Business Loans: What You Need To Know

It’s not unusual to need a business loan to cover expenses you can’t handle with your current budget. Seasons and circumstances change, impacting daily cash flow and your ability to support continued growth. Before approaching a lender, educate yourself on the types of loans available, the terms you can expect, and what documentation will be required to determine eligibility.

What Are the Types of Business Loans?

Information from Fundera  - Last updated: Jan 2023

Lenders offer a variety of loans for businesses depending on what the money is going to be used for and how companies are able to guarantee payment.

• Secured loans require collateral to back up the amount of the loan, meaning you could lose what you put up if you fail to pay in full.
• Unsecured loans are granted to companies with solid credit ratings and may offer lower interest rates than secured loans.
• Lines of credit work like a credit card, allowing you to borrow against a set amount as needed and only requiring interest payments on the money you use.
• Merchant cash advances are based on your volume of monthly credit card sales and are paid back using a percentage of each future sale.
• Accounts receivable loans use outstanding invoices as collateral to help pay off short-term debts.
• Equipment loans are granted specifically for the purchase of new equipment, using what you purchase as collateral.
• Construction loans provide funding to expand your existing location or build a new facility, and the building is considered collateral.
• Invoice factoring lets businesses with rigid cashflow constraints operate more flexibly by providing them with access to the funds they require until invoices are paid in full. 

Each loan type has a specific payment structure, term length, and interest rate. Some are more difficult to qualify for than others, and most require you to present detailed paperwork when applying.

Applying for a Small Business Loan 

When seeking financing for growth or to cover gaps in cash flow, small businesses have a surprisingly easy pathway to funding thanks to the tailored loan solutions available. Unlike traditional loans extended to enterprise level companies, small business loans are easier to access, quicker to apply for, and have friendlier terms for repayment.

Finding the right loan is not a problem thanks to the rise of financial services providers and new companies that offer quick funding and straightforward approval processes. Additionally, the requirements many companies set for approval, tend to be much accommodating for small businesses.

Unlike enterprise-level loans, which are usually extended by large banks, small businesses have different options when seeking financing which can be much more beneficial. Aside from banks, small companies can take advantage of federal loans such as Small Business Administration loans, work with credit unions, or even consider online alternative lenders.

For these online lenders, working with smaller companies is more useful considering they can be growth partners and create lasting working relationships. Additionally, these lenders often provide different forms of financing outside of traditional loans, which are better suited for some businesses. Services such as invoice factoring, lines of credit, and equipment loans can help small businesses more as they provide a targeted influx of capital. These financing types offer flexibility and let smaller companies take loans without putting themselves at a disadvantage.

Generally, lenders are looking for small businesses that meet the following requirements:  

• Companies whose owners have good to excellent credit
• A proven flow of income that can be used to repay the loan, or financing extended
• More than one year in operation, although this may vary from lender to lender
• In some cases, proof of collateral that can be used to secure the loan
• A plan for investing the capital being extended

Requirements will vary between the different alternative online lenders, but small business loans are a great way for expanding companies to find the funds they need to sustain growth and help them reach performance targets.  

How Do Business Loans Work?

Acquiring a business loan can be more difficult than obtaining funding for other purposes. Business loans represent a big risk to lenders because of the volatility of the consumer market. Although marketing analytics are making it easier to predict customer behavior, many unknown variables still affect business cash flow and profits. This is another reason why banks want to know exactly what you plan to do with the loan should your application be approved.

When applying for a loan, you’ll discuss terms, interest rates, and other details with the lender. It can be a long process requiring a lot of detailed financial information from both personal and company accounts, and you’ll likely need to speak with more than one lender to find the right fit.

Remember, a loan is a binding agreement for a given period of time, and once you sign the documentation, you’re committed to paying the money back according to the agreed-upon terms. Make sure you know exactly what you’re getting into before the loan is finalized.

Questions to Ask About Business Loans

Because of the time and expense involved, consider whether you actually need a business loan and if it will benefit your company before applying. If you determine that a loan is necessary, prepare a list of questions to bring along when you compare loans from different lenders. Your list should help you narrow down your choices to banks and other lending institutions offering options closely aligned with your business needs. You may want to ask:

• If the lender has experience lending to your type of business
• How much the lender typically loans to businesses of similar size
• Who is in charge of application review and approval
• What documentation is required to apply for a loan
• How long a typical application-and-approval process lasts
• Whether interest rates are fixed or variable
• If there’s a penalty for paying the balance off early

How to Apply for a Business Loan

Once you decide what type of loan you need, your lender will request certain documents and financial records to determine if your business qualifies. These documents may include:

• A business plan showing your intentions for the loan
• Tax returns for your business
• Three to five years of company revenue figures
• Personal and business credit information
• Personal and business bank statements
• Cash flow history and future projections
• Business licenses and certificates
• Current profit and loss statements
• Detailed resumes of key executive staff members
• Franchise, partnership, and other legal agreements

The lender will review this information along with your application. However, before taking the time to gather such an extensive amount of paperwork, review the specifics of the loan one more time. Ask questions about anything you still don’t understand, and be ready to move on to another lender if something doesn’t sound right. If the cost of the loan is more than the benefit you’ll get from it, you’re better off seeking alternative options.

A business loan can give your company the boost it needs to make it through a difficult time or fund growth to catapult you to future success. Talk to a variety of lenders before making your final decision to find the terms and conditions compatible with your financial situation. Structure your budget so that you stay on top of loan payments to ensure your business winds up stronger and more profitable once the balance is paid off.

On this page, you’ll find a list of some of the highest-rated lenders in the industry. Check out their reviews , compare their features, and find the lender that’s best suited to meet the needs of your business.

The lender will review this information along with your application. However, before taking the time to gather such an extensive amount of paperwork, review the specifics of the loan one more time. Ask questions about anything you still don’t understand, and be ready to move on to another lender if something doesn’t sound right. If the cost of the loan is more than the benefit you’ll get from it, you’re better off seeking alternative options.

A business loan can give your company the boost it needs to make it through a difficult time or fund growth to catapult you to future success. Talk to a variety of lenders before making your final decision to find the terms and conditions compatible with your financial situation. Structure your budget so that you stay on top of loan payments to ensure your business winds up stronger and more profitable once the balance is paid off.

On this page, you’ll find a list of some of the highest-rated lenders in the industry. Check out their reviews , compare their features, and find the lender that’s best suited to meet the needs of your business.

What is an APR?

APR is an acronym for annual percentage rate. It combines the charges, fees, and payments to tell you the grand total of what your loan will cost you per year. The lower the APR, the less you are going to pay in the long run.

The APR calculation on personal loans will vary depending on your lender, but it will typically be lower than what you would receive from a payday or short-term loan – usually starting at 3% and capping at 35.99%. It is not ideal to owe any money, but if you require a loan, then a personal loan could certainly be a viable option.

APR rates mentioned include associated fees.

Full repayment for the loans displayed range between 61 days to 180 months.

Representative example: assuming a loan of $10,000 over 60 months at a fixed rate of 3.1% per annum and fees of $60.00. This would result in a representative rate of 3.3% APR, with monthly repayments of $180.80, for a total amount paid of $10,868.00.

Disclaimers

American Express® Business Blueprint:

* If eligible, you can be approved in minutes for a line of credit from $2,000 to $250,000 when we are able to automatically obtain your business data and verify your bank account. If a manual review is required, it will take longer to provide you with a decision. American Express® Business Line of Credit offers access to a commercial line of credit between $2,000 to $250,000. Each draw on the line of credit will result in a separate installment loan. All loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee. Monthly fees range from 2-9% for 6-month loans, 7.5-18% for 12-month loans, 15.75-27% for 18-month loans, and are subject to change for future loans drawn under the available line of credit. Not all customers will be eligible for the lowest fee. Not all loan term lengths are available to all customers. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. Lines of credit are subject to periodic review and may change or be suspended, accompanied with or without an account closure. Late fees and return payment fees may be assessed. Loans are issued by American Express National Bank.

¹ All businesses are unique and are subject to approval and review.

Upstart:

* Small business loan amounts range from $5,000 - $200,000. Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Small business loans not available in NV, NH, MD, WV, IA.

When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information may be reported to the credit bureaus.

Biz2Credit:

* Applies to the Biz2Credit Term Loan. Not reflective of rates for all products. Full Terms & Conditions available at biz2credit.com.