August 2023

The Advantages of Online Lending

by Simon Dreyfuss5 minutes / August 21, 2023

a woman holding and showing American dollar banknotes for money

As small businesses look to grow and reestablish themselves in the wake of the COVID-19 pandemic, businesses with good personal and business credit scores may have access to more simplified application and speedy approval processes through online lenders than they would typically see from more traditional commercial lenders.

Whether you’re a small business services office, construction company or independent medical practice, access to cash to grow your business or get caught up with expenses is crucial. The first thing you need to do is fFind out your personal credit score, which you can quickly obtain online – and often for free – through various services such as Experian, Equifax or Nav.

Online Lenders are Better for Small Businesses Because They Offer More Choice

“Technology like blockchain and artificial intelligence will bring in new players that will challenge the hegemony of the traditional banks, and this competition will make it better for small businesses with various options,” said Hitendra Chaturvedi, Professor of Practice, Supply Chain Management at Arizona State University’s School of Business, in a recent interview with AdvisorSmith. “Post-pandemic, this could be the birth of a new small business landscape as we know it—and all for the good.”

While credit history, time in business, cash flow and business collateral will always be factors considered by all lenders, online lenders do offer some unique advantages over traditional lenders:

#1 Fewer Application Requirements

A traditional loan may require long and tedious paperwork from an applicant. Some traditional lenders may require you to submit an outline of your ongoing business plans and give presentations outlining your business goals and objectives. They will also probably require tax returns and other IRS documentation, as well as personal credit card statements and outstanding invoices.

Online lenders, however, often only require a signature, credit score and your three most recent bank statements to apply.

#2 Amount, Flexibility of Funds

What if your business only needs to borrow $10,000 or less? Traditional brick and mortar lenders are typically interested in larger loan amounts in order to make more money. Online lenders, however, are usually more flexible in the amount they are willing to lend and more nimble in their terms for the loan.

Additionally, traditional lenders often will require you to specify how the borrowed funds will be used and may require you to commit to using those funds for the exact reason stated. That requirement is often more relaxed with online loans, which typically allow you to use funds for any legitimate business purpose.

#3 Faster Approval and Underwriting

While all traditional lenders are different, some may take 10 -30 days to review and approve your loan. In some cases, small business loans such as SBA loans may take up to 45-60 days, depending on the lender. Traditional lenders will investigate your credit history, collateral of business and the current and projected income of your business. While online lenders do examine many of the same factors, your approval can happen the same day.

Plus, online lenders often use underwriting sources in loan applications that traditional lenders will not, such as a business’s credit card sales and accounts receivable. As such, small business loans from online lenders may be more suitable to small businesses that may not qualify for traditional bank lending.

#4 Personalized Service

Historically, one of the advantages offered by traditional lenders is the ability to speak face-to-face with a banker who will listen to your story. However, more and more, online lenders such as Kapitus have financing specialists who are also able to hear your story, assess your unique situation and incorporate human factors into the online underwriting and approval process.

In addition, many online lenders use their own proprietary risk models, considering factors such as industry, time in business and current external forces. For example, many online lenders will view the COVID-19 pandemic as an extraordinary event and are willing to consider your three-year cash-flow history to get a better idea of your ability to pay back the loan.

#5 For Those With Less-Than-Stellar Credit

Traditional lenders are likely to reject your application if your personal credit score is less than 680. Online lenders, however, may be more willing to give you a loan with a higher interest rate, depending on why you are looking to borrow and what you plan to use the assets for. You should have a chat with your accountant or a financing specialist about your chances of getting approved in such a case.

#6 Financing for Any Business Needs

Online lenders offer a variety of ways to finance a unique business. They often do not ask to see a business plan and are primarily interested in your business revenue history. Regardless of why you need the money, online lenders, such as Kapitus can offer financing to fit that need. From money to launch a new product, to heavy equipment financing, to lines of credit to handle basic day-to-day operations, online lenders can help you achieve your vision.

Simon Dreyfuss

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Small Business Loan Application Checklist

Manage Your Money

by Vince Calio11 minutes / August 15, 2023

Applying for a small business loan can be a tricky process, as there are several requirements you need to meet in order to obtain one. Those requirements can be confusing, as lenders require everything from business licenses and cash flow history to business plans and personal financial statements.

Whether you are applying for a business loan from a traditional bank, alternative lender, or credit union, as a small business owner in need of financing, one of the ways you can untangle the process is to use the following small business loan checklist. This checklist will help to ensure that you are ready to apply with confidence. Knowing what documents are needed for a business loan ahead of time will keep you organized and possibly help you get a reasonable interest rate on your loan.

Things to Consider Before Applying for a Business Loan

Before even beginning to collect your business loan paperwork, there are key factors you should consider:

Why do I need a loan?

This is perhaps the most important question you should ask yourself before applying for a small business loan. Getting a business loan just to have the money you borrowed sit around while you pay interest on it is obviously a bad idea.

Ideally, the proceeds of a business loan should be used towards growing your business so that it can increase its revenue. For example, if you need money to develop and market a new product; purchase or upgrade equipment; expand your business by hiring new employees; or adding to your inventory would all be ideal reasons to obtain a loan.
There are also financing products, such as working capital loans and business lines of credit, that can help your business operate during the offseason or when there’s a downturn in the economy.

Can I afford a loan?

Everyone knows that loans carry interest rates, and those rates are, in part, affected by the current interest rate environment. The Federal Reserve has raised interest rates 10 times in the past year-and-a-half, and that’s going to make the interest rate on virtually every type of business loan you want to take out more expensive. If you can afford to wait, you might want to hold off on getting a business loan until rates drop again.

What type of lender suits me best?

There are several types of lenders who can provide you with a small business loan. Those include traditional banks, alternative lenders, trade unions, marketplaces, and brokers. Each one comes with pros and cons that you should consider carefully. Some lenders, such as traditional banks and alternative lenders, offer financing products directly, while brokers typically offer you a marketplace of lenders. Also, some will demand higher business and personal credit scores than others, and some can deliver your funds more quickly than others. Carefully consider which one best serves your needs.

Can I get a grant instead?

There are, of course, several public and private business grants available to small businesses – some of which are backed by the US SBA. These grants often have specific criteria for applying. For example, some may be offered to small businesses in certain industries, and others may be offered only to women- and minority-owned businesses. Determine whether you qualify, but remember, applying for these can be a roll of the dice and you’re not guaranteed to win a grant.

Do I have a plan B?

All small business owners have the best of intentions when applying for a business loan, but life happens, and sometimes it won’t go your way. Before you take out a loan, it’s a good idea to make a contingency plan if things go south and you find yourself struggling to keep up with debt payments. Bankruptcy should be a last resort. Do you have assets you can sell? Do you have a cash reserve that you can draw upon until you get back on your feet?

Small Business Loan Documents Checklist

Go over this business loan documents list to make sure you are prepared for the sometimes overwhelming process of applying for a business loan. Doing so will simplify and hasten the process of getting the funding you need for your small business.

Check your credit scores

All lenders will pull both your personal and business credit reports. You can check your personal FICO scores online for free at the websites of the three main credit bureaus, Transunion, Experian and Equifax. You may have to pay a fee to get detailed reports so that you can check for errors. You can check your business credit score at the website of Dun & Bradstreet, the business credit bureau that is most heavily favored by lenders, for a small fee.

If your personal FICO and business credit scores are less-than-stellar, you may want to consider taking 6-9 months to improve them so that you can increase your chances of being approved and get a better rate on your loan.

Prove that your business exists

All lenders will require documentation proving that your small business is registered as a tax entity. At the very least they will require your employee identification number, which is issued by the IRS, and proof that your business is registered as a LLC, “Doing Business As” (DBA) company, or an S or C corporation. Lenders will also require proof of identity, pay stubs, and your social security number as well. For an SBA 7a loan or a term loan from a traditional bank, the lists of documents required can be even longer and include items such as business licenses, business lease agreements, proof of equity injection and franchise, and licensing agreements if you plan to franchise your business.

Have a business plan

If you plan to apply for a term loan with a traditional bank or for a SBA 7a loan, chances are you will need to show your business plan. This is a plan that shows how your business is organized and typically includes a market analysis and what niche your products and services fill, how they differ from your competitors, and why you believe your small business will be successful going forward. In short, it details why you believe your business is going to make money.

Financial Statements

Almost all types of lenders will want to see your business’s financial documents that indicate it has a strong cash flow history, including, but not limited to 3-6 months’ worth of business bank statements, 2-3 years of tax returns, balance sheet statements and income statements.

Run a cash flow analysis

Cash flow is one of the primary indicators that lenders use to understand the health of your business. Being able to show 3 to 6 months of positive cash flow can increase your chances of approval. It can even get you better financing terms for your small business loan.

Collect your business bank statements

Your business accounts are another good indicator of your company’s financial health. Generally, lenders want to see a positive daily balance on your bank statements for the past 3 to 6 months.

Gather supporting documents for unusually large deposits

Unusually large deposits can act as a red flag for lenders. While the presence of these deposits can delay finalization of loans, they are not necessarily bad. Many businesses understandably have large swings in deposits and credits to their account. If your business is like that, you can expedite your loan application process gathering copies of your account receivables and future contracts to support these large deposits.

Take care of delinquencies

Many lenders only want to lend to people whom they believe are of high character. This is especially true when you’re applying for SBA loans. As such, if you have any tax liens or are late on child support payments, you should take the necessary steps to clear those up before you apply.

Resolve any open tax liens

Unresolved open tax liens can hurt your ability to obtain financing. If possible, try to get a payment plan set up on any open tax liens you may have before you apply for a loan. A payment plan on a tax lien, along with a very strong positive cash flow will typically be considered by alternative lenders and even some SBA lenders for loan approval

Assess any collateral you may have

Before you apply for a loan package, you may want to sit down with a business loan specialist or an accountant to see if you need to put up collateral. This includes real estate, investment holdings, savings and even your car or valuable pieces of equipment you may own. Traditional banks often want collateral if your business credit or personal FICO score is shaky. In rare cases, alternative lenders may ask for collateral. Even if you have good credit, it might be worth applying for a secured bank loan or business line of credit because you may be able to notch a lower interest rate and a higher credit line or loan amount if you put up collateral.

Get trade references

If your business credit score is borderline, you can boost it by getting positive references from either your suppliers or, if you lease a physical space, your landlord. You can give these references to your credit bureaus and, if you’re using a traditional bank, to the loan officer. Having these could mean the difference between obtaining a loan or getting rejected.

If you get Rejected

Getting rejected for a business loan isn’t pleasant, but it can be a valuable lesson on how to get accepted the next time you apply. Traditional banks and alternative lenders want to grant you a loan approval because it’s the way they make money. As such, they will be happy to give you a detailed explanation for why you were denied, and, usually, it will take a bit of time to improve your business to the point where you can obtain that business loan.

While every rejection is different, some of the most common reasons for getting rejected for a business loan are:

Your business credit score is not high enough

Some of the ways you can raise your business credit score include:

reducing the number of creditors you owe money to
making sure you make debt payments on time for at least 6-9 months
having a strong credit mix.

Other steps include being in good standing with your suppliers and increasing the assets of your business.

Insufficient time in business

Traditional banks typically won’t lend to a small business that hasn’t existed for at least three years, while alternative lenders may want to see at least two years in business. If this is the case, hold off on borrowing until your small business has been in operation for a sufficient time. If you can’t wait, see if you qualify for an SBA CDC/504 or SBA microloan, both of which only require 6 months in business.

Too much existing debt

This is actually a common reason why small businesses get turned down for a loan. If you already have outstanding loans, you can always try to retire them with a new loan. Additionally, if you have a line of credit that is close to being fully drawn, you should take steps to pay it down before applying for a new loan.

Your cash flow is not strong enough

If your small business’s cash flow is tight (meaning you are spending almost as much money as you are taking in), take steps to fix it by finding ways to reduce your expenditures.

Your industry is too risky

If your small business operates in an industry in which there are higher than average bankruptcies, or if it operates in what lenders may consider “vice” industries such as gambling, alcohol, or legal marijuana dispensaries, you will most likely get turned down no matter how financially strong your business is. A quick Google search, however, can most likely lead you to legitimate online lenders who specialize in lending to companies in your industry.

Don’t Get Frustrated

Remember, when applying for a business loan, patience and weighing the pros and cons of different lenders are often the keys to getting the funding that you need to help your business grow. Go down the checklist of items that you need to take care of in order to be ready to apply, and carefully consider the pros and cons of the different types of lenders out there so that you can get the financing that is exactly right for your business.

Vince Calio

Content Writer

Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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Getting a Business Loan with Bad Credit

Manage Your Money

by Vince Calio13 minutes / August 15, 2023

Most of us have faced financial hardship at some point that resulted in some missed debt payments, defaults or charge-offs, and this has negatively impacted our credit scores. After all, life has its ups and downs, especially when it comes to our finances. For small business owners who find themselves in this situation, one of the questions they may be asking themselves is, “Can I apply for a business loan with bad credit?”

The simple answer is yes. There are plenty of lenders that offer business loan options for bad credit, and there are several types of financing that don’t emphasize FICO scores as much as cash flow history and strong sales. So, if you’re one of the thousands of small business owners wondering where to get business loans with bad credit, you might be relieved to know that you have several financing options.

Before you delve into answering the questions of how to get a business loan with bad credit, there are several factors you should educate yourself on, such as how can you improve your credit score and what you can afford to pay in terms of an interest rate on your loan, given that loans for businesses with bad credit often charge a rate that’s on the highest end of the APR spectrum.

What is Bad Credit?

When looking into how to qualify for a business loan with bad credit, the first thing you need to know is that a low credit score depends on the type of lender you are considering. Traditional banks are still the most popular type of small business lender, but they typically want to see higher credit scores for financing products such as term loans and business lines of credit than an alternative or online lender. Generally, they consider a FICO score below 680 to be poor. Alternative lenders and credit unions, however, generally – but not in all cases – will accept scores within the 650 – 680 range, depending on the type of financing the small business owner is seeking.

There are online lenders that will accept a FICO score as low as 500 but will charge an inordinately high interest rate (cost of capital), depending on the type of financing you’re seeking.

How to Improve Your Business and Personal Credit Scores

Generally speaking, having to obtain a business loan with a poor credit score isn’t an ideal situation. If you can afford to wait several months for a loan and take that time to improve your FICO score, you could save a good chunk of money in terms of the cost of capital. Doing so is not as difficult as you might think.

The two types of credit scores you will need to improve: your personal FICO score, and your business credit score, if you have one. Most lending institutions and credit bureaus such as Transunion, Equifax, and Experian are happy to give you advice on how to improve your personal credit score. For a business credit score, Dun & Bradstreet is the credit bureau looked at the most by lenders.

The main factors that affect your FICO score and how to improve them are:

Payment history. Nothing will drag your FICO score down more than having a history of delinquent payments on your debt. This includes monthly payments on things such as credit cards, car financing, and mortgage/rent. If you want to dramatically improve your credit score, make sure to make on-time payments for at least 6 months. The longer you make on-time payments, the better your score will be.
Debt-to-credit ratio (aka credit utilization). Credit bureaus do not look favorably upon small business owners who have a low amount of available credit compared to the amount of credit available to them, as this tells them that you are having a hard time managing your debt. If you have the time and discipline to do so, try to pay down as much debt as you can over the course of 6-9 months to bring up that ratio. You may even want to consider applying for a new credit card to bring that ratio up. Increasing this ratio will do wonders for your credit score.
Length of credit history. While this is a big factor in determining your FICO score, it’s not one that can quickly be fixed. This is the age of the debt accounts on your credit report. The longer you have open account, in good standing with your creditors – including your credit card companies, car financing company, and your mortgage holder – the higher your credit score.

A business credit score incorporates most of the same factors as your personal FICO score such as your business’ loan and payment histories. There are a few differences, however. First, a business credit score will look at:

Industry risk. Your business credit score will incorporate how risky the industry in which your small business operates is. If it operates in one that has a high failure rate, such as the restaurant/food service industry, that could negatively impact your business credit score. In this case, having a strong business plan becomes even more important.
Good relations with your suppliers. There is a little-known action that many small business owners can take to improve their business credit score: getting trade references. If you have good relationships with your suppliers and have a history of on-time payments to them, they can send a note called a trade reference to the credit bureaus telling them such. Doing this can immediately improve your business credit score.

Where to get a Small Business Loan with Bad Credit

If you need capital now and can’t afford to wait 6-9 months to improve your credit score, there are lenders out there that are willing to lend the capital that you need. Traditional banks are more risk-averse and generally won’t approve loans to those with bad credit. The lenders that do, however, include:

Online lenders. A quick Google search will lead you to a host of reputable online lenders that are willing to supply you with an array of financing options such as term loans and business lines of credit and require a FICO score as low as 500. While every lender has their own set of terms, the cost of capital for these forms of financing is typically extremely high, with some being above 30%.
Alternative lenders. Alternative lenders that operate outside the sphere of traditional banks often allow loans to business owners with lesser credit scores than their banking counterparts. They often charge higher interest rates and will accept borrowers with fair-to-good credit scores in the 620-680 range, depending on the type of financing you are seeking. This is because they often emphasize annual revenue and cash flow history as well as credit score.
Trade credit unions. Credit unions are owned by their members, and many of them will give loans to small businesses in their own industries, even to those with less-than-stellar credit scores. Many credit unions will also look favorably upon small businesses that employ unionized workers.
The SBA. While the SBA 7(a) loan – which is the first loan that most people think of when they think of the SBA – often comes with strict requirements such as a high credit score, other SBA loans do not. SBA microloans and CDC/504 loans do give loans to small business owners with less-than-perfect credit scores through intermediary lenders, and these loans usually carry relatively low interest rates. The two catches for these loans are that they usually do not offer high loan amounts (the maximum for each is $50,000), and depending on the lending agent, these loans are sometimes restricted to minority- and women-owned small businesses, or businesses in underserved communities that are committed to additional hiring and renovating their storefronts.

Types of Financing for Bad Credit

Many people just think of bank loans when it comes to small business financing. There are, however, several types of financing that don’t place a heavy emphasis on credit score and can even offer small business owners a lower cost of capital than they might otherwise be able to get:

Secured business loan. If you have poor credit, securing a business loan with collateral may decrease your cost of capital and could even increase the amount you are able to borrow for your small business. Any savings, real estate, investment accounts and any other personal items of high value can be used as collateral. While you do risk losing these things if you fail to pay back the loan, having enough collateral can even convince a traditional bank to give you a business loan, despite a poor credit score.
Revenue-based financing. Revenue-based financing is offered almost exclusively by alternative lenders and is a form of financing that can quickly offer a lump sum of cash in exchange for a portion of your small business’s future receipts. It’s technically not a loan and lenders often look more closely at your business’ sales history rather than its credit score.
Equipment financing. Most traditional banks and alternative lenders offer equipment financing – loans that enable small business owners to purchase vital pieces of equipment. This type of loan is often made to small business owners with less-than-stellar credit since the piece of equipment being purchased acts as collateral for the loan. Like most loans, however, the lower your credit score, the higher the interest rate, so it’s important to shop around to find the loan with the lowest cost of capital.
Invoice factoring. Invoice factoring gives small businesses a lump sum of cash for their outstanding invoices, and therefore, credit score usually isn’t a factor when lenders decide to approve this type of financing. Rather, the creditworthiness of the customers who owe you money is. Invoice factoring is offered by both traditional and alternative lenders. When using this type of financing, it’s important for small business owners to read the fine print to find out the length of the contract and whether they will be on the hook for a portion of outstanding invoices in case customers do not pay the amount due.
Secured business lines of credit. A business line of credit gives small business owners access to a predetermined amount of cash when they need it and only charges interest on the amount borrowed. If you have poor credit, there are lenders willing to give you access to a line of credit but with a very high interest rate and a limited credit amount. If you offer to secure the line of credit with collateral, however, this could dramatically lower your interest rate and increase your chances of being approved. As with any business line of credit, it’s important to read the fine print to understand the repayment terms and minimum borrowing amounts.

What to do Before Applying

Even if you have a fair or poor FICO score, there are steps you should take before you complete a loan application to get a business loan or other type of financing for your small business to ensure you get the best possible interest rate or APR, as well as avoid hidden fees if possible.

Wait to improve your credit score. As stated, there are better situations than having to get a loan when you have a poor-to-fair credit score. If you’re not in a rush for a loan, consider taking the time needed to improve your score so that you can notch a better interest rate.
Check your credit report. Check for mistakes on your credit report with all of the three main credit bureaus – Transunion, Experian, and Equifax. While you probably generally know what’s dragging down your FICO score, there could be errors and/or false charges on your report that are bringing it down. According to a study by the Federal Trade Commission, 1 in 5 consumers (20%) have at least one error on their credit report.
Compare interest rates. Just because you have a low credit score doesn’t mean that different lenders won’t offer you different rates. While most lenders don’t disclose rates upfront, ask what the rate will be once you’re pre-approved.
Read the fine print. Depending on the lender, it’s crucial that you carefully read the terms of whatever piece of financing you’re taking on. Some lenders may want balloon payments or origination fees, while others may demand weekly instead of monthly payments. Find the repayment plan you’re most comfortable with.
Be comfortable with your lender. This may sound intuitive, but make sure that your lender has sufficient customer service available to you. While you can always walk into a traditional bank, most alternative lenders also provide readily-available, personalized customer service by phone as well.
See if you can renegotiate later. Bad credit takes a bit of time to fix, but it can be done. Ask your potential lender if you can renegotiate the terms of your loan down the road when your credit score does improve.

Additional Advice for Businesses with Bad Credit

Obtaining a small business loan with bad credit isn’t impossible, but it most likely will be costly. If you need a loan and you have poor credit:

Use the loan proceeds wisely. Make sure the loan proceeds will be used in such a way that will increase the revenue of your business. This includes the development, marketing and launch of a new product or service, or for the expansion of your business.

Develop a plan B. No matter what your credit score is, the risk of taking out a loan or other type of financing is that you fall into hard times and can’t pay it back. To offset this risk, some of the ways you can develop a plan B is to build a cash reserve or make sure your lender will be available to refinance until you can get back on your feet.

Don’t overextend. The idea of being able to obtain financing, even with bad credit, can be an exciting one. However, try to only borrow or use the amount of credit that you need and know you can afford to pay back. Finding your small business drowning in debt is obviously not a good place to be.

In all, while bad credit is certainly an obstacle, there are still financing options for small business owners who are seeking to improve and expand their businesses and take advantage of unexpected growth opportunities. Carefully explore the options available to you and, at the same time, work on ways to improve your credit score.

Vince Calio

Content Writer

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Traditional Bank vs. Alternative Lender

Manage Your Money

by Vince Calio10 minutes / August 15, 2023

Should I get my business loan from a bank or an alternative lender?

Which is Best for Your Small Business?

The one ingredient every small business needs is capital – capital to grow, even out cash flow, and meet short-term expenses. The question of where you go to get a business loan, however, can be confusing, especially when it comes to choosing the type of lender. When it comes to financing, small business owners have two main choices for a lender: a traditional bank and an alternative business lender. Both come with pros and cons, different interest rates, different speeds at which funds are delivered, and different loan amounts offered so it’s important to fully know what your needs are and which type of lender is best suited for you.

What are Alternative Lenders for Small Businesses?

Most business owners know they can walk into a brick-and-mortar bank and apply for a traditional bank loan, but since the 2008 financial crisis, alternatives have become increasingly popular. There are financial institutions that operate outside of the traditional banking sphere that typically offer financing applications entirely online, while giving borrowers the opportunity to speak to lending experts via phone or online channels. They are just as legitimate as banks and offer distinct advantages over them.

Rise in Popularity

While alternative lenders have been around since the late 1990s, their popularity began to soar after the 2008 financial crisis when many banks struggled for capital and tightened their requirements for getting loans.

While alternative lenders were relatively obscure before the 2008 financial crisis hit, alternative business loans rose in popularity during the Great Recession. Before 2008, alternative lenders represented just 7% of the small business lending market, according to a study by the Federal Reserve. That figure rose to 12% after 2008. In 2016, 19% of small business owners turned to online lenders for their financing needs, and by 2019, the number jumped to 32%.

What is a Traditional Bank?

Traditional banks are the financial institutions in your neighborhood that can be regional or local banks or branches of larger banks such as JPMorgan Chase or Bank of America. They offer you face-to-face service with a loan officer specializing in helping small businesses. Depending on your FICO score, they usually offer slightly better interest rates than alternative lenders. Borrowing requirements, however, tend to be more rigid than alternative lenders, especially now that we’re in a high-interest-rate environment in which lending requirements have significantly tightened.

Also, the application process is typically more complicated than with alternative lenders and, once approved, there could be a relatively long waiting period to get your funds. Still, if you have an excellent credit score, you most likely will notch a lower interest rate, which could save you significant money when it comes to your total cost of capital.

Traditional Banks: Pros and Cons

Traditional banks are still the most popular types of lenders for small businesses and offer several advantages over alternative lenders, but there are also significant drawbacks as well. Small business owners should be aware of the pros and cons of using their neighborhood bank for a loan:

Pros

Lower interest rates. While every bank is different, most offer lower interest rates on bank loans than alternative lenders. However, as interest rates are currently high right now, the difference in the interest rates on a small business bank loan between traditional and alternative lenders has tightened.
Face-to-face service. Many small business owners like to see a familiar, friendly face when they walk into a bank – a lending expert who is already familiar with their business – and this is a significant advantage traditional lenders have over their alternative counterparts.
Direct product offerings. Many traditional banks directly offer a full suite of financing products to small businesses, such as bank loans and equipment financing. Meanwhile, most alternative lenders are usually funded by asset-backed securities, so may not have the capital to directly offer a full suite of financing products, such as business lines of credit. This allows small business owners to directly negotiate the terms of their loans with the lending officer. Many alternative lenders, however, typically partner with several lenders to offer you a marketplace of financing options that they don’t directly offer.
Offers other financial services. Small business owners can simplify things by having all of their financial needs met under one roof. This includes having a business savings and checking account, as well as a business credit card, all with one institution. Most traditional banks can provide this to you.

Cons

Stricter lending requirements. While every lender has slightly different requirements, traditional banks generally have strict requirements for small business loans. You’re often going to be turned down if you don’t have an excellent FICO score (700 or higher). Also, to get a bank loan, your business usually needs to have higher annual revenue than what an alternative lender might want. Alternative lenders usually have shorter applications with fewer requirements.
Longer application process. Traditional banks often require longer application processes than alternative lenders since they are generally more risk-averse.
Slower funding times. In some cases, if you are approved for a loan from a traditional bank it could take several days or even weeks to get your funds.

May be Cumbersome to shop around. If you were shopping for an expensive item such as a new car, you’d probably want to visit several dealerships to get the best possible price. The same holds true for a small business loan. Shopping around for a loan from a traditional bank, however, means you may have to physically visit several local banks to get the best possible deal, and small business owners might not have the time to do that. Many large banks allow you to compare offers online. However, since alternative lenders operate almost entirely online, all you need is your laptop and an internet connection to compare offers.
Systemic risk. Systemic risk is essentially the risk that banks may collapse due to declining economic conditions. Banks shut down during the credit crunch of 2008, and recently, as interest rates have gone up, banks such as Silicon Valley Bank and Signature Bank were taken over by the Fed earlier this year in high-profile collapses. While this doesn’t happen very often, it’s still a risk when working with a traditional bank.

Alternative Lenders: Pros and Cons

Alternative lenders have become a legitimate borrowing choice for small business owners since the Great Recession, especially when small business lending from traditional banks dropped by some 40% in 2009. These lenders offer significant upsides for small businesses, but they also carry some downsides as well. Here are some of the pros and cons of using an alternative lender:

Pros

Relatively simple application process. Applying for small business financing from an alternative lender typically takes only a few minutes, and it can all be done online. With a traditional bank, there is usually far more paperwork involved and in many cases with regional banks, you need to visit a location as part of the application process.
Fewer requirements. Alternative lenders primarily judge you by your FICO score and cash flow history and require minimal paperwork compared to a traditional bank. Alternative lenders also sometimes require fewer years in business and less annual revenue than a traditional bank. Additionally, loan approval rates from alternative lenders remain far higher than traditional banks. If you’ve been turned down for a loan by a traditional bank because of a borderline credit score (let’s say in the 660 to 680 range), then you may still qualify for a business loan with an alternative lender if you have a strong cash flow history.

Different Financing Products. In addition to traditional business financing products, such as short-term loans, long-term loans and equipment financing, alternative lenders offer some financing options that banks do not. Including:
Revenue-based financing. Revenue-based financing is when a lender gives your small business a lump sum of cash in exchange for a portion of your future receipts – a practice often referred to as factoring. This type of financing is often used when a small business needs cash for an emergency or to finance an unexpected growth opportunity. Most traditional banks don’t offer this, but many alternative lenders do, giving you another option when it comes to financing.
Factoring. Factoring is a form of financing offered mainly by alternative lenders. A financing tool such as invoice factoring, for example, can give you cash based on your outstanding invoices. While this can be an expensive way to get quick cash, it is an example of the types of alternative financing that you can get with many online lenders.
Rapid funding. If you qualify for financing with an alternative lender, you could receive your funds in as little as 24 hours, whereas with many traditional banks it could take several days or even weeks to receive your funds.

Cons

Higher interest rates. Because alternative lenders are generally willing to take on a bit more risk when giving loans to small businesses, they typically charge a higher rate on those loans compared to traditional banks. However, in the current high-interest rate environment, the difference in the cost of capital charged by traditional banks vs. alternative lenders has dramatically tightened over the past year.
Fewer direct products. Alternative lenders don’t borrow cash from the Federal Reserve, nor do they offer savings accounts upon which they can lend against. Therefore, many don’t typically don’t have the cash reserves to directly offer certain financing products such as business lines of credit or equipment financing.

Many alternative lenders, however, do partner with banks and other lending institutions to offer a marketplace to small business owners seeking those products to get them the best possible deal. The potential drawback to this is that borrowers typically can’t negotiate directly with alternative lenders for the terms of certain financing products like they could with traditional banks.

Key Takeaways

Small business owners in need of capital must make prudent decisions on where to apply for financing. Alternative lending and traditional lending each have pros and cons, so it’s important to be educated on both. Generally speaking:

If you have the time and meet the criteria, traditional banks are probably the best bet for financing.
If you need funding fast, or have a borderline FICO score and a strong cash flow history, then an alternative lender might be the best choice for you to obtain capital.
While traditional banks generally offer lower interest rates on their loans than alternative lenders, the difference in those rates has tightened as interest rates continue to climb.
Traditional banks offer you the opportunity to conveniently have all of your financial services needs – including a business checking and savings account and business credit card – taken care of under one roof.
Alternative lenders have made great strides in providing personable customer service. Most offer small business financing specialists available by phone to help educate you and assist you in deciding which financing product is best for you.
Whether you’re applying for a loan with a traditional bank or an alternative lender, make sure to have your paperwork ready. This includes past bank statements, tax returns, and an updated business plan.

Before you decide how you want to get your business loan, it’s vital that you take the time to closely examine which type of lender best suits your small business needs. Make sure you know what to expect with both alternative lenders and traditional banks in terms of cost of capital and convenience.

Vince Calio

Content Writer

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Understanding Business Loan Requirements

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by Vince Calio12 minutes / August 15, 2023

Understanding small business loan requirements.

Looking to get your first small business loan? It can be a confusing process, especially when it comes to understanding the qualifications you’ll need to meet and why lenders have these requirements for a business loan. Both traditional banks and alternative lenders will judge your worthiness for a loan based on a specific set of risk criteria, whether you are seeking a basic business loan, an SBA loan, a line of credit, or any other type of financing.

Before you apply for financing, it will help you to understand how lenders determine how much of a risk you represent so that you can be ready to get approved. While much of it depends on your personal credit score, there are other factors that weigh heavily as well depending on the type of financing you are seeking.

What do I need to Qualify for a Business Loan?

Every lender, be it a traditional bank or alternative financing entity, will view you as a risk when you apply for a business loan, and will judge your risk based on specific factors before they approve your loan. Let’s run through the most common business loan qualifications and why lenders use them to evaluate whether they should approve your loan:

Personal & Business Credit Scores

FICO score. If your business is fairly new (2-3 years old) and you’re seeking your first loan or other form of financing, your personal credit score provides a quick snapshot of how well you manage your finances, both in the past and present. This indicates to potential lenders the likelihood of you making on-time payments toward a new loan. Three main credit agencies – Transunion, Experian, and Equifax – keep tabs on your debts such as credit card debt, mortgages, and car loans, tracking your payment history. Generally, the factors that make up your score are:

Payment history. This is the factor that counts most heavily toward your credit score. The longer your history of on-time payments towards your debt, the higher your score. If you don’t have a perfect history, you may want to wait before applying for a loan so that you can have 6-9 months of on-time payments.
Debt-to-credit ratio. This indicates how much debt you have relative to your credit limits. If your credit cards are maxed out, this indicates that you can’t manage your debt well, regardless of how many on-time payments you’ve made.
Debt history. Your credit score gets a boost if you have been in good standing with a credit card or other form of debt account for a long period of time.
The number of hard credit inquiries. This is when a lender or some other entity requests a detailed report of your credit score. This usually happens when you apply for a mortgage, car loan, or new credit card. If there are too many hard inquiries, this could indicate to the credit agencies uncertainty about your finances. This factor, however, isn’t weighed nearly as heavily as the aforementioned factors.
Credit mix. This indicates the number of different types of debt you have, including car loans, personal loans, mortgages, or credit card debt. This typically is not factored very heavily into your credit score, but it may be important if you don’t have a long credit history.

Which lenders look at your FICO score? Just about every type of lender, including traditional banks, alternative lenders, credit unions, and online lenders will pull your credit score when you apply for a loan. Alternative lenders typically require a lesser credit score, usually in the 650-680 range, than a traditional bank, which often requires a score of 680 or above.
For which types of financing is your FICO score most important? While your FICO score will be examined by just about every type of lender, the types of loans that it is most important to are bank loans, SBA 7a loans, and business lines of credit. There are also lenders that specialize in helping small business owners with bad credit.

Business credit score. If your business is established and has used financing in the past such as a business loan or a line of credit, or even if you have a business credit card, your business has a business credit score. These scores are produced by credit bureaus such as Dunn & Bradstreet, Equifax, Transunion, and Experian, with Dunn & Bradstreet being the most popular credit bureau that potential lenders look at.

Much like your personal FICO score, your business credit score gives lenders a quick overview of how well your business has managed its debt and expenses. A good business credit score will make obtaining financing for your small business much easier; will make your business more trustworthy to suppliers, and can even help lower your business insurance rates.

While you can usually access your personal FICO score for free, you might have to pay a small fee to one or all of the rating agencies to see your business score. A business credit score does consider additional factors beyond those that go into a personal FICO score:

How well you’ve managed your business’ debt. Much like your personal FICO score, if your small business has taken on financing such as a bank loan, SBA loan, or line of credit, a consistent history of on-time debt payments will be the biggest factor in determining your business credit score.
Personal financial information. Even if your small business is strong, the credit bureaus will still factor in your personal financial information, such as your assets, liabilities, and personal FICO score.
The riskiness of your industry. If your small business operates in an industry where closures and bankruptcies are frequent (such as the restaurant industry, for example), this could negatively affect your business credit score.
Assets. The credit bureaus will also take into account your business’ assets such as machinery, business vehicles, office equipment, real estate, etc. when determining your score. If your small business has a lot of valuable assets on its books, this could raise your business credit score.

Which lenders look at your business credit score? All lenders look at your business credit score if your business has been in operation for a few years and has previous debt, even a business credit card.

For which type of financing is business credit score most important? Depending on the type of lender you are dealing with, you will need a moderate-to-strong business credit score to obtain bank loans, term loans, SBA 7a loans, and business lines of credit. Your business credit score will also be looked at for equipment financing, but won’t be emphasized as much since the equipment you are purchasing serves as collateral.

Debt-to-revenue ratio. One of the most fundamental questions on the minds of potential lenders is, “can this business afford to take on additional debt?” As such, they are going to compare the existing debt of your business to your business’s annual revenue. If the number isn’t strong, they could determine that your business is too risky to lend to.

Which lenders look at debt-to-revenue ratio? Since this risk factor is so fundamental, most lenders closely look at this to determine if you qualify for a loan.

For which type of financing is your debt-to-revenue ratio most important? Most small business debt products do require a strong debt-to-revenue ratio, including term loans, SBA 7a loans, business lines of credit, and equipment financing.

Cash flow history/bank statements. Your cash flow is simply the amount of money that’s flowing into your business versus the amount of money that’s flowing out. A strong, consistent cash flow history indicates to a lender that you can afford to make future loan payments. It also indicates to them whether you spend money wisely on your small business and indicates the sustainability of your business. Doing this proves to your potential lender that your small business has a strong cash flow and will go a long way toward getting your loan approved.

Which lenders look at your cash flow history? Again, almost all lenders will examine your cash flow history and will want to see several months’ worth of business bank statements.
For which types of financing is your cash flow history most important? Your business’s cash flow history is generally most important to bank (term) loans, SBA 7a loans, lines of credit, invoice factoring, and revenue-based financing. For invoice factoring and revenue-based financing, lenders will want to examine your accounts receivables, the creditworthiness of your customers, and outstanding invoices.

Government documents. All potential lenders need to know that your business exists in the eyes of both your state government and the IRS. Before you are even considered for a loan, you need to show an Employee Identification Number for tax purposes. You also need to be registered as a LLC or a “Doing Business As” (DBA) company. If your small business is more profitable than most or has several different partners, you can register as an S corporation.

Which lenders look at your government documents? All lenders require this.
For which types of financing are your government documents most important? Providing these documents is necessary for any type of financing.

Business plan. Your business plan explains why your business is unique, what your market niche is, shows your current financial statements, and indicates how you plan to make money in the future, among other things. While it’s not an official business document, some lenders want to see one before they approve you for a loan, especially if you are seeking to borrow money to expand your business.

Your business plan will tell potential lenders that you plan to wisely spend the proceeds of your loan, that you’ve done market research, and that you have a well-thought-out plan to increase your revenue. A quick Google search can lead you to several services that offer business plan templates, often for free.

Which lenders want to see a business plan? Generally, traditional banks and SBA lenders will require a business plan as part of the small business loan application process. Alternative lenders often do not require this.
For which types of financing is a business plan most important? Traditional banks often require a business plan for a bank loan or SBA 7a loan.

Collateral. If you don’t have a strong credit score or your business is fairly new, a lender may require that you secure your loan with personal assets, such as your house, car, or any other possession of significant value. In essence, putting up collateral acts as a personal guarantee for a lender. While this may be a high-risk proposition for the borrower, putting up collateral on a loan could lower the cost of capital on the loan and increase the amount being borrowed.

Which lenders require collateral? Traditional banks usually require collateral if they believe a potential borrower represents a high risk. Some alternative lenders may also require collateral in rare cases.
For which types of financing is collateral required? Many traditional banks may require collateral for term loans and lines of credit if they deem the borrower to be high risk. For financing such as equipment financing and real estate the loans, the machinery, or land being acquired becomes the collateral.

Loans That Have Fewer Requirements

The requirements for obtaining a small business loan may seem overwhelming, but there are financing products that don’t require as much paperwork. These options are great for newer businesses and small business owners that have less-than-stellar credit scores. These include:

SBA CDC/504 loans. These loans are partially backed by the SBA and administered through community development companies (CDCs). These loans can be up to $500,000 and are often given to businesses for community development, such as renovating storefronts or hiring locally, but the proceeds can also be used for other purposes.

Small business owners typically don’t need stellar FICO scores to obtain this loan, and the interest rates are favorable. However, some CDCs have specific programs in which they only lend to women-owned and minority-owned businesses, or small businesses operating in underserved communities.

SBA Microloans. These loans are also backed by the SBA and carry very similar requirements as CDC/504 loans but offer small amounts – the maximum amount is $50,000 and in 2022, the average microloan amount was a little under $17,000.
Working capital loans. These loans are typically offered by online lenders and often charge high interest rates. They don’t emphasize credit scores as much as they do cash flow history, as they are meant for small businesses to keep their operations going during the offseason or when there is a downturn in the economy.

Additional Advice on Business Loan Qualifications

Making sure you meet the qualifications to get a business loan can be a daunting process. To give yourself the best chance of obtaining a loan, make sure you go over a checklist of things you need to do:

Start early. Loan applications, especially from traditional banks, can be long and complicated. Don’t wait until the last minute to start filling it out.
Get your paperwork in order. Most lenders require a mountain of paperwork, such as proof that your business is registered with both the state and the IRS, a business plan, a government-issued ID, and several months’ worth of bank statements and tax returns, among other things. Having this at your fingertips will make the process much easier for you.
Make sure you know why you’re borrowing money. Whenever you borrow money for your business, it’s crucial that you know exactly what you’re going to spend that money on so you’re not left with interest-bearing debt. Most importantly. You should be using borrowed money to invest in your business to increase your revenue to ensure that you can afford to make debt payments.

While loan requirements can be complicated, all it takes is some careful planning to meet all of them before applying for a small business loan. When you speak to a loan representative at either a bank or on the phone with an alternative lender, it’s important to be ready to meet all of their requirements beforehand to ensure that you get the loan that you need to grow your business.

Vince Calio

Content Writer

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Types of Small Business Loans and How to Choose One

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by Vince Calio10 minutes / August 15, 2023

Deciding which type of small business financing you need may be one of the most important decisions you can make as a small business owner. Here is a suggested guide.

If you’re ready to take on a loan or any other type of financing for your small business, you should give yourself a pat on the back. That usually means that your business has grown to the point where you’re ready to take on additional growth opportunities or you just need funding to keep your operations running smoothly. Before you get that business loan, however, one of the most important questions you need to ask is, ‘what type of financing should I get?’

Various types of small business lenders offer an array of loan options and other financing products for different purposes, and it’s crucial that you determine which product best suits your needs as a small business owner. While nobody really wants to pay interest, each financing option will offer a different cost of capital. There are also those that offer different repayment terms, while there are still others that are designed to fund specific business needs.

What types of loans are there and which one is best for you? You have an array of options, and which one you choose should depend on how you plan to use the funds, your business and personal credit scores, as well as the loan amount you’re seeking.

Types of Business Loans

Here are the different types of small business loans you can seek for your small business and how they can help you the most:

Term loans.

Term loans are offered by both traditional banks and alternative lenders. It is a large chunk of money that you receive all at once and agree to pay back over time with interest. The proceeds of a term loan (also called a bank loan) typically must be used for a specific purpose, such as expanding your business, developing and marketing a new product, or consolidating debt.

Traditional banks usually offer slightly lower interest rates than alternative lenders, but often demand that you have a good to excellent personal FICO and business credit score. The application process tends to be longer and more complicated than alternative lenders, and the funds may take days or weeks to be delivered to you. Alternative lenders typically charge higher interest rates but offer a simpler application process, typically have less stringent qualification requirements, and can deliver funds to you in as little as a day.

Small Business Administration (SBA) 7(a) loan

SBA 7(a) loans are essentially term loans given out by both traditional and alternative lenders, while the US Small Business Administration guarantees a large portion of them and sets the general borrowing requirements for small business owners. These loans typically offer the best interest rates when it comes to term loans, but come with a long list of requirements such as an excellent FICO (680 and above) and a business (80 or above) credit score. Also, it may take weeks to actually obtain the funds.

Working capital loan

These loans are typically offered by online lenders and typically don’t require a personal FICO or business credit score as high as a term loan. They are usually meant for small businesses with seasonal or uneven cash flows throughout the year that need to keep operations going during the offseason or when there’s a downturn in the economy. Depending on the borrower’s credit score, the interest rate can be very high.

Non-Recourse Loan

Non-recourse loans are often used in commercial transactions in which the real estate itself acts as collateral. In a non-recourse loan, the lender may only seize the collateral in the event of default or bankruptcy, even if the collateral does not equal the full value of the loan. A non-recourse loan, in rare cases, can also be applied to a secured term loan.

Lenders usually offer this type of loan with strict requirements, such as a very high credit score or performance guarantees. The SBA also offers some non-recourse loans through intermediary lenders, which also usually carry exceptionally strict requirements.

Commercial Real estate loan

If you’re a small real estate company seeking to invest in a property or a small business owner who’s decided that it’s in your best interest to purchase the property from which your business operates, a commercial real estate loan is your best option. It is essentially a commercial mortgage from a traditional bank in which the property being acquired becomes the collateral, so your credit score may not matter as much as your business plan.

SBA Microloan

An SBA microloan is offered through intermediaries, many of which are not-for-profit and are geared towards young small businesses (at least 6 months in operation) and carry fewer requirements and lower interest rates than bank loans. In some communities, these loans are offered exclusively to women- and minority-owned businesses, or small businesses operating in underserved communities. The maximum loan amount is $50,000 with the average amount in 2022 being slightly less than $17,000.

SBA CDC/504 loan

Like the SBA Microloan, these loans are typically offered through not-for-profit intermediaries and are typically granted to small businesses for the purpose of enhancing their communities through storefront renovation and increasing local hiring. They can also be used for land acquisitions and equipment purchases, and carry less strict requirements than bank loans. Unlike the SBA Microloan, they do offer larger amounts, with the maximum being $5 million.

Equipment loan

An equipment loan, commonly referred to as equipment financing, is just that: a loan that pays for the entirety of a piece of revenue-producing machinery (such as a business vehicle, tractor or manufacturing equipment) for your business. This is offered directly by traditional banks and alternative lenders. This type of loan usually offers an interest rate that is less than a bank loan, depending on the credit score of the borrower, since the machinery purchased acts as collateral for the loan. The catch is that the interest rate on this loan will usually be higher than if you went directly to a dealer and financed that equipment. However, if you buy directly from a dealer, you usually have to make a large down payment.

Non-Loan Business Financing Options

While there are a lot of different types of business loans, there are also financing products that are not technically considered loans, even though they involve lenders giving money to businesses in exchange for the principal and an interest rate or “factor” fees. These types of financing products can come in handy for specific purposes and sometimes can be more convenient than traditional loans.

Business Line of Credit (BLoC)

A business line of credit, offered by traditional banks and alternative lenders, gives your small business a predetermined amount of debt to draw upon for any business need. While conceptually similar to a credit card in that way, there are many differences. A BLoC often offers a lower interest rate than a business credit card but doesn’t offer rewards of any kind. Additionally, a BLOC has to be renewed, sometimes on an annual basis. It often has minimum withdrawal amounts; penalties for non-use and repayment terms that include full payment at various intervals.

BLoCs, however, are very flexible financing tools for a small business owner – the money can be used for any purpose at any time, including meeting payroll during the offseason or for purchasing additional inventory when customer demand unexpectedly swells.

Revenue Based financing (RBF)

RBF is a contract-based financing tool typically offered by alternative lenders. A lender will give a lump sum of money to a small business owner in exchange for a predetermined percentage of the business’ future receipts. The contract is based on a factoring model, which means that the portion of each receipt will be factored as a percentage to give to the lender or factoring company.

While this is usually a more expensive form of financing than a loan, RBF can be very useful if a small business owner comes across an unexpected growth opportunity or an emergency business expense. One positive is that factoring companies usually don’t consider your credit score as the most important qualifier when deciding to do business with you.

Invoice Financing

Often referred to as invoice factoring, this is a financing tool in which an alternative lender gives you money upfront for your unpaid invoices. The money upfront will be slightly less than the combined value of the invoices, but this type of financing enables small business owners to unburden themselves of the risk of slow-to-pay customers never paying. The potential drawback is that the small business owner may be forced into a longer contract than desired, and depending on the terms of the contract, may be on the hook for a portion of the money if the customers never pay their invoices.

Purchase Order Financing

Let’s say your small business receives a large order from a major retailer. However, the cost to produce this order is beyond your reach right now or you’re just not comfortable using up that much of your available cash flow to fulfill the order. This is where purchase order financing, another type of factoring product, can be incredibly useful.

With purchase order financing – usually done through an alternative lender – the lender will pay your suppliers upfront for inventory in exchange for a small percentage of the purchases being made, which are referred to as factoring fees. While this can be a bit expensive compared to other types of loan products, the cost of purchase order financing is covered by the amount you would be paid when fulfilling the order. While it may eat into your profit a bit, that is profit you wouldn’t have had if you had to turn down the order due to a lack of inventory. Additionally, high credit scores on your end will not be a requirement for this type of financing because the credit that is taken into account is the credit of your customer that made the purchase order.

Consider a Checklist to Help You Select the Right Business Loan for You

Choosing from the different small business loans available to grow your small business, meet unexpected expenses, or keep your business running smoothly is one of the most important decisions you need to make as a small business owner. Before applying, you should go down a fundamental checklist of questions you should answer before seeking financing:

Why do I need financing/what will the money be used for?
How much am I willing to pay for business financing?
Which types of financing are most convenient for me in terms of how I can use the money and how quickly will I receive it?
Which financing products am I most qualified for?
Do I have a realistic plan for making loan payments or paying the factoring fees?
Does my current cash flow justify taking on financing?

Answering these questions beforehand will help you make the wisest decision possible on what type of financing you need, what financing you’re able to afford, and will – ultimately – help your small business flourish in the long run.

Vince Calio

Content Writer

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A Guide to Small Business Loans for Veterans

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by Brandon Wyson14 minutes / August 14, 2023

A guide to small business loans for veterans

Veteran small business owners are a strong community of achievers with a background in determined hard work. It’s no wonder so many veterans shift into starting and running a business when they rejoin civilian life. However, while time spent as an active duty service member can be an advantage when dealing with the demands of day-to-day business operations, it can also impede veteran business owners’ chances of obtaining business financing – with service-related gaps in financial history making it more challenging (and more complicated) for veterans to get business loans than their non-military counterparts. There are still great options out there, though. It just may take a little more time and a little more paperwork to put your hands on some funds. Let’s explore the most popular loan options for veteran small business owners.

Small Business Loan Options for Veterans

Veteran entrepreneurs can choose from a large selection of business loans and financing options provided by traditional banks and alternative lenders, along with loans that are backed by the federal government through the Small Business Administration (SBA). Loan options vary by lender and will have their own set requirements laid forth by each lender. Depending on your specific situation, one loan type will likely serve you better than another so fully researching each option to select the best financing for your business is critical.

Personal Loans for Veteran-owned Businesses

Let’s begin with one that you may not expect: It is more than possible to take out a personal loan to boost your small business. While business loans are frequently based on the overall financial standings of your enterprise itself, the terms of personal loans will be based on your personal creditworthiness and financial health. Using personal loans for your business, however, has its own set of rules and considerations.

Pros of Using a Personal Loan for Your Business:

While there are options for secured personal loans, the majority typically do not require collateral, which means you’re less likely to be risking any of your personal assets to finance your business with this option.
For new and very small businesses, it can be much easier to qualify for a personal loan than a traditional business loan. In addition, you can use the funds from your personal loan for virtually any expense.
You can get access to funds quickly – usually within a few days after you are approved, though some personal loans offer same-day funding. And personal loans typically come with very reasonable terms, ranging anywhere from two to seven years (though some lenders will go out as far as 10-12 years for much larger personal loans.)

Cons of Using a Personal Loan for Your Business

You will have access to less money with a personal loan. In rare situations, some lenders do offer personal loans up to $100,000; but, typically, most lenders will only go up to $50,000 for very qualified candidates.
APRs tend to be much higher with personal loans, with the average being about 11.05% in 2023, according to Bankrate. In addition, interest on a personal loan isn’t tax-deductible, unlike interest paid on a business loan.
Regardless of whether you go for a secured or unsecured personal loan, you will be putting your personal credit on the line. If you do opt for a secured loan, you will also be putting personal assets at risk if you are unable to pay the loan.

Taking all of the positives and negatives into account, veteran business owners should be cautious when they decide to leverage a personal loan for business use. The scenario is best applied for new or very, very small businesses that aren’t likely to be approved for business-specific financing.

Loans from Family & Friends

Depending on your circumstances, taking out a loan directly from friends or family may be one of the best options available to small businesses – especially startups. While traditional financing will uniformly lay out terms and conditions (with the expectation of prompt payment), loaning money on a personal level requires a level of trust and understanding between both parties that extends beyond a pen-and-paper contract.

Pros of Friends & Family Loans:

Friends & Family loans can be much more affordable for business owners, as individuals with this personal relationship often won’t charge as much in interest. In fact, they can waive interest overall for other benefits, such as a stake in ownership, royalties/revenue share, or even a lifetime discount for your products.
This type of loan also has the potential to add more flexibility than “official” lenders. If you need to delay payment or you want to pay off the loan early, friends and family are more accommodating and less likely to charge you additional fees for these types of scenarios.
These loans are a particularly great option for veterans who have a limited credit history that precludes them from accessing financing elsewhere.

Cons of Friends & Family Loans

You’re making business personal which could negatively impact your relationships. Missed payments, disputes over a loan agreement, or a sense of general awkwardness if your business isn’t making money as quickly as you’d hoped, could all lead to a damaged personal relationship.
While these loans are great options for those with limited credit, they can also be a detriment to your credit profile since they will not be helping you to build or improve your credit standing – which is something that you will need if you want to get more financing from a traditional lender down the line.

Like personal loans, friends and family loans can be a great option for new and very small businesses. They can also be a viable loan option for business owners with limited or bad credit. However, make sure you have a strong agreement – that both parties are happy with – in place to help insulate your relationship from any potential damage.

Term Loans

Term loans are what most business owners think of when they hear the word “business loan”.Term loans are one of the most straightforward ways to get a lump sum of working capital for your small business. Interest rates on military business loans like these can be fixed or floating and they are available as both short-term and long-term loans. Business term loans can be used for virtually any business purpose, but some lenders do have restrictions on how you use the funds.

Pros of Using a Term Loan for Your Business

With business term loans you don’t have to give away any ownership of your business to get access to funds like you would with some other types of financing
There are many types of business loans available so finding one to suit your exact needs and business situation is relatively easy so long as you qualify.
Unlike other kinds of financing, interest payable on a term loan is sometimes tax deductible. You should always check with your accountant prior to signing a loan contract to determine if you can take advantage of this tax deduction.

Cons of Using a Term Loan for Your Business

Business term loans tend to have stricter requirements than other types of business financing (especially when it comes to credit scores) and they typically require quite a bit of paperwork – from bank statements and tax returns to financial statements and a business plan
If you are a newer or very small business, term loans aren’t typically a great option as they’re very hard to meet time in business and revenue qualifications set by lenders.
If you need money quickly, you may want to consider other financing options. Business loans tend to take longer – from several days to several weeks – to get a decision on whether or not you were approved. In addition, once you are approved, it can take another several days to weeks to get the funds in your account.

SBA Loans

For honorably discharged veterans, service disabled veterans, active duty military members who are eligible for the TAP program, active reservists, and National Guard members, the SBA offers a number of loan programs designed to help you get access to the capital you need to start, grow and manage your business. Through their Veteran’s Advantage Loan Program, the SBA will provide “fee-relief” on small-dollar loans along with training courses and counseling that help veterans become “lender ready”.

SBA 7(a) Loan

7(a) loans are the most well-known and the most common type of SBA loans, which actually represent an entire class of loans with limited fees, capped interest rates, and a partial guarantee of the total capital offered in the loan. Standard 7(a) loans can offer up to $5 million in capital. The terms of a 7(a) loan are typically determined by your use of the funds. For example, if you plan to use the loan for real estate, terms can go out as far as 25 years but if you plan to use the loan to purchase equipment, for example, terms are capped at 10 years.

Under the Veteran’s Advantage program guaranty fees for standard 7(a) loans are discounted by 50%.

SBA Express Loans for Veterans

SBA Express loans are a type of 7(a) loan that boasts an accelerated review turn time of 36 hours by the SBA. These loans can go up to $500,000 and have terms that can extend up to 10 years. Under the Veteran’s Advantage Program, your up-front guarantee fee for an express loan is 0%

SBA Microloans

SBA microloans are only offered up to $50,000 and are generally considered the best option for veteran small businesses still in the early stages of business. According to the SBA, interest rates will always depend on the intermediary lender, but generally range from 8 to 13 percent. Further, the maximum repayment term possible is six years.

Military Reservist Economic Injury Disaster Loan (MREIDL)

While not specifically for veterans, this is a helpful loan if you have an essential employee who is a reservist that was called up to active duty. MREIDLs provide funds to assist eligible small businesses to meet their ordinary and necessary operating expenses that have been severely impacted due to the absence of the now-active reservist employee. Loan amounts can go up to $2 Million, but the actual amount will be determined based on SBA calculations of the actual economic injury to the business.

Pros of SBA Loans for Veterans:

SBA loans tend to be the most cost-friendly loans available to all small business owners. They are even more so for Veterans through the Veteran’s Advantage Program fee reductions.
There is a variety of loan types that are backed by the SBA that come with favorable interest rates and longer payment terms making it easy to find a loan that can fit your current business needs

Cons of SBA Loans for Veterans

There is a ton of paperwork involved when applying for an SBA loan and there are many strict requirements for qualification, including the fact that you need to exhaust all other forms of financing first. In addition, collateral may be required for approval.
While there are a variety of loans available, you are limited on how you can use the funds based on each loan type. It’s important that you nail down exactly how you plan to use your funding to ensure that you apply for the appropriate type of SBA loan.

Additional Financing Options for Veteran Business Owners

While there are several great veteran business loan programs out there, loans luckily aren’t the only financing option available for veterans. Here are some alternative financing options that veterans should consider based on their needs:

Revenue Based Financing

Revenue based financing is a type of financing that allows businesses access to working capital through a pre-purchase of future revenue. Essentially, a financing partner or lender will provide you with a lump sum of cash based on expected future sales. You “sell” this future revenue at a discounted rate to get money to run your business today. This is a short-term type of financing with terms averaging around 6-12 months. Payments are typically made daily, though some lenders allow for weekly or monthly payments and payment amounts are based on a pre-determined percentage of that day’s revenue. This percentage is fixed, so if you make less in sales on any given day, your payment to your lender will be less that day. If you make more sales, your daily payment is larger.

Equipment Financing & Leasing

If you’re looking for financing to add or upgrade business equipment, equipment financing or leasing may be the way to go. Depending on the lender you choose, you may be able to finance 100% of the cost of the equipment and the asset that you are purchasing typically acts as collateral.

Business Line of Credit

A line of credit is one of the most flexible forms of financing available to small business owners. This revolving form of financing allows you to draw on funds when needed and you only pay interest on the amount you use. Businesses can draw and repay multiple times throughout the term of the line. Lines of credit tend to suit the veteran business owner either looking to keep more working capital on hand during slow seasons or those who are expecting a repeating and predictable expense that would make too large of a dent in available cash flow.

Where Else Can Veteran Business Owners find Money to Grow?

If formal financing arrangements aren’t in the cards for you right now, there are still several great ways for veteran small business owners to connect with the capital they need.

Grants for Veteran-owned Businesses

There is a robust collection of organizations that offer grants specifically for veteran business owners. Beyond simply offering grants, several of these organizations offer additional resources for veterans, doubling as mentorship organizations and offering a great community for the veterans who join up. And at that, many also have connections for picking government contracting work or special resources for disabled veterans.

Crowdfunding

Americans love their troops and any veteran business owner with an interesting business plan or a charismatic screen presence ought to consider bringing their business to crowdfunding. Crowdfunding is a way to raise capital for your business by tapping into your extended network, whether that be family, friends, customers, and/or individual investors. There are two primary forms of crowdfunding – rewards (where you offer something non-money related to those who contribute money) and equity (where you offer equity in your business in exchange for monetary contributions). While the main purpose of crowdfunding is to raise capital, there are additional benefits as well including brand awareness, growing your customer base, and potential partnerships.

Business Credit Cards

A business credit card is a great resource, especially for filling small gaps in your operations or giving yourself a small cushion for your working capital. When choosing a business credit card, however, be certain to weigh as many options as possible as the sign-on deal of your card is likely the most lucrative benefit you can take advantage of.

Before You Apply for a Small Business Loan

Getting a business loan can be a complex and time-consuming process. Each lender and each loan type comes with its own requirements, risks, and rewards so it’s important for you to do extensive research before even applying. From understanding your own business needs to breaking down the total cost of financing for each loan type, there are multiple steps you should take when going through the process of getting a business loan.

Don’t let this deter you, though, as there is a world of veterans’ small business loans and other financing options just some clicks away.

Brandon Wyson

Content Writer

Brandon Wyson is a professional writer, editor, and translator with more than eight years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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Are there Business Loans for Women?

Manage Your Money

by Brandon Wyson16 minutes / August 14, 2023

It’s been noted time and time again: female entrepreneurs begin in the business world with a social impediment that their male counterparts don’t. But at the same time, today there are more female entrepreneurs than ever before. Women, however, are still statistically less likely to be approved for financing compared to men.

While there technically are no programs reserved specifically for supplying loans for female business owners, there are a number of resources available to women business owners to help them run and grow their businesses. Let’s discuss the state of women and the small business world on three levels:

Why women are less likely to get approved for financing
The top financing options available today, and how to better set yourself up for an approval
Grants and other development programs created specifically for the benefit of women-owned businesses

Why Are Women Being Approved Less for Business Loans?

Despite the fact that women make up a growing percentage of today’s small business owners, there is still a large funding gap when you compare business financing secured by women with that secured by men. While there are many reasons for this gap, some of the largest are the result of being unable to meet the basic qualifications set forth by most lenders. Below are some of the primary reasons women have more difficulty securing business loans than men:

Industry: Every lender takes industry into account when reviewing a loan package. Why? Because some industries are inherently riskier than others. One of these risky industries is retail which tends to have higher expenses and lower profit margins. Many women-owned businesses are in the retail sector.

What can you do about this? Completely changing the industry of your business is likely not an option, but there are a few things you can do – regardless of the industry you’re in – to help improve your options for the future including:

Figuring out ways to lower your business overhead
Building a plan to increase your revenue
Start by borrowing smaller amounts of money and ensuring that you pay them off on time

Time in Business: Regardless of who owns a business, if the business is in its early stages of operation (typically under two years in business), many lenders will not provide financing because the business does not have enough history to show it can maintain profitability and meet payment obligations. The number of women-owned businesses has been picking up significantly over the past couple of years, so many of them simply haven’t been in business long enough to qualify for conventional financing.

What can you do about this? If you’re able to, you can opt to wait out this two-year period. But, in order to keep a business running – especially in its early years – financing is needed. Fortunately, there are some alternative lenders who are willing to be more lenient about this requirement if you show both good credit and at least six months of very strong revenue and consistent positive cash flow.

More Risk-Averse: There are a number of studies out there showing that women are more averse to taking risks than their male counterparts. This can show itself on many fronts in a business – including women being less like to bring in outside investors (they don’t want to have to run decisions by others) and being less likely to take on capital that comes with a higher cost, which limits their ability to take advantage of opportunities to grow their business.

What can you do about this? Ultimately, being risk-averse can be a good thing – but in business, taking on some risk is necessary. If you have a legitimate growth opportunity in front of you, it could be to your advantage to reconsider what financing options you are willing to use. Absolutely still consider it as a risk, but be strategic in that consideration. Run all of the numbers. Determine if paying higher rates is worth the cost because, ultimately, your new endeavor will cover that cost of financing and give you additional profit at the same time. Truly consider if bringing in investors will impede your decision-making processes as much as you think. Only you can answer these questions and make the final call, but it is definitely something that you should research and consider strategically before making that call.

At the end of the day, it’s all a numbers game when it comes to lenders AND running your business. Improve your numbers and you improve your chances of being approved and growing your business.

Best Small Business Loans for Women

Let’s break down the types of loans that are available today, covering those that are not just popular but also attainable for many of today’s women business owners. There are several ways to connect your business with a business loan – from online lenders to traditional financial institutions. But before partnering your business with a lender, it’s key to consider each type of small business loan on the table and which may be best for you.

SBA Loans

The Small Business Administration (SBA) doesn’t technically offer loans themselves but instead guarantees loans carried out by partner lenders and traditional banks. Because of this guarantee by the Federal Government, the interest rate of SBA loans tends to be much lower – following the Prime Rate (this is the interest rate benchmark set by the Federal Reserve System on a nightly basis). Lower rates and a federally-backed guarantee make SBA loans a great option for reducing risk for both the lender and business owners.

SBA 7(a) Loan

The SBA 7(a) loan is often called the most popular of the SBA loans for women business owners. And for good reason: the SBA 7(a) loan is versatile. Business owners can finance up to $5 million with the 7(a) program. From real estate to payroll, an SBA 7(a) loan can meet just about any reasonable business need.

SBA Express Loans

SBA Express loans fall within the 7(a) loan program. They come with lower loan amounts than the standard 7(a), capping out at $500,000 but they also come with an expedited review by the SBA. Express Loans can be used for a wide range of business needs – from purchasing equipment or real estate or for basic working capital. If you are a female veteran business owner, this is an excellent option for you to consider as the Veterans Advantage Program allows for significantly reduced fees with the SBA Express Loan.

SBA Microloans

Microloans from the SBA generally have smaller payouts and shorter repayment terms, as the name would imply. Specifically, SBA-guaranteed microloans are offered up to $50,000. The most notable difference between a 7(a) and a microloan, however, is that microloans cannot be used for refinancing or buying real estate. SBA Microloans are a great loan option for women with businesses in the startup phase because they come with fewer requirements than the popular 7a loans

Term Loans

Term loans are one of the most widely used types of financing available to businesses today. Term loans are generally what most people think of when they hear the word ‘loan’. Term loans are an agreement between a business owner and a financial institution to give an approved loan amount with a set repayment schedule. That repayment schedule is the ‘term’ in term loans.

Term loans generally give the full principle of a loan upfront. Because of this, term loans can be very helpful for getting more cash flow into your coffers. Depending on what you are looking to finance, term loans can last either a fairly short amount of time or several years. Of course, term loans with longer terms and more capital at stake will generally require a higher credit score, more time in business, and a strong history of positive financial statements.

Personal Loans for Business

If you’re in a pinch, it is entirely possible to take out a personal loan and use the funds as capital to better your business as long as your lender has no restrictions. If you have decent credit, a personal loan could end up providing you with better interest rates than a business loan, which is always a win. However, there are some drawbacks: personal loans typically come with much lower amounts than traditional business loans. In addition, you are potentially putting personal assets on the line if you fail to meet your payment obligations. When used responsibly, this can be a great option for women-owned businesses, particularly those in the beginning stages of the business journey.

Loans from Family & Friends

Taking out a loan from friends or family rather than a financial institution has a whole different set of rules. Rather than your financial record being the biggest indicator of your trustworthiness, you’ll functionally be relying on your social record. This is, once again, a rather common option for female entrepreneurs in the beginning of their business journey.

And while there are several big-name success stories of today’s Fortune 500 who started their way with capital from a friend or family, the main rule of financing remains here: only borrow the money you are certain you can pay back. Instead of just affecting your credit, you risk breaking the ties that bind.

Additional Financing Options Women Business Owners Should Consider

Beyond small business loans, there are several other types of financing that are worth considering depending on your needs and current situation.

Revenue-Based Financing

Instead of paying central attention to your credit score and personal financial reputation, revenue-based financing approvals are based more heavily on exactly what you would expect: your revenue. While there are still minimum credit score requirements to be aware of, revenue-based financing generally allows the strength of a business to speak for itself.

Revenue-based financing is not a loan. Instead, a lender will purchase a percentage of your future sales. This gives you cash on hand today for sales you wouldn’t make until tomorrow (or over the next couple of months). Because revenue-based financing is not a loan, there is no actual interest rate. Instead, there is a factor rate that will not change throughout your agreement with the lender. Repayment is made by paying a percentage of your daily, weekly, or monthly sales (depending on the contract terms with your lender) until the entire amount provided, plus the factor and any fees are paid back. Revenue-based financing can be extremely expensive, so it should only be used very strategically and is ideal for opportunities that would generate a large enough return to both cover the cost of the financing and put profit in your account.

Business Line of Credit

A business line of credit is functionally a borrowing limit that allows your business to take out capital until a predefined upper cap. You pay interest only on the portion of the line you’ve used. And, once you pay back what you’ve used, you can use it again, making one of the biggest advantages of a business line of credit is its flexibility.

For example, if you take out a line of credit with an upper cap of $50,000 and you only use $5,000 in a billing period, you would only pay interest on that $5,000 and not the entire $50,000. Further, if you pay the full balance of your line before the end of the month, you won’t pay any interest.

Lines of credit can be used for almost any business purpose, so it is a great way to cushion your bottom line and cover unexpected expenses.

Equipment Financing

Equipment financing is a great way to get expensive or timely machinery for your business. The logic goes that you approach a financial institution with the specifics on a piece of equipment you need for your business.

The institution can agree to pay either a percentage or the entire price of the machinery on the agreement that you will pay back the principal with the assistance of that machinery. The equipment in question also tends to act as collateral or in some cases the lender may demand to take out a lien on the equipment in the place of collateral.

Choosing the Right Loans for Your Businesses

Considering the world of lending options available for women-owned businesses, it is essential to weigh the value – along with the cons – of each financing option available to determine which is best for your current business needs. Here are some tips to help you determine what loan option is right for your business.

Make a Detailed Plan

Female loan applicants ought to start by laying out a plan that considers every step of the loan journey – from completing an application all the way through to how you plan on spending your capital if you’re approved AND how to recover if you’re declined for a business loan.

Step 1: Determine how Much Capital you Need

Before even looking at your loan options, sit down and find a firm figure as to how much capital you want and, further, how quickly you would like to get it. You should list out all of the items/services your business needs and then research the estimated cost for each. Once you have the list fully compiled, you need to prioritize them. From there you can gauge a range of financing amounts that will help you accomplish your goals.

Step 2: Look into Your Prequalification Options

Several online lenders offer full prequalification at no cost to you. Using pre-qualification is a great way to learn how lenders see your business. It can also help you determine just how much loan you can afford. Once you’ve got your prequalification numbers, it’s time to go back to your list of needs and shuffle as necessary.

Step 3: Select your lender

Choosing your lender should not just be based on interest rates. Choosing a financial institution or online lender is a mutual recognition of value and trust. Remember that your lender is pitching themselves to you just as much as you are pitching your business to them. Look closely at their reviews to see how they treat customers. Ask questions to see if their business practices will meet your needs – will they work with you to come up with the right payment plan for your business? Do they allow early pay-off without any fees? Do they provide support to their customers even after they are funded? There’s a variety of ways to determine if a lender is the right financing partner for you – it all just depends on what, as the customer, would like to see in that relationship and then finding the best lender to fit that wishlist.

Step 4: Gather paperwork

The best lenders are generally quite upfront about their paperwork requirements but the most common paperwork to expect and have handy are:

Six most recent bank statements.
Two years of business tax returns
Business Plan
Financial statements, including your income statement and balance sheet
Budget and cash flow projections
Government documents including all business licenses, your business registration and your EIN

Not all lenders will require all of these documents, but some will, so the specific paperwork you need will be determined by the lender you select. Your chosen lender will be able to provide you with the full list that they require for underwriting and approval.

Step 5: Apply for your loan

This is the easy part. If you have a good financing partner, application processes ought to be smooth and straightforward.

Step 6: Compare offers

Lenders will often give you multiple term options, some lenders, like Kapitus, even have the ability to offer you different financing products based on your single application. The best lending partners will consider your business structure and guide you toward the terms that make the most sense for you. But it is also essential to do your own research and confer with all those who are involved with your business’s finances.

Step 7: Read the Fine Print

We all know it. But let’s say it again for the sake of how serious this is: always read the fine print of your loan agreement and make sure you understand everything in your BEFORE you sign on the dotted line.

Additional Financing Resources for Female Business Owners

There are even more alternatives out there for women entrepreneurs who are looking for more ways to boost their business’ cash flow. If a loan isn’t right for you at the moment or if you’re simply looking to diversify cash flow sources, consider these options.

Business Credit Cards

There are several well-known financial institutions that offer credit cards tied to the credit score and creditworthiness of your business rather than you personally. Choosing the right business credit card, of course, has its own key considerations, so be sure to thoroughly research all options.

Crowdfunding

If your business has a fascinating plan for expansion or you’ve faced extraordinary hardship, you may want to consider creating a crowdfunding campaign. There are several women business owners who have found tremendous success through the help of others.

Consider the success story of Hannah Kromminga and her company Silfir. Kromminga caught the attention of the crowdfunding public because of the unique style and quality of her workwear made with sustainable materials. Because of some snappy videos and effective marketing, Silfir more than exceeded her funding goal.

And crowdfunding is a great way to get the capital your business needs while spreading the word about your business.

Grants for Women-owned Businesses

There are luckily plenty of small business grants reserved specifically for women business owners, minority-owned businesses, or female veterans. While loans will always expect repayment, grants are often obligation-free. Among the most reputable small business grants for women is the WomensNet amber grant which gives monthly small business grants to female business owners and has built an impressively active community of female business leaders.

Keep Going!

It is no small thing being a female business owner. In fact, each small business success from women today further opens doors for future generations of women business owners. So, don’t give up. Keep learning. Keep doing. Keep growing. Keep succeeding!

Brandon Wyson

Content Writer

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Declined for a Business Loan? Take These Next Steps

Manage Your Money

by Vince Calio9 minutes / August 14, 2023

Declined for a Business Loan? Take These Next Steps.

Life is a process of trials and errors, and there’s probably no one for whom that statement rings more true than a small business owner. This statement especially applies when small business owners apply for loans to gain much-needed capital to ensure their businesses grow or to smooth out their cash flows. What if, however, a lender denies your application for a small business loan, even though you thought you took all the necessary steps to obtain that financing?

First thing’s first: while getting a business loan rejection is frustrating and disheartening, you need to keep a positive mindset. If your business loan was declined, don’t look at it as a failure, look at it as one of the many lessons you will learn as you run your business. There are specific steps you can take to make sure you get approved the next time around – and it might not take as long as you think.

The following are steps to take after you’ve been rejected from a business loan and how you can improve your situation to increase your chances of approval on your next attempt.

Talk to Your Lender

The first thing you should do after being rejected for a small business loan is try to get into the mindset of the lender.

Small business lenders – be it traditional banks, alternative lenders or credit unions – make money by giving loans and collecting interest and fees on those loans. Therefore, whenever a small business applies for a loan, they want to be able to approve it. So, if you do get rejected, give them a call, and they will be happy to give you the specific reasons why your application was rejected.

Also, keep in mind that lenders are in the risk business. The simplest and most general reason that you, the small business owner, gets rejected for a loan is that the lender does not have enough confidence that you will be able to pay back the loan and believe that you represent too much of a risk of default. There are a lot of factors that go into deciding how risky you are as a borrower, and again, the lender will be more than happy to tell you which criteria you didn’t meet.

Improve Your Credit Scores

When you apply for most types of business loans, the first two items the lender will look at are your credit reports – for both your personal credit score and your business credit score. One of the most common reasons small business owners get turned down for loans is that their credit scores aren’t high enough.

You can find lenders that are willing to give loans to those with poor credit scores, but they charge exceptionally high interest rates. So, if you’ve been turned down for a business loan because of your credit scores, it’s worth it to take the time and effort to take steps to improve those scores to avoid paying high interest rates.

Some steps you can take are:

Check your credit reports. You can easily access your detailed, personal credit reports through the three main credit bureaus – Experian, Equifax, and Transunion, and you should check your business credit score through the most commonly used business credit bureau, Dun & Bradstreet. Check for any errors that may be dragging your score down. Remember, in 2022 it was found that on average, 1 in 5 people had errors on their reports. You may have to pay a small fee to gain access to your reports, but it’s worth it in the long run.
Make sure you have at least 6-9 months’ worth of on-time payments towards your existing debts. This includes payments towards business and personal credit cards and any other debt your small business may have. Nothing hurts your credit score more than a history of late payments on your debt.
Pay down existing debt. Credit utilization (the amount of debt you have on your credit cards or business lines of credit vs. your credit limit) is factored heavily into your credit score, so if you can, take a few months to bring that number down.
Get another credit card. This might seem counterintuitive at first as you may be thinking, ‘The last thing I need is another credit card.’ However, getting another personal or business credit card (but not using it!) will decrease your credit utilization and can boost both your personal FICO and business credit scores. BUT, note that this will only help in some situations and it may take some time for you to see the positive impact. Getting a new card can initially lower your score due to the hard credit pull by the card issuers. In addition, a new card can lower the average age of your accounts. However, the longer-term gain may just be what you need to tip the scales in your favor!
Get trade references. If you have good relationships with your suppliers, you can try to convince them to write letters to your credit bureaus stating such. These letters are called trade references, and they can boost your business credit score as most business credit bureaus don’t initially factor that into your credit report.

Reconsider Your Financing Options

A term loan from a traditional bank isn’t the only way to get the capital you need for your small business, nor are traditional banks the only types or lenders out there. There are financing products in which lenders don’t put as heavy of an emphasis your credit scores, such as:

Secured loans. A secured bank loan or business line of credit will emphasize credit scores less since they are backed by collateral.
Equipment loans. Equipment loans use the equipment being purchased as collateral, so your credit scores typically don’t have to be as high as they would for a standard business loan.
Small Business Administration (SBA) microloans and 504 loans. These types of SBA loans are backed by the SBA and are often geared towards younger small businesses, women- and minority-owned small businesses and small businesses that operate in underserved communities, so lenders typically don’t heavily emphasize credit scores when approving these loans.

Also, if you’ve gotten a loan rejection from a traditional bank (especially for a SBA 7a loan, which has very high standards) because your credit scores are borderline, you may want to try applying with an alternative lender. Alternative lenders often have simpler business loan applications and are more willing to approve borrowers with borderline credit than traditional banks.

Improve Your Cash Flow

Almost every type of lender will want to see several months worth of bank statements for your business, as well as several years of tax returns in order to gauge your cash flow history. Cash flow is simply the money flowing into your small business vs. the money that’s flowing out. In some cases, you could get rejected for a loan if your cash flow isn’t strong enough.

In this case, you may want to seek ways to improve that cash flow, but it may be a painful process. The most immediate way to improve your cash flow is to curb your business expenditures. This may mean letting some employees go and curbing excessive business expenses such as trips, business meals, cutting down on low-selling inventory, etc. Doing so could very well get you approved next time.

Improve Your Business Plan

Traditional banks often require you to present your business plan, especially if you are applying for an SBA 7a loan, which has strict borrowing requirements. If you’re seeking a loan to expand and grow your business, you need to convince the lender that you are going to increase your revenue stream. This is where a business plan comes in handy.

A detailed business plan tells a lender that you’ve done your research about the market your business operates in, why you believe your business has an edge on its competitors, and how you plan to make money. A convincing and detailed business plan can mean the difference between an approval or a rejection. You can find business plan templates online, and many of them are free.

Take an Inventory of Your Assets

If your credit scores are borderline, a traditional bank or credit union may ask for a personal guarantee for your loan, which often means putting up collateral. Collateral can include any investment accounts you may have, personal items of high value or even the deeds to your house or car. Keep in mind that these assets can be seized in the event that you default on your loan payments.

Of course, putting up collateral presents a high risk to you, the borrower, but it does have potential rewards. Collateralized loans or business lines of credit can notch you a higher borrowing amount and lower interest rate, as well as cut down on fees and required balloon payments. In essence, collateral can dramatically cut the cost of capital on your loan.

Try to Expunge Your Record

While it’s rare, small business owners may get rejected for a loan because many lenders want to do business with people of “high character.” This means that if you’ve made a mistake in the past and have been convicted of a crime, late on child support payments, or have an IRS tax lien on your finances, lenders will consider this a red flag and you may get rejected for a loan. If this is the case, you may want to speak to your attorney to see if you can get your record expunged, and get caught up on any child support payments or back taxes you may owe.

Don’t Give Up

We all know the line made famous by The Godfather: “It’s not personal, it’s just business.”

This is precisely the case when you’re turned down for a business loan. If you do get rejected, don’t take it personally, and don’t give up. All a loan rejection means is that you need to take steps in order to get approved next time so that you can get the funding you need to improve your small business. Follow the above outlined steps to improve your situation so that, next time, you can get the funding you need to enhance your small business.

Vince Calio

Content Writer

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Best Business Loans for Startups

Manage Your Money

by Vince Calio15 minutes / August 14, 2023

Can I get a business loan for my startup?

There are many ways to describe what it’s like to start a business: exciting, ambitious, and passionate, to name a few. Almost every small business owner would agree, however, that there’s one word they would never use – easy. For all types of businesses, one of the most difficult challenges for any new small business owner is obtaining capital to launch your new endeavor. After all, some 47% of small businesses that fail after two years do so because they run out of money.

Apart from new dentists and doctors’ offices, traditional banks generally don’t offer loans to brand-new businesses, so startup business owners must look elsewhere for funding. The good news is that there are business loans available for new business owners, but each carries a different interest rate, terms, and personal credit score requirements, so it’s important to get educated on the different sources of funding available.

How to Qualify for a Startup Business Loan

Before you begin exploring the best business loans for a startup, take steps to make sure you qualify. This means that you need to check factors such as:

Your personal credit score. Much of your personal credit score (or FICO score) is determined by your debt repayment history, your debt-to-credit ratio, and how much outstanding debt you have compared to your income. As soon as you begin your application process for a small business loan, this is the first factor that lenders will look at.

If you have less-than-stellar credit, some of the ways you can improve your FICO score are by making sure you are current on all of your credit cards; paying down as much of the outstanding balances as possible. It’s also crucial to check your credit report with the three major credit bureaus to get rid of any errors that may be on it.

Your Repayment Plan. Ask your potential lender for a detailed repayment plan on the types of financing you’re considering. You can impress your lender by showing them a detailed plan of how you intend to meet your payment obligations. This could be in the form of a simple document demonstrating the income you believe your business will achieve and how you believe you will be able to handle the repayment terms.
Potential collateral. Many private lenders will require collateral as a condition of approving the loan, especially for startup business owners with poor credit. If you own a house, have money in your personal savings, or own other items of high value, the lender may require that you put those up as collateral.
Your sales pitch. If you need a loan to start a business, or you need working capital to fund your new business, you’ll need to convince a lender that your business is viable as part of the application process. This means explaining to your potential lender why you believe your business will make money, who your market is, and what differentiates your small business from your competitors. Lenders will be impressed if you show them that you’ve done a thorough evaluation of your market and have a sound marketing plan to sell your products and services. If your business has been running for a short time, it would also help to show your potential lender your financial statements to demonstrate a strong cash flow.

Assess Your Financial Needs

Before considering a small business loan or other types of financing for your new venture, you need to itemize what you need to spend money on, and what the general costs are. This will give you an idea of how much money you need to borrow and the type of loan you should consider. Once you’ve come up with your unique idea and product offerings for your business, assess what you will need to spend money on to make it happen:

Manufacturing and inventory. Whether your business is online or operates out of a brick-and-mortar location, it won’t get very far if you don’t have products to sell. Manufacturing your product and having enough inventory will cost money. It’s crucial that you realistically gauge the market and determine the amount of products or services that you expect to sell and figure out how much that will cost.
Marketing strategies. Your great product or service won’t do you much good if potential customers don’t know about them. Determine who your target audience is and devise a marketing strategy to reach them. This may involve having to purchase marketing software that enables you to reach your potential customers via SMS, email, social media, and search engine optimization strategies. Determine what software you need and estimate the cost.
A website. No matter what type of business you are running, having an online presence– even a rudimentary one – is crucial, as most consumers today begin their search for products and services online. Even if you use a website builder and hosting service such as Wix or Squarespace, there can be fees involved. Do your best to estimate the cost for this vital business component.
Equipment/machinery. If you’re planning to launch a new restaurant, construction company, or any other small business that offers physical services, you’re going to need equipment to run your business. Assess what equipment you’re going to need and the costs.
Rent money for a physical space. If your business will operate out of a physical location, shop around to determine the ideal location and price for your space, as well as the cost to design it.
Outside contractors. There’s no shame in admitting that you can’t do something, and if you have the means to do so, contracting outside help for things like logo and website design and marketing could make your life a lot easier and greatly improve your business. These services are expensive, so shop around and guestimate the cost if you feel bringing on contractors is necessary.
Employees. Whether you’re opening a plumbing business, small accounting firm, or construction company, you will probably need employees at some point. A small business loan can help you get started on payroll until your business is pulling in enough revenue to pay your employees.

Where to Get Start-up Business Loans

There are not many types of start-up loans available. There are even less start-up loans for those with bad credit. So, getting an unsecured loan for your startup business will be difficult but not impossible. While most traditional banks and many alternative lenders do not offer them, as many of them view startups as too risky, there are some options:

Startup Business Loan Options

Online Lenders. There are online lenders that specialize in giving loans to startup businesses, even to new small business owners with less than stellar FICO scores. These finance options can include term loans, lines of credit, and equipment financing.

Drawbacks: Because they are taking on so much risk, these lenders often charge very high interest rates – in some cases as much as 30% – to new small business owners, depending on their FICO scores.

Personal Loans. Personal loans have become popular over the past decade as online lending has become more prevalent. They are often easy to apply for, have far lower requirements than a standard business loan, and funding is typically quick. They can be a good source of bridge financing to pay for the startup costs if your personal savings aren’t enough to cover everything.

Drawbacks: Personal loans usually don’t offer as much money as business loans, so you may not be able to borrow the amount that you need. Additionally, depending on your FICO score, the interest rate on a personal loan can be extremely high.

SBA Loans. The SBA loan program offers two specific types of loans that new small businesses may be eligible for: the SBA Microloan and the SBA 504 Loan. These loans have much lower requirements than the popular SBA 7a loan and pay relatively small loan amounts to new businesses and offer much lower interest rates than online or personal lenders. They are typically offered through not-for-profit intermediaries, often called community development companies (CDCs), although some for-profit private lenders may offer these types of loans as well.

Drawbacks: These loans are usually offered to small businesses that have been operating for at least six months, with some form of working capital foundation, so if you can somehow be in business for that long, the loan may be worth it. Additionally, CDCs and lenders often only provide business loans for minorities, those that operate in underserved communities, and veteran-owned businesses. The biggest potential drawback is that the amount you borrow may not be enough to cover your costs – while the maximum amount you can borrow for a microloan is $50,000, the average SBA microloan size in 2022 was a little more than $16,000.

Personal Credit Card. If you’re desperate for funding and have no alternative sources of capital, then your personal card gives you a line of credit to draw upon to fund any start-up expenses. Make sure to get receipts so you can separate your personal expenses from your business ones so that you can take advantage of business tax deductions.

Drawbacks: Personal credit cards typically carry a much higher interest rate than a business loan. Plus, startup business costs are usually high, and this will cause you to draw down your available credit significantly. That, in turn, will affect your FICO score, as your credit utilization rate is a big factor when calculating your score among all three major credit bureaus.

Home Equity Line of Credit (HELOC). A HELOC allows you to establish a line of credit using the equity in your home as collateral. You can use the money for large purchases, such as the cost of funding your new business.

Drawbacks: This might not be an option for you if you recently bought your house, as most banks require you to own a certain amount of equity in your home to use this type of finance option. Also, when you borrow against the equity of your home and are somehow unable to repay the debt, you could risk losing your home.

Friends and Family Loans. Hey, you can always remind your friends and family members that Michael Dell started Dell Computers with a $1,000 loan from his parents. Seriously, if you have family members and close friends who trust you and you’re possibly willing to share with them a piece of your future success, this is always an option.

Drawbacks: If you were a troublemaker as a kid or never paid back that $100 your friend spotted you back in the day, then asking your parents or close friends for a loan may not be an option, no matter how much begging you do. So, if you’re planning on asking, try to make amends with them beforehand.

What to do if You’re Declined

Rejection is always a bitter pill to swallow, but if you are turned down for a startup business loan, you shouldn’t see it as a failure, but as a valuable lesson. Lenders make money by giving loans and charging interest on them, so in most cases, they want to see your small business succeed. As such, if you are turned down, they will usually be happy to specify why they turned you down and give you advice on how to get approved next time. The most common reasons for getting turned down are credit score, lack of assets, and a poor business plan. The ways to improve this are:

Make sure you are caught up on your bills. Having at least six months’ worth of on-time payments toward your current debt will go a long way toward improving your FICO score.

Apply for new debt. This may sound counterintuitive, but a strong debt-to-credit ratio is a big part of your credit score. The more unused debt you have, the more favorably a lender will look upon you.

Save money! Of course, this is easier said than done, but if you have savings and any other assets of value such as your house, lenders will see that you have potential collateral, thus making it easier for you to qualify for a loan.

Have a strong pitch! Improving your business plan to include careful market research will improve your chances of getting a loan. Some of the questions you need to answer are: What differentiates your products and services? How will your business turn a profit? Do you have a strong marketing plan?

Other Financing Options for Startups

If getting a startup loan isn’t an option, worry not, as there are avenues to explore to obtain capital for your new venture.

Crowdfunding. Over the past decade, crowdfunding has become a popular way to raise funds for start-up businesses. It is the practice of raising funds through popular crowdfunding websites. Setting up a crowdfunding campaign is relatively easy and typically done through a crowdfunding platform. Once you’ve set up your account on the platform, write up a compelling description about your company and its products, and indicate the amount of money you are seeking to raise and how you plan to use it. To attract investors, your business plan and products must strike an emotional chord. One of the biggest perks of crowdfunding is that you can retain full ownership of your business. While equity crowdfunding is an option, you can also focus on handing out rewards – such as discounts, special product releases, or profit-sharing – to your investors.
Small Business Grants. There are several grants available for startups through both private entities and the federal government that could reward you with thousands of dollars in start-up cash, especially if you are launching a woman-owned, minority-owned, or veteran-owned business.
Small Business Credit Cards. Since there are limited business loan options available for startup businesses, you may want to consider applying for a business credit card as a temporary alternative. Business credit cards issued to startups will require a strong FICO score, which helps to mitigate the risk the card issuer is taking due to your lack of time in business. Like with any credit card, interest is only charged on the amount you use. As an added bonus, business credit cards typically come with perks – such as cash-back rewards, travel points and discounts with select vendors – helping you save money at the same time.
Venture Capital. VC funds usually have the most stringent requirements, and only invest in companies that are in an industry with the potential for high-margin growth. To invest, VC managers will require a strong business plan, showing growth and revenue milestones you plan to hit and how you will accomplish them. In return for investing VC managers may want high ownership stakes, a seat on the company board of directors, right of first refusal, and anti-dilution protection. VC funding is not easy to obtain. There are hundreds to thousands of businesses vying for funding at any given time. To make their own selection process more seamless, most fund managers will only accept pitches through referrals.

Steps to Take Before Applying for a Startup Business Loan

Before you seek a loan to fund your startup, there are several steps you need to take first to set up and establish your new business. These include:

Making sure that the federal government knows your business exists. Okay, this may sound strange, but it’s really not – in order for your business to operate, get a loan and take tax deductions, the IRS must know that it exists. That means that you need to obtain a federal Employee Identification Number (EIN) from the IRS. This is a number needed for the IRS to identify your business. You can apply for one on the IRS website.
Registering your business. For tax reasons (and to also make sure your company officially exists), you should register your business within your state as a limited liability company (LLC), “doing business as” (DBA), or a corporation. Sole proprietors typically become LLCs or DBAs so that they can tie their business’ revenue with their personal incomes, which has tax benefits. Higher-margin small businesses that have multiple owners sometimes register as S corporations, which also have tax and legal benefits. Registration must be made in your state, and each state has slightly different requirements. Either a tax attorney or online legal companies such as legalzoom.com can assist you with this for a fee.
Creating a business plan. Small business lenders may ask for a business plan before approving you for a loan. A business plan is like a resume for your business. It defines your business, what makes it unique, and states why you believe it’s going to make money, among other things. You can find templates for business plans online, or if you have the means, you can hire someone to do it for you.
Getting your paperwork in order. Whenever you apply for a start-up loan it’s a good idea to get your paperwork in order BEFORE you start the application process. If you’re seeking to borrow for a startup business, lenders will probably want to see any financial statements you have at this point, your personal tax returns, and a business plan.

Hang in There

Creating a business from scratch is one of the most difficult – albeit rewarding – challenges that anyone can take on, and obtaining capital for your new venture may be the most difficult challenge early on. There are, however, borrowing opportunities and other sources of money that you can tap into besides your personal savings. Carefully evaluate your funding options to make sure you select the one that is right for your business.

Vince Calio

Content Writer

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