Business Loans

SBA loans

The Small Business Administration (SBA) loan program is one of the most popular types of business financing and for good reason. Thanks to government backing, they come with some of the lowest rates out there.

The SBA also sets caps on loan amounts, interest, fees, requirements, and terms, making it a low-cost option for small businesses.

Term Loan

A Term Loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. Term loans are normally meant for established small businesses with sound financial statements. In exchange for a specified amount of cash, the borrower agrees to a certain repayment schedule with a fixed or floating interest rate. Term loans may require substantial down payments to reduce the payment amounts and the total cost of the loan.

Term loans carry a fixed or variable interest rate and a set maturity date. If the proceeds are used to finance the purchase of an asset, the useful life of that asset can impact the repayment schedule. The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments. As noted above, some lenders may require down payments before they advance the loan.

Business Line of Credit

How does a business line of credit work?

A business line of credit is a type of business financing that works a lot like a business credit card. It gives your business access to a specific amount of funds, called a credit limit, which it can withdraw from as needed. Usually these range from $1,000 to $250,000.

Typically it takes between a few hours and a few days for a withdrawal to appear in your business bank account. In some cases, each withdrawal turns into a short-term loan, which you repay plus interest and fees. In others, the lender requires your business to make a minimum monthly payment on the balance similar to the way you pay off a credit card.

Most business credit lines are revolving, meaning that as you pay off your withdrawal, the balance replenishes. But in a few cases, lenders offer nonrevolving lines of credit. These can’t be used again after they’re paid off.


Secured vs. Unsecured Business lines of credit

Often, your business will have a choice between a secured line of credit and an unsecured line of credit.

A secured line of credit is backed by your business’s assets often inventory, accounts receivable, or a general lien on business assets. This means if you default on your line of credit, the lender can seize the collateral to make up for the loss.

An unsecured line of credit does not require collateral. However, many still require a personal guarantee from all small business owners with a 20% stake or more in the company which is also a requirement for most secured credit lines. This means that the owners are responsible for paying the line of credit if the business can’t.

A secured line of credit often comes with lower rates and fees than an unsecured line of credit. And backing your credit line with collateral can help you qualify for a higher credit limit. However, unsecured credit lines often have a quicker turnaround time when you first apply.

Pros and cons

Lines of credit can be highly beneficial to small businesses, there are some highlights and drawbacks worth noting before you sign up.


* A business line of credit gives you a safety net for unexpected costs, helping you avoid expensive short-term loans. You only pay interest on what you use, rather than taking out a larger term loan more than you need and paying more interest than necessary.

* You can often qualify for lower rates and fees than a credit card. This can help you save on regular expenses that add up in the long run, like office supplies. It gives you access to cash, not credit. Cash is often required for costs like payroll, hiring contractors, and paying rent or utilities. It can help you develop a long-term relationship with a lender, which can lead to lower rates and loyalty discounts down the road.


* Credit limits are often lower than term loans, making it less-than-ideal for a large, one-time expense.

* Minimum withdrawal requirements can force your business to borrow more than it needs. These are particularly common during the first six months your small business has a credit line.

* Business lines of credit come with more fees than a term loan. This can make them appear less expensive than they actually are if the lender only advertises the interest rate.

* Variable interest rates are more common with lines of credit. These typically increase when the economy is doing well and decrease during a downswing.

Vehicle Financing

Business Vehicle Financing?

Business vehicle financing refers to several different borrowing options that can help cover the cost of a new car, truck, van, or other vehicles for business use. Your options are similar to auto loans, but you might not have the same selection of lenders and could have to meet different application requirements.

Which type of financing works best for your business depends on a range of factors including its financial situation, taxation needs, and whether you’ll use the vehicle solely used for business purposes or a mix of business and personal use.

Equipment Financing

Equipment financing is a type of business loan specifically for purchasing business equipment from construction equipment to office furniture. With this type of financing, the lender bases your loan amount and term on the equipment itself.

Usually, you can finance between 80% to 100% of the equipment’s value and receive a loan term based on how long your lender thinks the equipment will be useful often around five years. Typically equipment small businesses repay the loan with monthly payments. When the term is up, your business will own the equipment outright. But at that point, it might be time to take out another equipment loan.

Merchant Cash Advances (MCA)

A merchant cash advance is a type of business financing for companies that have a large amount of credit card sales. Your business gets quick access to revenue from sales and then repays it plus a fixed charge based on a percentage of your sales. Merchant cash advances can be set up as daily or weekly financing.

Merchant cash advances are designed to provide a temporary cash flow solution to business owners who might not be able to qualify for other types of financing. It’s typically fast, but it can be one of the more expensive business financing options out there.

Invoice Financing

Invoice Financing?

Invoice financing, also known as accounts receivable financing, is an advance on your business’s outstanding invoices. It’s an asset-based loan that gives your business the cash flow it needs to pay employees and cover overhead costs while you wait for customers to fill unpaid invoices.

Invoice financing is usually easier to qualify for than most business loans all you really need are unpaid invoices. But like other cash advances, it’s pricey. Consider less-expensive alternatives like a business term loan before going for an advance.

Pros and Cons

* Fast turnaround of as little as one business day

* Minimal paperwork compared to a bank loan

* Less expensive if your clients pay on time

* Available to business owners with bad credit

* Can be costly if clients take more than a month to pay

* Difficult to predict total cost ahead of time

* Often requires a long-term commitment

* Not available to consumer-facing businesses

Pros of Invoice Financing

* The main benefit of invoice financing is that it’s a fast form of financing that relies on your customers’ credit, rather than your own. If you apply with an online invoice financing company, you can often get your funds in as little as 24 hours. And it requires less paperwork than most business financing options. You can also often qualify if you have bad credit or less than a year in business.

Cons of Invoice Financing

* The main drawback of invoice financing is the cost. It can get expensive if your clients take a couple of months to fill their invoices. And if they don’t pay at all, your business is often responsible for covering the advance.


Since the payment timeline is out of your business’s control, it can be difficult to predict how much it will cost ahead of time. And factoring companies often require you to commit to several months of invoice financing meaning you could be on the hook for financing you don’t need. Those that don’t tend to charge a higher fee.

Invoice Factoring

Invoice factoring lets your business unlock money your clients owe by selling their invoices to a third party for a fee. It can be a great source of working capital, especially if your business is in an industry that has a hard time getting a loan. But there are several different types of factoring to choose from and not all are right for every business.

First, what exactly is invoice factoring?

Invoice factoring is a type of business financing in which a business sells its unpaid invoices to a factoring company at a discount. The company typically gives businesses between 80% and 95% upfront and then the rest of the funds after your clients pay up with a fee subtracted.

Businesses can use their funds for any legitimate purpose like working capital. It can be expensive, so you might want to consider less costly financing like equipment loans if they’re available to your business.

Is invoice factoring the same as invoice financing?

It isn’t. Invoice factoring technically isn’t a loan. Instead, it’s an advance with a two-step process that doesn’t involve repayments or interest. When you sign up for invoice factoring, the factoring company typically handles invoice payments from your clients and gives you the funds after your clients pay up.

On the other hand, invoice financing is a secured business term loan backed by your business’s unpaid invoices. You repay it in installments over a set period of time with interest and fees. And you’re still in charge of collecting on your invoices.

Three types of Invoice Factoring to compare

* Whole turnover

Sell all of your invoices to a factoring company over a period of time.

* Selective invoice factoring

Sell only the invoices you choose over a period of time.

* Spot factoring

Sell Individual invoices in a one-off deal.

Business Loan Requirements

Business & Personal Credit Scores

When you submit a business loan application, a lender will typically review both your personal and business credit scores to assess the risk you pose.
While a bad personal credit score can hurt your chances of approval, a good personal credit score can improve your loan approval odds and help you secure a lower interest rate.

What’s considered a good or bad personal credit score varies according to the credit scoring model a lender uses and its own guidelines. One of the most widely used credit scoring models FICO ranges from 300 to 850. While scores below 580 are considered bad, a score of at least 670 is considered good.

Although minimum credit score requirements vary, some online lenders may approve you for a business loan with a personal credit score as low as 650. A traditional lender like a bank may require you to have a minimum score as high as 680, however.

Similar to personal credit scores, what’s deemed a good or bad business credit score also varies based on the credit scoring model a lender uses. One of the most popular business credit scoring models Dun & Bradstreet (D&B) PAYDEX ranges from 0 to 100.

A good score ranges from 80 to 100; a bad business credit score ranges from 0 to 49.

Annual Business Revenue & Profit

Lenders often have minimum annual revenue requirements, and some have minimum monthly revenue requirements, too. To confirm your business’ earnings, a lender will request your business’ bank statements and income tax returns. You can upload your bank statements manually or allow a lender to connect to your bank and analyze your statements, if available.

In addition, some lenders may ask to see your profit and loss statements to determine if you have enough positive cash flow to afford your loan.

Time in Business

Businesses that have been in operation for longer have a greater chance of loan approval. While minimum time requirements vary, it’s common for traditional lenders to require you to have at least two years in business.

Online lenders often require applicants to be in business for at least six months to a year.

However, this requirement may vary depending on the specific type of business financing. For example, with invoice factoring, which involves selling unpaid invoices to a factoring company, a lender may require that you’ve been in business only for three months.

Debt-to-income Ratio

Some lenders will review your debt-to-income (DTI) ratio to determine whether you can afford to take on additional debt. Your DTI ratio weighs your monthly debt against your gross income.

You can calculate the DTI ratio by dividing your monthly debt by your gross income. For example, if your monthly debt is $10,000 and the gross income is $20,000, your DTI ratio is 50% ($10,000/$20,000).

The higher your DTI ratio, the greater your risk is as a potential borrower. While minimum DTI requirements vary by lender, it’s a good idea to keep your DTI ratio at or below 43%.

Debt-Service Coverage Ratio

Another ratio some lenders consider is the debt-service coverage ratio (DSCR), which measures your business’ annual net operating income in relation to its total annual debt. Remember, annual net operating income is another way to say earnings before interest, taxes, deductions, and amortization (EBITDA)(Earnings Before Interest, Taxes, Depreciation, and Amortization)

Example 1: Your business has a net operating income of $100,000. Your annual debt obligations are $40,000. Your business has a DSCR of $100,000/$40,000, or 2.50.

Example 2: Your business has a net operating income of $50,000. Your annual debt obligations are $75,000. Your business has a DSCR of $50,000/$75,000, or 0.67.

In example 1, your business will likely qualify for the loan based on the DSCR. However, in example 2, the loan application will likely be denied due to a DSCR lower than 1.25. The business in example 2 can only meet 67% of its current obligations.
Although DSCR requirements vary by lender, U.S. Small Business Administration (SBA) loans require a minimum DSCR of 1.15.

Collateral for Secured Loans

Lenders offer both unsecured and secured business loans. If you apply for a secured loan, lenders require you to pledge collateral something of value, such as accounts receivable or real estate that they can seize if you fail to repay the loan.

The collateral requirements can vary, depending on your specific loan. For instance, you could take out a loan to purchase a business asset like equipment, a business vehicle, or commercial real estate. The collateral in that scenario would be the asset purchased. This means if you purchase equipment such as a commercial printer, the printer will serve as collateral.

In addition, some lenders will require you to provide a personal guarantee, which means you accept responsibility for repaying the loan with your personal assets if the business fails to do so.

Your Industry Matters

The industry you operate in also plays a factor in whether you qualify for a loan. That’s because each industry has a different risk factor and some lenders are restricted from working with certain industries, such as adult entertainment businesses, gambling businesses, and not-for-profit businesses. 

Business Plan

Some lenders may require you to share your business plan, especially if you’re a startup, which may include the following:

* Financial projections
* Purpose of using the funds
* Industry outlook
* Competitive analysis
* Your plan should provide a lender with a detailed outline of how you intend to use the loan funds and include a five-year forecast of cash flow, income, and expenses.

Documents Commonly Required for Business Loans

A lender will likely ask for some or all of these items:

  • Bank Statements
  • Personal and Business Tax Returns
  • Business Licenses and Permits
  • Employee Identification Number (EIN)
  • Proof of Collateral
  • Balance Sheet
  • Copy of your Commercial Lease
  • Disclosure of other debt
  • Accounts Payable and Accounts Receivable aging
  • Ownership and Affiliations
  • Legal Contracts and Agreements
  • Your Driver’s License
  • Business Insurance Plans
  • Payroll Records
  • Incorporation Documents
  • Business Plan