Small-business loans can be critical to your success as a business owner, whether you're stocking your shelves, buying equipment or expanding your footprint. Traditional banks are no longer the only sources of business financing. With online lending, you now have access – often quickly – to various funding options, from SBA loans and business lines of credit to term loans and invoice-based financing.
In response to the economic fallout from the coronavirus pandemic, small-business owners and self-employed workers have access to new relief loans provided under a new stimulus package. The application for Paycheck Protection Program reopened in January 2021.
Small-business loans
Small-business loans are typically issued only for businesses with a year or more of history and revenue. Among the financing options for entrepreneurs who qualify are U.S. Small Business Administration loans, term loans, business lines of credit and invoice factoring. Startups operating for less than a year can consider other financing options
Types of small-business loans
PAYCHECK PROTECTION PROGRAM LOANS
PPP, which was designed to keep employees on the payroll, reopened in January. Small-business owners impacted by the COVID-19 pandemic can apply for first or second PPP loans.
SBA LOAN
The government-guaranteed SBA loan program works with banks to offer low interest ratess and long-term repayment. But the process is time-consuming, and the requirements are strict. Only those with good personal credit (690 or higher, although some SBA lenders may have lower score requirements), strong business finances and the flexibility to wait for funding should apply.
-Loan amounts: $30,000 to $5 million.
-Approximate APR range: 5.50% to 8%.
-Good for large one-time and longer-term investments, purchasing real estate or equipment, buying existing businesses and refinancing debt.
BUSINESS TERM LOAN
Online lenders offer term loans of up to $500,000. For a short-term loan, the repayment period typically ranges from six to 12 months, while a long-term loan repayment can extend up to 10 years or longer in some cases. Business owners can also find financing that can be used for specific items, like equipment or inventory.
-Loan amounts: $500,000.
-Approximate APR range: 9% to 99%.
-Good for large one-time investments.
BUSINESS LINE OF CREDIT
A business line of credit provides access to flexible cash. Similar to a credit card, lenders give you access to a specific amount of credit (say, $100,000), but you don’t make payments or get charged interest until you tap into the funds.
-Credit line range: $2,000 to $250,000.
-APR range: 10% to 99%.
-Good for managing cash flow, handling unexpected expenses and financing short-term business needs.
INVOICE FACTORING AND INVOICE FINANCING
Invoice factoring turns business owners’ unpaid invoices into immediate cash. You sell the invoices to a factoring company, which is paid when it collects from your customers. If you prefer to maintain control over your invoices, invoice financing is an alternative to factoring. Time to funding can be relatively short with invoice factoring or financing.
-Financing amounts: Up to $5 million.
-APR range: 10% to 79%.
-Good for managing cash flow, short-term financing.
Additional funding options
Business financing options other than traditional loans or lines of credit include personal loans for business or business credit cards. Apersonal loan for business is a good option if your business is still young and you don’t qualify for traditional financing. Personal-loan providers look at your personal credit score and income instead of your business history.
A business credit card offers revolving credit, making it a solid option for short-term expenses. It can also be easier to qualify for a business credit card than a small-business loan. While credit limits tend to be smaller than a line of credit, a business credit card may offer rewards, such as cash back or travel points.
How do I get a business loan?
Every lender has different underwriting guidelines, but they generally consider similar factors, including personal credit score, your time in business and annual revenue. Lenders also consider your cash flow and ability to repay the debt.
Banks that offer small-business loans typically require a strong personal credit score (starting in the 700s), several years in business and a solid track record of business finances such as strong cash flow. In some cases, banks will require collateral.
Depending on the lender, you’ll be asked to share financial documents like tax returns, and bank and cash-flow statements. Read more about how to get a small-business loan