Business Financing Essentials
Frequently Asked Questions
What does a small business need to get a loan?
Documentation and eligibility for small business loans depends on the lender and loan programs, which can each have specific requirements. For example, eligibility for Small Business Administration loans like 7(a) tends to depend on certain factors:
- How a business earns income
- How business ownership is structured
- Where the business operates
- Business size
- Ability to repay the loan
- Sound business purpose
SBA loan criteria require that businesses must also be for-profit and located within the U.S. or its territories.
Are small business loans hard to get?
Eligibility for small business loans can often be affected by both personal and business credit scores and other factors like lack of collateral and capital investment. However, if business owners are affected by bad credit, for example, there are certain loans can try to obtain including working capital loans from the likes PayPal, AmEx, and Square.
What is the limit for a small business loan?
Maximum business loan amounts can vary by lender, but some can reach into the millions. For example, the SBA's 504 loan program has a threshold of $5 million max for major fixed asset purchases toward business growth and job creation.
What type of financing is best for a small business?
There are several financing options available to small businesses, but it can sometimes depend on what phase your business in. Banks can be one of the best options if you qualify as they typically offer lower interest rates than other lenders. However, most banks may require a business to show signs of success before lending money as they want to make sure it gets a return on its investment. So bank loans might be more difficult to obtain for businesses just starting out. In such cases, options such as SBA loans, microloans, or even bootstrapping might be more ideal options.
Seed capital is the initial funding needed to start a new business and cover startup costs like business proposals and research. It also covers proof of concept, which demonstrates that a business idea is feasible. Investors during this stage usually include friends, family, and people close to the business owner.
Asset-backed lending refers to a business loan or line of credit secured by a business’s assets. Loans backed by assets may make sense if your capital is tied up and you’re having trouble getting approved for other types of financing.
A commercial loan is a type of conditional funding for businesses. These loans allow them to acquire capital for day-to-day operations, expansion, or other business purposes. Businesses can also use them to refinance existing loans.
Crowdfunding is the method of financing a business venture, project, or cause by collecting small monetary contributions from a large group of people through online platforms. Those who contribute funds can be friends, family, fans of your product, backers who want your product to come to life to buy it, supporters of your mission, cause, or area of interest, or even sympathetic strangers, depending on what you’re trying to fund.
A swingline loan is a short-term loan that offers quick access to capital, typically used for debt obligations. Swingline loans are available to business owners and individuals and can function as revolving credit or a syndicated loan.
Microloans are small amounts of funding intended to help start or grow a business. They are typically provided by the Small Business Administration (SBA), virtual loan platforms, and even individuals. Microloans loans are typically meant for small businesses or startups, and commonly target specific groups such as women, minorities, veterans, or others who may face barriers to accessing bank loans and other traditional means of funding.
Business Loan Broker
A business loan broker is someone who acts as a connector between a business seeking financing and a lender. Commercial loan brokers can save you time by identifying the best loans for your business’s needs. They can also help you navigate the often complicated process of identifying eligibility and applying for financing.
Business Line of Credit
A business line of credit (LOC) works like a business credit card in that it is revolving and subject to credit review and annual renewal. However, it can be a great way for business owners looking for a short-term, temporary financial fix to access cash without going through the process of applying for and potentially being denied a loan.
Angel investors are different from other types of investors in that they invest specifically in new startups that have yet to really establish themselves. Angel investors provide the first round of funding of outside capital, meaning they are the first individuals to invest in the business aside from the founders themselves or the founders' close friends and family.
A secured loan is when a lender requires you to use a piece of property, an asset, or money as collateral to get funding. The main difference between secured business loans and unsecured business loans is the use of collateral. Secured loans are guaranteed, so lenders are generally more lenient with terms and requirements; unsecured loans have more restrictions because they are not guaranteed with collateral.