of Judgment?

In a confession of judgment clause, the borrower agrees to waive their right to due process in certain cases. A confession of judgment clause can also be included in a commercial lease agreement. This means that if you default on your payments and your lender or landlord decides to sue you, you don’t have the right to defend yourself. 

In other words, the creditor or landlord can request a court order to garnish bank accounts, seize property, and take other actions to force repayment. In some cases, this can even happen without prior notice. 

The contract clause may also state that you agree to pay the plaintiff’s attorney’s fees and any costs associated with the court incurred during the process.

Finally, confession of judgment clauses can also state that you’re joint and severally liable for the debt. 

This is also known as a personal guarantee, it means that you’re personally on the hook to repay the debt if your business can’t, which means the lender or landlord can go after your personal assets too.

How Does a Confession of Judgment Work?

When you sign a loan or lease contract with a confession of judgment, you agree to allow the other party to enter into a judgment against you if you default on the loan or sometimes miss a payment. 

If you’re working with a lender or landlord that uses this type of clause, they can go to court and request a judgment against you by a judge. There’s no requirement for the lender or landlord to notify you before doing this, so you may not find out until after it’s too late.

On top of that, a confession of judgment may allow the lender or landlord’s legal team to skip certain steps of the process that are normally required when a plaintiff files a lawsuit against a borrower or tenant.

For example, they may not have to file a complaint, serve you as the defendant, take discovery, or go through the trial process. 

Not only will you be legally required to comply with the judgment, but you may also need to pay the lender or landlord’s legal fees, along with the court costs. 

What’s more, the judgment will likely show up on your commercial credit reports, making it difficult for you to get business financing and enter into other important business agreements in the future.

Confession of Judgment in a Business Loan

When you apply for a business loan, whether it’s a term loan, line of credit, merchant cash advance, or anything else, you’re basing your decision on the interest rate, repayment period, and other surface-level factors.

But if you get approved, and the lender offers you certain terms, it’s crucial that you read through the entire loan agreement before you sign the dotted line and accept the terms. 

It’s particularly important if you’re considering a merchant cash advance or another form of alternative short-term, high-interest financing. 

The good news is that many states have prohibited confession of judgment clauses on business loans because they’re associated with predatory lending practices. The federal government has outlawed the practice entirely for consumer contracts. 

But if you’re operating in a state that allows them — New York is one example — it’s crucial that you take steps to protect your business and personal assets. 

Because the last thing you want is to struggle to pay back a business loan then suddenly notice that your business or personal bank accounts have been frozen and funds have been garnished to repay the debt. 

If you notice a confession of judgment clause in your loan agreement, your best bet is to walk away. Even if you have less-than-stellar credit, there are plenty of financing options available that don’t require you to sign your rights away. 

How Can a Confession of Judgment Affect Your Business Credit Score?

If you simply sign a confession of judgment but never miss a payment, you don’t have to worry about any impact on your business credit history. 

However, if a court enters a judgment against your business, it will show up on your commercial credit reports. Even after you’ve satisfied the court order, it may still remain on your reports for several years, albeit with a notation.

It’s unclear exactly how a judgment impacts your business credit scores. But just the fact that they’re listed on your credit reports can make your life difficult. 

Anyone can look up your business credit reports, so if you’re applying for credit, you may have a hard time getting approved. The same goes if you’re applying for a lease or vendor credit. 

Even if you’re just looking for investors or are trying to partner with another company, they may balk if they find judgments on your credit reports.

Fortunately, a confession of judgment won’t impact your personal credit history at all because court judgments are no longer listed on consumer credit reports. 

However, if there’s a personal guarantee involved, the creditor may choose to report late payments or default to the consumer credit reporting agencies.

The Bottom Line

A confession of judgment is a relatively predatory practice that some lenders and landlords might use to limit their risks when working with borrowers or tenants. 

If you fall victim to a confession of judgment, not only do you face legal issues, but also legal costs, potential loss of business and personal assets, a negative mark on your business credit history, and more. 

Even if you’re confident that you’ll be able to make your loan or lease payments on time for the duration of the contract, it’s best to avoid agreements that include them — or at least attempt to negotiate to have them removed.

The post What Is a Confession of Judgment? appeared first on Credit Strong.

Here’s what you need to know.

What Is Invoice Factoring?

Invoice factoring is a type of financing that you can get utilizing unpaid invoices from your customers and clients. With invoice factoring, you’ll sell some or all of your accounts receivable to a third-party factoring company, which will pay you a portion of the invoice as a lump sum.

The factoring company then takes over the collection of your invoices directly from your customers or clients. Once it’s collected the payment, it’ll pay you the remaining amount minus its factoring fee.

Because you’re selling your invoice instead of using it as collateral, invoice factoring is technically not considered a loan.

Invoice factoring is sometimes also referred to as debt factoring or accounts receivable factoring. However, it’s different from invoice financing, which we’ll cover in more detail later.

How Invoice Factoring Works

If your small business makes money through invoicing customers and clients instead of collecting upfront payment, you may allow them to pay on a net-30, net-60, or even net-90 basis.

But if you have outstanding invoices that aren’t yet due and you need cash urgently, invoice factoring can be a way to get what you need. 

You’ll typically receive between 80% and 90% of the invoice amount up front and assign the role of collecting the payment from the customer or client to the factoring company.

Once the factoring company has collected the payment, it’ll give you the remaining amount minus its factoring fee, which usually ranges from 1% to 5%. 

The factoring fee will depend on various factors, including your sales volume, the creditworthiness of the customer or client, and whether you or the factoring company is responsible if the invoice goes unpaid. 

For example, let’s say you have an invoice for $5,000, and it’s due in 30 days, but you need the money sooner. So you sell it to a factoring company, which agrees to buy it for $4,800, taking a 4% fee. It gives you $3,840 upfront, then the remaining $960 when it collects the payment.

Typical Invoice Factoring Costs

Factoring rates can vary from 1% to 5%, which doesn’t sound like a lot. But considering it typically takes between 30 and 90 days for the factoring company to collect payment on the invoice, the short-term nature of this financing option can result in a high APR.

What’s more, some factoring companies may charge additional fees, such as an application fee, processing fees for each invoice, credit check fees, late fees, and more.

The more fees that get added to your factoring contract, the more expensive it will be. 

Invoice Factoring Pros

There are several reasons business owners rely on invoice factoring to get help with short-term cash needs. Here are some of the benefits you can take advantage of:

• Fast funding: Traditional business loan options can take weeks or even months to fund, but if you can wait that long, you can usually wait until your customer pays their invoice. If you need the money urgently, though, invoice factoring can be a quick and easy way to get access to money that you’ve already earned.
• Easy approval: If you have poor personal credit, a limited history of time in business, or a lack of collateral, you may have a hard time getting approved for most forms of business financing. However, invoice factoring companies underwrite primarily based on the creditworthiness of the customer paying the invoice and your sales volume. So it’s possible to get approved even if you can’t get alternative financing options.
• No collateral required: Invoice factoring is a form of unsecured financing, so you don’t have to worry about putting up any collateral to secure the funding. 
• Improved cash flow: Invoice factoring makes it possible for you to maintain your payment terms with your customers and clients, which can keep them happy. At the same time, you’ll still get access to that cash flow when you need it, even if it’s at a discounted rate.

Invoice Factoring Cons

Despite the clear advantages to using invoice factoring to boost your cash flow, there are several pitfalls to keep in mind that may make you want to think twice before you apply:

• It’s expensive: As previously mentioned, invoice factoring may seem inexpensive at first because factoring fees usually cap at 5%. But since it’s a short-term form of credit, that can translate into a high APR. You’ll also want to watch out for extra fees in the contract and shop around to ensure that you find the most inexpensive option.
• It doesn’t work for B2C businesses: Invoice factoring is an option if your business works exclusively with other businesses. But if you’re working directly with consumers, it’s unlikely that you’ll be able to take advantage of invoice factoring.
• You lose control of the collection process: When you use invoice factoring, the factoring company takes over the collection of the invoice. If this results in a poor experience for your customer or client, it could damage your relationship. Make sure you work with factoring companies that use ethical and fair collection practices.
• Your options are reliant on client creditworthiness: If you try to factor an invoice from a client that has a poor credit history or weak revenue, the factoring company may deny your application. Unlike traditional forms of business financing, you can’t rely on your own responsible credit habits to get approved.
• You may be forced to buy it back: If the customer or client refuses to pay the invoice and it’s a recourse factor, the factoring company may force you to buy back the invoice or replace it with another invoice that has equal or greater value. If this happens, it could disrupt your cash flow.

Invoice Factoring vs. Invoice Financing

As you’ve done your research, you may have come across both invoice factoring and invoice financing, and it’s important to note that these are two different financing options.

With invoice financing, you don’t sell your accounts receivable to a third party. Instead, you use outstanding invoices as collateral to obtain a loan. 

Unlike invoice factoring, invoice financing allows you to retain control of the collection process, so you don’t have to worry about your customers or clients getting a bad experience.

Typically, you’ll receive up to 85% of the original invoice amount upfront with invoice financing, though that percentage can vary from lender to lender. 

Then, once you’ve received the payment from your client or customer, you’ll pay the lender, and it will provide you with the remaining invoice balance minus any fees. You’ll typically pay a processing fee, which is about 3%, plus a weekly factor fee of 1% to 2% until the loan is repaid.

Like invoice factoring, invoice financing can be an expensive way to get capital, especially if it takes longer to get payment on the invoice you’re using as collateral for the loan. But if you need the money urgently and don’t have a lot of options, it can be worth the extra cost.

Build Your Business Credit to Have More Financing Options

If you’re considering invoice factoring or invoice financing, your cash flow needs might be urgent enough that you don’t have time to qualify for other financing options. 

But over time, it’s a good idea to focus on your business credit scores as a way to open up more opportunities to get the capital you need, preferably at a lower cost to you.

One way to do that is to use business credit cards or vendor credit, both of which are possible to obtain, even if your business is relatively new and doesn’t have a lot of revenue or operating history. 

You can also take advantage of online business loans and lines of credit, though these can be more expensive than even business credit cards if you’re not careful.

Another option to consider is a Credit Strong business credit builder account. This can be a great way to build business credit because it’s affordable and provides long-term reporting. Here’s how it works:

• Apply and choose a repayment term, which can be as long as 120 months.
• Receive a response in minutes. If you’re approved, the loan amount will be locked in a business savings account to act as collateral.
• Make your monthly payments, which will be reported to several commercial credit bureaus.
• Once you’ve paid the loan in full, you’ll receive the loan funds, which you can use however you want.

If you change your mind, you can cancel your account early and get credit for your monthly payments up to that point. 

Regardless of how you go about it, it’s important to be proactive about building your business credit history so that you’ll have access to more favorable financing options in the future when you need them.

The post What is Invoice Factoring and How Does It Work?  appeared first on Credit Strong.

If you’re considering a merchant cash advance, here’s what you need to know about how they work, why you should avoid them, and what you should use instead to get funding and grow your business.

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a form of alternative business financing. It’s not technically a loan, but an advance on your future credit and debit card sales. In some cases, you can even get an MCA that’s not tied directly to your sales.

If you get approved for a merchant cash advance, you’ll receive a lump-sum payment, then you’ll pay it back with a percentage of your debit and credit card sales or regular payments from your business bank account.

Merchant cash advances can be appealing to small business owners who have relatively stable sales but are struggling to obtain capital for short-term needs. 

However, MCAs can be incredibly expensive, and their terms often contain predatory practices that can threaten your small business and your livelihood.

How Merchant Cash Advances Work

A merchant cash advance can work in a couple of different ways, based on either your credit and debit card sales or your bank statements. Here’s a breakdown of how each type works.

Merchant Cash Advances

This is the traditional form of merchant cash advances, and it’s predominantly tied to debit and credit card sales. 

If your small business revenues come primarily from credit and debit cards, you could get an advance on future sales in the form of a lump sum, similar to an installment loan.

But unlike an installment loan, these traditional merchant cash advance agreements collect payments by taking a percentage of your sales. 

The MCA provider will partner with your payment processor to assess your sales and collect payments on a daily basis. 

Instead of charging interest, the cost is based on a factor rate, which typically ranges from 1.1 to 1.5. This means that if you receive an advance of $10,000, you’ll ultimately pay back between $11,000 and $15,000.

MCA providers determine your factor rate based on your revenue, creditworthiness, and other factors. 

ACH Merchant Cash Advances

While MCAs have traditionally been based on ongoing sales, it’s now also possible for small businesses without strong credit and debit card sales to get a merchant cash advance.

Instead of looking at your sales, these MCA providers will review your bank statements to determine your cash flow situation and how much you can afford.

Then, in exchange for giving you the advance, the provider will take daily payments from your business bank account to satisfy the loan. Instead of it being a percentage of sales, though, your payment will be a fixed amount.

As with traditional MCAs, ACH merchant cash advances charge a factor rate instead of interest. 

Typical MCA Financing Costs

The factor rate on a typical merchant cash advance is between 1.1 and 1.5. But because MCAs are a form of short-term financing, that translates to an APR range that goes from 40% to 350%. 

In other words, merchant cash advances are one of the most expensive types of financing for your small business, and if you’re not careful, they can cause more cash flow problems than they solve.

To get an idea of how much an MCA will cost you, it’s a good idea to use an online merchant cash advance calculator.

To give you an example, let’s say you receive an advance of $20,000 with a factor rate of 1.3. (We’ll use an MCA calculator to help us figure out the payments.) 

Your monthly debit and credit card sales average about $20,000, and your MCA provider requires a 15% holdback rate or the percentage of your daily sales that it takes to satisfy the debt.

With this arrangement, you’ll pay back a total of $26,000 with daily payments of $100 on average. It’ll take 260 days to repay the debt in full, and your APR will be 76.95%. 

Take that same advance and increase the factor rate to 1.5, and your effective APR will be 106.15%, with $30,000 in total payments over 300 days.

MCA Advantages

Merchant cash advances exist because small business owners use them. Here are some of the reasons why it might be appealing to take advantage of this form of short-term financing for your business:

• They’re easy to obtain: You don’t need great credit to get approved for an MCA, and you don’t need to meet high revenue or time-in-business targets like many types of business loans. As long as you meet the sales or bank account cash flow requirements, you can get approved.
• They don’t require collateral: Unlike many business financing options, you don’t need to provide collateral to secure a merchant cash advance. Instead, you allow the MCA provider to gain direct access to your payment processing or business bank account to collect payments.
• Payments tied to sales may not be oppressive: While MCAs charge high APRs, the daily payments tied to debit and credit card sales will go down if your sales go down. This approach to making payments as a percentage of your sales can come in handy compared to a term loan with a fixed monthly payment.
• They’re fast: If you meet all the eligibility criteria, you can typically get access to your MCA funds within a week. In contrast, some small business loans take weeks or even months to fund. If your capital needs are urgent, this can be a better option.

Why MCAs Are Usually a Bad Idea

Despite their benefits, merchant cash advances are not a good idea in most cases because the cons generally outweigh the pros. Here are some reasons to think twice about getting an MCA for your small business:

• They’re expensive: APRs can climb into the triple digits with merchant cash advances, making them one of the most expensive ways to obtain capital for your business. Even online business loans, which don’t have as stringent standards as traditional business loans, don’t charge that much.
• There’s no benefit to repaying early: The factor rate on a merchant cash advance is fixed, which means you’ll pay the same amount whether or not you pay down the debt early. With traditional business loans that charge interest, you can often save money by paying it down more quickly.
• The higher the sales, the more expensive in terms of APR: If your MCA is based on your credit and debit card sales, increasing sales will result in a faster repayment, but since the factor rate is fixed, you’ll only end up with a higher annual percentage rate on the debt.
• No federal regulations: Merchant cash advances are structured as commercial transactions, not loans, which means they’re not subject to federal oversight. They’re also not subject to the Truth in Lending Act, which provides several protections for borrowers. Instead, they’re subject to the Uniform Commercial Code (UCC).
• Contracts are confusing and potentially dangerous for your business: MCA contracts can be difficult to understand and can contain terms that are unfamiliar to you. Additionally, most merchant cash advance agreements include a clause called a confession of judgment. If you sign it, you’re essentially giving away your right to defend yourself if the MCA provider decides to sue you. In fact, they can sue you and obtain a judgment without notifying you in advance. Avoid these contracts if you can.
• They can compound cash flow problems: If you’re considering an MCA because of issues with your cash flow, getting an expensive form of financing that requires daily repayment may not be the best solution. Many small business owners find themselves needing another advance to help them satisfy the terms of their current one, and it could end up putting you through a vicious cycle of debt.
• They won’t help you build business credit: MCA providers typically don’t report your payments to the commercial credit bureaus, so if you’re looking to use one to build your business credit history, you’ll want to look elsewhere.

What to Get Instead of an MCA

If you need access to capital, there are plenty of better alternatives to a merchant cash advance, even if your business is new or your business credit history is in less-than-stellar shape. Here are some options to consider.

Business Credit Cards

A business credit card can be a good way to get access to a credit line for working capital purposes. These cards don’t typically have the same time-in-business and revenue requirements as traditional business loans, and you can even get one if you’re just starting out.

Additionally, small business credit cards can provide other benefits, such as rewards, insurance protections, and expense management tools to help you get value back every time you use them.

Just keep in mind that although most business credit cards don’t require a security deposit, you’ll likely need to provide a personal guarantee, which means you’ll pay off the debt if your business can’t afford to.

Also, in some cases, business credit cards can impact your personal credit, but if you use them responsibly, you won’t need to worry about negative consequences.

Online Business Loans

Several online lenders can offer fast funding and less stringent creditworthiness requirements than traditional business loans from big banks and credit unions. 

You’ll likely still need to meet certain requirements related to your time in business, revenues, credit history, and other factors. Also, you may be required to put up collateral to secure the loan. 

But if you’re looking for a short or medium-term business loan or a business line of credit, you can save money by going through an online lender instead of obtaining a merchant cash advance.

Equipment Financing

If you need money to buy some equipment or machinery for your small business, an equipment loan could be a good fit. These loans require you to use the equipment you’re buying as collateral, and you may need a large down payment.

But if you can make that happen, equipment financing typically carries low-interest rates compared to other types of business financing. You’ll also get a much longer repayment period, which can relieve a lot of pressure for you and your cash flow.

Get Money From Family and Friends

If you’re just starting out, one way to get help building your business from scratch is to request help from loved ones. This can be challenging if you don’t have a strong relationship, and you’ll want to draw up a contract to make sure that you repay the debt in a timely manner.

But these types of loans can be cheap or even free in terms of interest, and they can help you build your business without the pressure of daily payments from your sales or bank account.

Build Your Business Credit

Your business credit scores can impact your ability to obtain inexpensive financing for your small business, and while it may not help in a situation where you need capital urgently, taking the time to build business credit can open up much better opportunities in the long run.

One way to do this is to use other forms of financing discussed above since MCAs don’t report to the commercial credit bureaus. Another is to use a business credit builder account from Credit Strong. 

When you apply for a business credit builder account, the loan funds will be locked in a separate account as you make your monthly payments (over 5 or 10 years). 

As you make your monthly payments, Credit Strong reports them to the commercial credit bureaus, helping you establish your business credit history. Then once you’ve paid in full, you’ll receive the loan funds to use however you wish.

The post What Is a Merchant Cash Advance and How Does It Work? appeared first on Credit Strong.

Whether you’re a seasoned investor or new to real estate investing, you’re sure to hear about hard money loans at some point in your investment journey. Hard money loans offer an easier way to borrow money for some investment property purchases. 

Of course, there are also some significant downsides to hard money loans that you need to consider with care. Read on for a deeper look at how hard money loans work, along with the pros and cons you’re likely to encounter with this type of investment property loan. 

What Is a Hard Money Loan?

A hard money loan is a type of non-conforming real estate financing offered by a private, nontraditional lender. These short-term investment loans usually feature expedited repayment terms and high-interest rates. 

There is, of course, a trade-off for these less attractive loan terms. With hard money lending, the approval criteria you’ll need to satisfy can be a lot more lenient. Funding times on hard money loans are much faster compared to traditional investment property loans.

When you take out a mortgage, you usually have a month or more between the time the seller accepts your offer and the date of your loan closing. It’s not unusual for hard money loans, by comparison, to close and fund within a few business days. 

Hard money loans get their name from the asset that you use to back the loan — aka the property you purchase. If you fail to repay a hard money loan as promised, the lender can take possession of the property and sell it to a third party to recuperate its investment. 

How Does a Hard Money Loan Work?

With a private lender, the value of the property you wish to purchase is the most important detail on your loan application. You might qualify for some hard money loans with a bad credit score. But if the loan-to-value ratio is too high, you’re likely to receive a loan denial. 

Loan underwriting can be faster and less stressful with a hard money loan too. You might not have to supply as much documentation as you would with a traditional bank loan. For example, you might qualify without providing bank statements, tax returns, and more. 

Once an acceptable appraisal comes back, the final loan approval can move at a faster pace. 

But since the lender is accepting more risk with a hard money loan, you can expect to pay more —sometimes a lot more— for this type of real estate financing. 

Drawbacks of Hard Money Loans

It’s important to consider the risks and the drawbacks whenever you take out any new loan. And there are some significant disadvantages to think through before you move forward with hard money financing. 

Cost

One of the biggest reasons to pause before taking out a hard money loan is the cost. Every private lender is different. But it’s not unusual to see double-digit interest rates with this type of loan—perhaps 10 or more percentage points higher than you see with a conventional lender.

The average interest rate on a 30-year, fixed conventional loan is 3.12% in December 2021 according to Freddie Mac. Meanwhile, Rocket Mortgage says hard money loan rates commonly climb into the 8%–15% range. 

On top of high APRs, you may have to pay extra fees to the lender. Hard money loans could feature higher closing costs, origination fees, loan-servicing fees, and prepayment penalties. Some private loans may feature a balloon payment requirement at the end of the loan term.

Shorter Repayment Period

You usually have to repay the lender much faster with a hard money loan than you would with a traditional mortgage loan. This type of short-term loan might require repayment in just a few months.

Unregulated

A private investor, like a hard money lender, isn’t regulated by the Federal Reserve like banks, credit unions, and other lenders. With private money, you may not have the same consumer protections a traditional lender has to offer when you borrow money.

Of course, you could face this same drawback with other types of investment loans. Business loans and business credit cards, for example, don’t enjoy consumer protections either.

Benefits of Hard Money Loans

Despite the drawbacks listed above, you might want to consider a hard money loan under the right circumstances. If you’re comfortable with the risk, below are three benefits that working with a hard money lender could offer you. 

Convenience

Getting a hard money loan can be more convenient than a traditional mortgage or real estate investment loan. There are several reasons why this is true.

• Funding speed with private loans could be a matter of days, not weeks or months. 
• Usually these loans are used for making substantial renovations, so the property won’t have to be livable to qualify for financing.
• The lender might not make you prove where the money is coming from for closing costs or a down payment. 

Flexible Approval Terms

Hard money loans are primarily collateral-based. The value of the property matters most. If the investment makes sense from a loan-to-value (LTV) perspective, a private lender might approve your application even with credit problems, income challenges, or asset limitations. 

Private lenders still have some minimum hard money loan requirements that you have to satisfy for loan approval. Yet even in this scenario, the minimum credit score the lender accepts will probably be lower than you would encounter with a traditional loan. 

Collateral

Like most real estate loans, the property itself acts as collateral with a hard money loan. So, you probably won’t need to pledge additional assets to a private lender to secure financing.

If you default on a hard money loan, the lender can take possession of the property. This arrangement reduces the lender’s risk and ensures it has something of value to resell if it needs an alternative way to recover its investment. 

What Is the Down Payment Requirement for a Hard Money Loan? 

The down payment size a hard money lender requires from you can vary based on several factors. The loan amount, loan-to-value ratio, and other details can all have an impact here. 

In the best-case scenario, you might be able to get a private money loan with no money down. That can be an attractive feature for an investor who needs a flip loan for a quick resell. 

Yet in many hard money scenarios, you’ll need a big down payment instead of a small one. Some lenders may only be willing to finance 70% to 80% of the value of the property. It’s not unheard of for a hard money lender to want a borrower to put 30% or more down. 

When Should You Consider Working with a Hard Money Lender? 

Hard money loans tend to work best for fix and flip scenarios.

Taking out a hard money loan isn’t the right move for every real estate investor, nor every real estate transaction. If you’re not confident that you can rehabilitate and resell the property in a timely manner, the risks involved with a hard money flip loan are probably too high. 

In some situations, however, a private money loan could pay off and help you finance a profitable investment deal. Below are a few examples: 

• Hard money loans can be easier to get. They may work for investors that need financing and don’t have big lines of credit.
  
• They can give you a competitive edge. In a hot real estate market where you’re facing a lot of competition, the promise of fast money could help your purchase offer stand out compared to other interested buyers.
  
• You plan to resell the property quickly. If you’re buying a home to fix and flip, you might not need a loan that offers lengthy repayment terms. 

If you decide to move forward with a hard money lending scenario, take the time to shop around for the best hard money lender. When you compare multiple loan options, you can make sure you find the best deal available for your situation. 

In the long run, it’s wise to work to put yourself in a position to qualify for more affordable financing options. Working to build personal credit and business credit could help you. 

Note that your business credit scores and personal credit scores are separate. But depending on the type of financing you apply for, either or both of them might impact your approval odds. 

If you need to establish credit, a credit builder loan may be worth considering. Credit Strong offers credit builder loans for both individuals and small businesses, offering you the opportunity to build positive credit history with the consumer and business credit bureaus. 

FAQs

Do Hard Money Loans Require a Down Payment? 

The private money lender you work with and the loan details determine whether you have to supply a down payment with a hard money loan. No money-down loans are possible. But you could also face down payment requirements as high as 30% or more in some situations. 

Does a Hard Money Loan Appear on Your Credit Report? 

For a hard money loan to appear on a credit report, the lender must sign up to be a data furnisher with at least one credit reporting agency. Being a data furnisher is an involved (often expensive) process. So, most hard money lenders don’t share data with the credit bureaus. 

Before you apply for a loan, you can ask the lender if it reports account information to the business or consumer credit bureaus. Asking this question is the most reliable way to find out if a private money loan will show up on your credit report after closing. 

Do You Have to Make Monthly Payments on Hard Money Loans? 

Most hard money lenders will require you to make some sort of monthly payment on the loan. In some cases, however, the lender may set up an interest-only repayment schedule to help make up for the high-interest fees it charges. 

If you sell the property quickly, there might be a scenario where you never have to make a payment on a hard money loan. But that’s also true of any loan you pay off before the first payment is due. Watch out for prepayment penalties if a quick payoff scenario interests you. 

The post How Do Hard Money Loans Work?  appeared first on Credit Strong.

As a small business owner, obtaining capital for your business is a top priority. But not all business loans are created equal in terms of what they’re designed to help you do. 

If you’re looking to purchase equipment to run your business, equipment financing is your best option. Here’s what to know about what equipment financing is, how it works, how much it costs, and the pros and cons to consider before you apply.

What Is Equipment Financing?

Equipment financing is a type of small business loan designed to help you purchase equipment to help run your business. 

Examples of things you can buy with this type of financing include machinery, office furniture, medical equipment, heavy-duty vehicles, commercial ovens, and more. 

The amount of funding you qualify for is typically based on the value of equipment you’re purchasing with the loan.

You can typically get an equipment loan from a traditional bank, credit union, or online lender.

How Equipment Financing Works

An equipment financing loan is a secured loan, similar to an auto loan or mortgage. This means that the equipment you’re purchasing is used as collateral. If you can’t make your payments, the lender may seize the asset to recoup the remaining balance.

The amount you qualify for will typically be less than the value of the equipment. For example, if you’re purchasing some farm machinery worth $60,000, you may qualify for a $48,000 loan, which means you’ll need to make a 20% down payment to get approved.

Additionally, the term of the loan typically matches how long you plan to use the equipment. If you pick a repayment plan that’s too long, you’ll end up making payments for something you no longer use. Repayment plans can range from one to 25 years.

Because this type of financing is secured by the collateral you’re purchasing, it’s typically cheaper than other forms of business financing that aren’t secured. Traditional banks typically provide the best interest rates, but they also have the strictest credit standards and funding can take several weeks. 

Online lenders may be a better fit if you need a faster turnaround time on your funding or don’t meet the eligibility requirements from traditional lenders. But you may end up with a higher interest rate in exchange.

Typical Equipment Financing Costs

Depending on where you look, equipment financing interest rates can range from 2% to 30%. Again, traditional lenders, like banks and credit unions, tend to offer the lowest interest rates while online lender rates can be higher.

However, your rate will also depend on the type of equipment you want to purchase, your time in business, your annual revenue, and your business credit history. 

For example, you may need to have at least two years in business and $250,000 or more in revenues to qualify with a traditional bank. 

Regardless of which type of lender you apply with, the better your track record in these areas, the better your odds of getting approved with a low interest rate.

In some cases, you may also need to provide some information about your personal finances. That may include tax returns, your personal credit report and score, bank statements, personal debts, and more. 

Some commercial lenders may also require a business plan to show how you plan to use the equipment to build your business, along with your financial projections.

To give you an idea of how much an equipment loan will cost you in the long run, let’s say you finance a heavy-duty vehicle for $75,000 over 10 years with a 7% APR. 

Your monthly payment would be $870, and you’d end up paying $104,400 in total over the 10 years — that’s $29,400 in interest.

Equipment Financing Pros

There are many different benefits to using equipment financing to help build your business:

• Can be affordable: Because most equipment loans are secured, they typically carry lower interest rates than their unsecured counterparts. If you’re looking to minimize your costs and you qualify, this could be a much better option for your business than a standard term loan.
• You’ll own the equipment: Once you’ve paid the loan in full, you’ll own the equipment outright, giving you some flexibility. If the equipment is still in good working condition, you could even sell it and lease it back from the buyer to get an influx of cash.
• Can help build business credit: You may already have a good business credit history, especially if you’re getting your loan from a traditional bank. But even then, making your payments on time can help you continue to build and maintain a good credit history for your business, which can make it easier to get approved for other types of business financing in the future.
• Interest and depreciation are tax-deductible: As with other small business loans, the interest you pay is considered a business expense and, therefore, tax-deductible. Additionally, you’ll be able to deduct depreciation of the asset on your tax return. Consult with a tax professional to determine the best way to approach depreciation.

Equipment Financing Cons

Although there are some clear benefits to using an equipment loan, there are also some potential pitfalls to keep in mind:

• Your loan may outlast your equipment: If your equipment breaks down or fails before you’re done paying off your loan, you’ll be making payments on an asset that’s no longer helping your business.
• Can require a high down payment: If you don’t have enough cash on hand to make the required down payment, you may be forced to pursue a more expensive financing option like an unsecured loan or line of credit.
• More expensive than buying outright: Using financing in your business as leverage is generally a smart move. But if the interest rate is high and you have enough cash to pay for the equipment in full, it may be better to avoid expensive debt, especially if you’re just starting out.
• Missing payments could damage your credit: Just as on-time payments can help build credit history, missing a payment or two could have a negative impact on people’s business credit scores. In cases where the lender requires a personal guarantee, it can also impact personal assets and credit scores. 

Build Your Business Credit to Have More Financing Options

The best interest rates on equipment financing necessitate a strong track record, including a strong credit history. If your business credit score isn’t where it needs to be, consider taking the time to build your credit before you apply for equipment financing.

One way to do this is with the Credit Strong business credit builder account. 

Unlike a traditional loan, Credit Strong deposits the loan funds into a separate account and locks them while you make payments. Then, once the loan is paid in full, you’ll get the loan funds, which you can use however you want.

Credit Strong offers a 60-month and a 120-month term, and your monthly payments will be reported to the commercial credit bureaus Equifax and PayNet — and soon, Experian and SBFE. 

You can qualify for a Credit Strong credit builder account if your small business is at least three months old. 

When you apply, there’s just a soft credit check, which won’t impact your credit score. There is interest on the loan, but over time, you’ll be able to establish a solid business credit history as a result.

The Bottom Line

Equipment financing can be a great way to purchase the equipment you need to build your business. However, it’s important to take your time to shop around and compare several lenders to determine the best fit for you. 

If you don’t need to make the purchase immediately, consider taking steps to build your business credit so that you can improve your chances of securing favorable financing terms.

The post What to Know About Equipment Financing appeared first on Credit Strong.

Building a business without the right amount of capital can be incredibly difficult, so it’s common for both new and established businesses alike to borrow money and leverage that debt to grow the company.

Microloans for small businesses are just one of many types of business financing from which you can choose, though their unique features make them more appealing to new business owners. 

Here’s what you need to know about how microloans work, how to get one, and what you should consider before applying.

What Is a Microloan?

A microloan is a small business loan that provides a small amount of funding, primarily for newer businesses. Depending on where you look, these loans can range from $500 to $50,000. 

Because they’re on the smaller side compared to other business loans, microloans tend to be used for startup costs, working capital needs, and small investments in inventory, supplies, and other expenses that startups need to get their businesses off the ground.

Microloans are generally more affordable than short-term business financing options, but their eligibility requirements typically aren’t as stringent as you’ll find with traditional bank loans, particularly when it comes to your revenue figures and operating history.

Microloans are typically available from banks, credit unions, and nonprofit organizations. You can also apply for a microloan through the Small Business Administration’s microloan program. 

While the loan is actually originated by an intermediary organization, it’s partially guaranteed by the government agency.

Microloans are available for various types of small businesses, but many microloan programs are designed specifically to help low-income communities.

They are also designed for groups that have been historically underserved by commercial lenders, including women, minorities, people with disabilities, and veterans. 

How Do Microloans Work?

Microloans are term loans, which means that they function similarly to a personal loan or an auto loan, at least in terms of being a form of installment credit.

When you take out a microloan, you’ll receive a lump-sum payment for the amount of the loan. Then, you’ll pay it back over a set repayment period in equal installments. They typically have fixed interest rates, so you don’t have to worry about your monthly payment changing.

Microloans, which typically provide $50,000 or less in funding, charge relatively reasonable interest rates, especially compared to online business loans. 

Depending on where you look, interest rates are often lower than 20%. Some may charge no interest at all, while others may charge upwards of that threshold.

Depending on the lender and the loan amount, microloans may have repayment terms ranging anywhere between a few months and several years. 

When you receive microloan funds, you can use the money for just about anything you want. However, they’re typically used for the following purposes:

• Working capital
• Inventory
• Supplies
• Furniture
• Fixtures
• Machinery
• Equipment

Certain microloans may have restrictions on how you can use the funds. For example, you may not be able to use one to consolidate existing debt or to purchase real estate. 

Like many other small business loans, microloans typically require a personal guarantee when you apply. We’ll cover that more in a minute. 

Best Types of Microloans for Small Businesses

As previously mentioned, there are a few different ways you can obtain a microloan for your business. Depending on the source, the requirements and terms of the loan can vary. As a result, it’s important to shop around and consider multiple options before you settle on one.

Also, keep in mind that some lenders may have special microloan programs tailored to meet the needs of specific communities and groups of business owners. The more research you do, the easier it will be to find the best fit for you and your business. 

With that said, here’s what you should know about SBA microloans, bank microloans, and nonprofit microloans.

SBA Microloans

The SBA microloan program provides loans of up to $50,000 to eligible small businesses and not-for-profit childcare centers. While it’s possible to get up to that amount, the government agency states that the average SBA microloan is $13,000.

Instead of originating the loans itself, the SBA works with intermediaries — nonprofit community-based organizations — to administer the microloan program for eligible borrowers.

This means that you’ll apply directly with one of those organizations rather than the SBA. Each intermediary has its own eligibility requirements, but you can generally expect to provide some form of collateral and a personal guarantee in the event that your business can’t repay the debt.

To find an authorized SBA microloan lender in your area, you can contact your local SBA district office.

As with the eligibility criteria, interest rates and repayment terms can also vary from lender to lender. That said, the SBA states that interest rates generally range from 8% to 13%, which is much cheaper than an online business loan or a business credit card. 

Your repayment period will generally be based on the amount, how you plan to use the funds, your business needs, and the lender requirements. The maximum repayment term allowed by the government agency is six years.

SBA microloan funds cannot be used to pay existing debts or to purchase real estate.

Bank Microloans

It’s possible for local banks and credit unions to offer microloan programs, but it’s not very common. You’ll be hard-pressed to find one from a major bank. 

If you find a bank or credit union that offers a microloan program, the terms and eligibility requirements likely won’t be as predictable as they are with SBA loans. Instead, everything will depend on the financial institution that’s offering the loan.

You can also obtain a small loan from an online lender, with some offering loan amounts under $1,000. But these loans typically come with high-interest rates, and you may also need to have a certain amount of time in business and meet minimum annual revenue requirements.

Finally, if you’re just starting out, you may also consider a personal loan to help you start your business. You can get a personal loan from many big and small banks, as well as from credit unions. 

Keep in mind, though, that some lenders don’t allow you to use personal loan funds for business purposes.

Personal loans are generally unsecured, so you don’t have to worry about putting up collateral. Interest rates can also be lower than online business loans. 

However, they won’t help you build your business credit scores, so it may only be worth it if you can’t find any other business loan options. 

Nonprofit Microloans

There are several nonprofit organizations that offer microloan programs for startups and other small businesses. These microloan programs typically don’t have stringent credit requirements, and many of them are targeted toward minority business owners.

They can also be incredibly cheap, though they may also have lower loan limits than what you’ll find with the SBA microloan program. For example, the Kiva microloan program only offers loans as high as $10,000, but there’s no interest. 

The process of getting a microloan from a nonprofit organization can vary. In some cases, you may need to get the process started by crowdfunding peer-to-peer involvement from your friends and family. 

In others, you may be part of a lending circle, where each business owner receives a loan in turn, with the other business owners in the circle funding the loans.

As with other institutions that offer microloans, it’s important to take your time to shop around and consider multiple options from nonprofit organizations to determine the best fit for you and your business needs.

How Do You Qualify for a Microloan?

Microloans are specifically designed to help startups and other small businesses in the early stages of their development. However, all small businesses are eligible to apply for one, as well as certain nonprofit child care centers (for the SBA microloan program).

Unlike many traditional small business loans and lines of credit, microloans can be available to you, even if you don’t have an established business or personal credit history. 

You also don’t necessarily need to have annual revenues yet, though some SBA microloan lenders may have some requirements in place related to these things.

And while any small business owner can apply, most microloan programs are geared toward women and minority-owned businesses, as well as veterans, people with disabilities, and small businesses located in low-income communities.

Application and document requirements can vary if you’re getting a loan through a nonprofit microloan program. When you apply for a microloan through the SBA microloan program, you may need to provide the following information and documentation:

• Business plan
• Recent tax returns (typically two years)
• Recent pay stubs
• A list of collateral options
• Contracts or purchase agreements, if applicable
• Business tax returns
• Balance sheet
• Income statement
• Cash flow statements and projections
• Business licenses
• List of existing business assets

Note that if you’re just starting out, you may not have some of these. Don’t fret, though. You may still be able to qualify for a microloan without an established business operation.

In addition to collateral, you’ll typically be asked to provide a personal guarantee when you apply for a microloan. 

This clause, which is also known as a joint and several liability clause, states that if your business can’t repay the debt it’s incurred, that you’ll be held personally liable to pay it off.

In other words, you’ll have to use your personal assets, such as income, savings, or other assets, to pay off the debt. If you don’t, the lender may sue you to collect the outstanding balance.

What Is a Microloan Used For?

Microloans for small businesses can be used for many different purposes. As outlined above, that can include:

• Working capital
• Inventory
• Supplies
• Furniture
• Fixtures
• Machinery
• Equipment

Depending on where you get the loan, there may be restrictions like the ones in place for the SBA microloan program. But that’s not always the case. 

As you consider whether a microloan is right for you, take some time to determine how you plan to use the funds. Think about how it will help grow your business and whether it’s the best way to help you achieve that goal.

Also, think about the potential consequences if you can’t repay the debt. While it might make sense to use a microloan to furnish your office, is that what your business needs right now? 

And if your business doesn’t generate enough cash flow to make those payments, how do you feel about paying it back with your own assets?

In other words, before you take out a microloan — or any small business loan for that matter — think carefully about whether it’s the best move for your business right now.

Microloan Advantages and Disadvantages

As with any small business loan, there are both benefits and drawbacks to using a microloan program to help fund your business. If you’re thinking about getting a microloan, here’s what you should keep in mind.

Pros

• Lower eligibility standards: Not only are microloans available to new businesses, but they can also be accessible even if you don’t have strong business credit or personal credit.
• Accessible for underserved groups: Women and minority entrepreneurs have historically had a difficult time obtaining affordable financing for their business ventures. The same goes for veterans and people with disabilities. If you belong to one of those communities, a microloan may be the ticket you need to build your business.
• They help build business credit: Unlike a personal loan or personal credit card, you can use a microloan to build your business credit history, making it easier to obtain financing again when you need it in the future.

Cons

• Low loan limits: Microloans max out at $50,000, but many lenders offer much lower loan amounts than that. Depending on how much you need, it might not be enough to accomplish your plans.
• Collateral and personal guarantee: You’ll likely be personally on the hook for repaying a microloan if your business can’t. That’s true for many other business loans as well, so it’s important to carefully consider all of your options before applying.
• Can be a long process: If you’re applying for an SBA microloan, it can take several weeks or even months to complete the application and approval process.

The Bottom Line

Microloan programs can be a great way to get the funding you need to get your business off the ground. 

They don’t have the same strict eligibility requirements as traditional bank loans, and with the right program, you don’t have to worry about drowning in high-interest charges or crippling monthly payments.

However, microloans for small businesses aren’t a guarantee, even if you belong to a community of business owners that are designed to help. And if you need more money than what microloan lenders are willing to provide, you may need to seek out alternatives. 

Do your due diligence to determine whether a microloan is right for you, and take your time to compare multiple loan programs to find the best fit for your business.

The post Microloans for Small Businesses: What You Need to Know  appeared first on Credit Strong.

If you need an influx of capital in your business, there are several different types of financing you can rely on. Two of the more traditional options include business lines of credit and business term loans.

Deciding between a business line of credit and a loan generally comes down to what you need for your business, as well as the terms you want for paying back the debt. Here’s what you need to know about both options and how to choose the right one for your business.

What Is a Business Loan?

A business loan, also typically referred to as a term loan, is a form of installment credit. This means that you’ll receive the loan amount upfront. That amount is then amortized over a set repayment term to give you equal monthly payments to repay what you owe.

Depending on what you need, there are a few different types of business loans from which you can choose. 

Short-term loans may have a repayment period ranging from three to 24 months and can be used for various working capital needs, such as buying inventory, supplies, furniture, and more.

Long-term business loans will often have terms ranging from three to 10 years, or sometimes even longer. These loans are often used to help expand your business by giving you the funds you need to make major investments in your products or services, equipment, and more.

Business loans are available from traditional banks, credit unions, and online lenders. You can also get a term loan that’s partially guaranteed by the Small Business Administration (SBA).

For term loans from banks and credit unions (including SBA loans), the requirements to get approved are generally strict. 

This means you’ll need to have an operating history of a few years or more, an established business credit history, and strong revenues. In many cases, you may also be required to provide collateral or, in the case of equipment financing, put money down.

In exchange for the tighter requirements, you can generally enjoy lower interest rates and fees, as well as longer repayment periods with more affordable payments.

If you’re looking for a short-term business loan from an online lender, eligibility criteria can be less stringent, which can work better for small businesses that are newer or don’t yet have a strong business credit history. 

The trade-off, of course, is that you’ll typically end up with higher interest rates and fees as well as shorter repayment periods.

What Is a Business Line of Credit?

A business line of credit is a form of revolving credit, which functions differently than an installment loan.

Instead of getting a lump-sum payment upfront, business lines of credit offer you a credit line that you can use over and over again — similar to a credit card. 

You can borrow up to a set limit, but you only have to pay interest on the amount that you’ve borrowed rather than the full credit limit.

There are generally two different periods with a business line of credit: a draw period and a repayment period. 

During the draw period, you can take draws from your credit line, and you’ll typically make interest-only payments on those draws during that time. That said, you can pay off the principal balance and reborrow it for other purposes.

Once the draw period ends, you’ll enter the repayment period. At the start of the period, your balance will be amortized over a set period of time, during which you’ll make regular monthly payments as you would with a business loan.

The main difference is that lines of credit may have fixed or variable interest rates, whereas term loans typically only have fixed rates.

Lines of credit can be short or long-term in nature, depending on your needs and creditworthiness. As with term loans, you can get them from banks, credit unions, and online lenders. 

Lines of credit from banks and credit unions typically offer better terms, but you’ll also need to meet stricter standards for approval.

In contrast, online lenders that offer lines of credit may charge higher interest rates and have shorter repayment terms. 

This type of financing is best suited for small businesses that have short-term capital needs but also want the ability to borrow on an ongoing basis instead of just once.

Differences Between a Business Line of Credit and a Business Loan

There are several differences between business lines of credit and business loans. Understanding these differences can help you better determine which is the right fit for your small business.

Purpose

The primary reason you’d pick a term loan over a line of credit is if you only need to borrow money once. Regardless of the reason, you’d get this loan if you don’t anticipate needing an open line to more credit access in the near future. 

Business loans are also more commonly used for big investments, such as equipment or machinery. 

On the flip side, a business line of credit may be the better choice if you want ongoing access to a revolving credit line. 

You can get this same arrangement from a business credit card, but lines of credit may offer much higher credit limits. Additionally, they give you more flexibility with how you can access your funds. 

Interest Rates

With a small business term loan, you’ll typically have a fixed interest rate, which means your rate and monthly payment won’t change for the life of the loan.

In contrast, business lines of credit may come with a fixed or variable interest rate. There may also be lines of credit that allow you to convert a balance with a variable rate over to a fixed rate with a set repayment term.

If you’re stuck with just a variable interest rate though, it will fluctuate over time with market rates, which means it could end up being more expensive.

Repayment Terms

With a term loan, you’ll have fixed monthly payments for the duration of the loan’s repayment schedule. This makes the process more straightforward, and you’ll know what your monthly payments will be at the start of the contract.

With a line of credit, though, you’ll just have a minimum monthly payment throughout the draw period, similar to a credit card. The payment won’t be fixed because you’re generally just paying interest, and it will be dependent on how much your outstanding balance is for that month.

Once the draw period ends and the repayment period begins, though, you’ll have a more predictable monthly payment that includes both principal and interest.

Loan Amounts

Depending on where you look and the size of your business, you can get both term loans and lines of credit in the millions of dollars. In general, it’s easier to get a larger term loan than a line of credit. 

What’s more, some banks may be less interested in offering smaller loans, but you may be able to get a line of credit for the amount you need.

What’s Better: A Business Loan or Line of Credit?

Ultimately, neither a business line of credit nor a business loan is inherently better than the other. It all depends on what you need and your goals for the future. Here are some questions to ask yourself to help you determine which is the better option for you and your company:

• How much do I need to borrow? Depending on how much money you need, either option may help you meet your needs. But if you need a large long-term loan, a line of credit may not be the best choice. On the other hand, if you don’t need to borrow a lot, you may be better off with a business line of credit.
• How do you plan to use the money? If you have a specific reason for borrowing money for your business and only need to borrow once, a term loan is likely the better fit between the two. But if you simply want open access to borrowing money as you need it over the coming months or years, a business line of credit will give you the flexibility you need.
• How does your cash flow look? If you can handle predictable monthly payments based on a fixed interest rate and set repayment term, consider a small business loan. However, if you want some more flexibility with lower monthly payments in the near term, a line of credit that has an interest-only payment period could be the better choice.
• What does your creditworthiness look like? You can get both term loans and lines of credit with good, fair, or even bad credit. But a variable interest rate that starts out high can ultimately cost you a lot more than one that starts out low. In that case, a term loan may be a better choice. Even if the rate is high, it’s fixed, so you don’t have to worry about it going up anymore.

As you try to decide which financing option is better for you, take your time to consider these and other questions to find the best fit. 

Does a Business Line of Credit Affect Your Credit Score?

As with most other forms of business financing, a business line of credit can impact your business credit scores. 

While there are different scoring models for businesses, many of them consider your payment history, mix of credit, and your credit utilization rate, among other factors.

As long as you pay your bills on time, you won’t have to worry about your business credit getting dinged. 

You’ll also want to try to avoid borrowing too much of your available credit. If your utilization rate — the percentage of your credit limit that you’re using at a given time — is too high, it could potentially hurt your business credit scores.

This is because it could indicate that you’re having trouble meeting your everyday expenses without the help of financing. It could also mean that you don’t have the cash flow necessary to support another loan or line of credit in the future.

But as long as you use your line of credit wisely, it can help improve your business credit history instead of hurting it.

The Bottom Line

If you’re trying to decide between a business line of credit and a loan, take your time to consider the strengths and weaknesses of each option to determine which is best for you. At the same time, consider other forms of financing that could help meet your needs. 

Alternatives may include microloans, vendor net 30 accounts, invoice financing, invoice factoring, crowdfunding, and more.  

The post Business Lines of Credit vs Loans: How to Compare appeared first on Credit Strong.

Starting a new business can get expensive fast. Whether you’re purchasing new equipment, getting supplies, or buying inventory, it can feel like there’s not enough cash flow to make it work.  

In this article, we’ll make it easier on you by uncovering what to expect from government small business loans and how to prepare for them.

How To Prepare To Get A Business Loan From The Government

The Small Business Administration (SBA) partners with lenders, banks, and credit unions to provide loans to small business owners who are in the process of expanding their business or just starting one. 

Since these loans are backed by the SBA, the financial institutions providing the loans take on less risk. This gives startup business owners who don’t qualify for traditional bank loans a better chance at getting approved for financing that’s vital to the growth of their business. 

These small business loans help provide funding used for:

• Working capital
• Purchasing equipment
• Buying real estate
• Purchasing inventory
• Business expansion

Sound like exactly what you need? 

First, you’ll need to take a few steps to get started before jumping into the loan application. Even though these loan programs cater to small business owners who don’t qualify for traditional financing, you still have to meet certain standards to get approved. 

To get a government small business loan, you’ll want to follow these steps to become prepared:

1. Review Your Business Credit and Personal Credit 

SBA loans have a minimum SBSS business credit score of 155 for most of their loans. If you don’t know what your business credit scores are, don’t wait for a denied application to check it out. You can use sites like Nav.com to check your scores for free. 

In addition to your business credit score, check your personal credit score as well. Most business loans require a personal guarantee. So, your credit score needs to be at least 650 depending on which SBA loan you decide to apply for. 

Being aware of your credit scores also gives you a hint at what your interest rate will look like.

2. Develop a Business Plan 

Lenders want to see a solid plan on how your business makes money. This includes income projections, projected expenses, and even how you plan to repay the loan. Show what you plan to do with the funding and how it can help your business.

If you’re going for an “SBA Community Advantage Loan” or government grants for specialized causes, you’ll want to include your company’s mission and how it relates to helping them meet their goals.

3. Research Which Lender to Use

It can be helpful to check with your home bank first. They already have a lot of your financial information and account history. This streamlines the application process. Don’t think you’re limited to the bank your current accounts are with though.

Be sure to check out what other financial institutions are offering too. Compare the bank’s reputation, APRs, credit score minimums, repayment terms, loan amounts, and added fees. 

4. Review Eligibility Requirements 

The SBA has its own set of requirements to qualify for one of its loans. You have to meet their size standards as well as their basic eligibility requirements. 

Typically this means your business is officially registered in the United States as a for-profit company. You’ll also need invested equity in the business and haven’t qualified for loans from other banks, credit unions, or alternative lenders.

This makes these small business loans perfect for business owners with bad credit.   

5. Take Stock of Collateral 

For any loans over $25,000, the SBA and your lender will require collateral to back the loan. This can be anything from commercial real estate, heavy equipment, vehicles, or other assets. 

If your business doesn’t have good financial standing, collateral could be required for a government business loan under $25,000. Decide which assets you would be willing to collateralize if necessary.

6. Collect Documentation 

Whether you’re getting a government loan, term loan, or other financial assistance, you’re going to need the documentation to back it up. If you’re pressed for time to get funding, this saves you a few days of back and forth with underwriters. 

You should always try to gather documents ahead of submitting a loan application. It reduces how often the underwriting department has to request additional information. Put together documents such as:

• A well-written business plan
• A year’s worth of bank statements (personal and business)
• Two years of tax returns (personal and business)
• Financing history and decisions
• Business licenses
• Profit and loss statements
• Proof of ownership

Each bank has different document requirements for startup business loans. These are just the basics. Depending on your loan type and bank, more or less documentation might be needed. Your loan officer can give specific info about the documents needed. 

7. Submit Your Application

Once you’ve done your research, chosen a loan type, and collected the necessary information, you can fill out and submit your application for an SBA loan. Here’s where you’ll need to have some patience. 

The process of getting an SBA loan can take several months if it’s not an SBA express loan. The downside is that the express loan calls for higher credit scores for both personal and business.

If you need the working capital sooner rather than later, you might consider the SBA express loan, business credit cards, or merchant cash advances. 

Types Of Government Business Loans:

There are several types of small government business loans made to help you start or expand your business. We’ll cover the three most popular loan options here, but for details on other SBA loans, check out our article: How to Qualify for An SBA Loan. 

SBA Microloan

The SBA microloan is made for underrepresented small business owners who need loan amounts of $50,000 or less to fund their businesses. It’s a loan program for veterans, people of color, and women entrepreneurs who struggle with credit issues or have low incomes. 

In the 2021 fiscal year, the SBA backed 4,510 microloans with an average loan amount of $16,555. The funding is used for working capital, equipment purchases, inventory, supplies, and other materials. And over 80% of these loans were used in urban areas. 

Want an SBA microloan for your business? Be aware of the interest rates and additional fees that come with this financing option. Lenders are allowed to charge reasonable fees up to 3% of the loan amount with loan terms of 12 months or more.

Loan closing fees are also included and can be financed as part of the loan. The interest rates for a microloan can range from 7.5% to 17.50% depending on creditworthiness. Meanwhile, loan terms can be up to eight years for this loan. 

SBA Community Advantage Loan

The SBA Community Advantage Loan is still in its pilot phase. But don’t let that discourage you. These loans are built for mission-oriented businesses that plan to revitalize traditionally underserved communities. 

Loan amounts for this working capital loan are much higher at $250,000. In addition to financing working capital, the funding can be used towards inventory, supplies, and other expenses. 

To qualify for this loan, your business has to meet the SBA size standards and have proof of a viable business idea. 

The credit score requirements for this loan program are lower than the other SBA loans with a minimum SBSS score of 140 and no minimum personal credit score through the SBA. 

The personal credit score requirements may vary based on the lender you go through. This financing option could be considered a low interest loan compared to the microloan. APR tends to range from 7% to 9%, on average. 

SBA 7(a) Loan

Last, but certainly not least. The SBA 7a loan is the most popular small business financing available through the government. This general-purpose financing boasts extreme flexibility. You can get anywhere from $30,000 up to $5 million in funding for your startup. 

You have the choice between a fixed and variable interest rate along with repayment terms ranging from 5 to 25 years depending on the loan’s purpose. These are very attractive factors to business owners who meet their eligibility requirements. 

Your business has to meet a FICO SBSS score of at least 155. For the best approval odds, your personal credit should be at 650 or higher. For financing needs over $25,000, you’ll have to come prepared to do a personal guarantee along with putting up collateral. 

Interest rates for SBA 7a loans range from 5.5% to 11.25%. The better your credit rating, the better your interest rate will be. Similar to other SBA loans, you have to come prepared with a business plan showing how you’ll use the funding and projected revenues from operations.

The great part about the 7a loan is that there’s an option for an express decision — otherwise known as an SBA 7a Express Loan. This carries higher credit and financial requirements, but you get the benefit of a loan decision within 24-36 hours instead of several weeks. 

Small business loans from the government are a great solution compared to business credit cards or even using personal savings to get things up and running. The process to get one can take a few months. There are a few things you can do to prepare yourself for the process. 

But If you can’t wait that long, other financing options might work better for you. Businesses affected by natural disasters and pandemic-related issues might qualify for Economic Injury Disaster Loans if they haven’t already taken advantage of the PPP loan. 

Disaster loans provide funding to businesses that have fallen on hard times. If your business is located in a rural area, you might look into a USDA loan instead.

Other traditional financing methods could help if you aren’t able to qualify for an SBA loan. Take some time to look into term loans, invoice factoring, or merchant cash advances. These funding options might fit your needs better and could equal faster access to funding. 

The post How To Get A Loan To Start A Business From The Government appeared first on Credit Strong.