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Small business owner concerned because he's not going to be able to make payroll.
Small Business Financing to Cover Payroll
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One of the most important resources you have as a small business owner is your employees, and therefore, one of the most important expenses you have is your ability to meet payroll. What happens, however, when your business hits a slow period or your cash flow is uneven? You don’t want to find yourself in a position in which you can’t afford to pay your employees – this could cause many of them to quit at once and harm your business’ reputation or keep the business from functioning at all.

There are various financing options available to you to help keep your payroll going during periods when your cash flow is tight or customers are slow to pay their invoices.

Fortunately, there are various financing options available to you to help keep your payroll going during periods when your cash flow is tight or customers are slow to pay their invoices.  These options can assist you in meeting salaries, payroll taxes, commissions, and bonuses until your business is in a position to meet its obligations.

Should Financing be Used to Meet Payroll?

At first, taking out a loan or other type of business financing product to meet your payroll may not seem like a good idea, but there are plenty of situations in which doing so will help your business stay on its feet and even help it grow. Here are some scenarios in which using financing is something to consider:

  1. Long-term growth plans. If you are seeking to execute a long-term growth plan and need to hire additional staff as part of that plan, you probably don’t have the immediate funds to pay new employees. Financing most likely would come in handy so you can move your business forward without having to worry about how you’re going to pay your workers.
  2. Handling large orders or contracts. When your business suddenly wins a large contract or receives a large order, you may need financing to quickly hire additional staff so that you can fulfill the obligations that came with the new order.
  3. Seasonal needs. Many businesses make the bulk of their revenue during certain times of the year. For example, a retail shop may make most of its sales during the holiday season. In this case, financing could be used as a convenient way to maintain payroll during slower periods.
  4. When customers are slow to pay. Sometimes customers can be slow to pay their invoices, but you still need cash on hand to pay your employees. Short-term financing can conveniently fill the gap between the time you need to meet payroll and the time the customer finally pays up. 

Sometimes Financing isn’t the Best Option

While financing can be an easy option to cover your payroll, it isn’t an ideal choice in all situations. If you find you can’t meet payroll because your business is struggling, then taking on additional debt to meet it probably isn’t such a good idea as it will only exacerbate the problems your business is facing. 

If your business is struggling to the point in which you can’t meet your payroll, financing will only add to your problems. Your best bet in that situation is to assess why your business is struggling and cut expenses wherever possible. This may even involve the painful step of cutting some of your staff. 

What Types of Payroll Financing Are Available?

There isn’t one specific loan product dedicated to meeting payroll, but there are several convenient financing options available to small business owners who need quick funds to cover their payroll obligations. Some of the most popular of these options with small business owners  include: 

Term Loan 

A term loan is a lump sum of cash that is paid back over time with interest – essentially, it’s a traditional business loan. This is a great option if you are looking to implement long-term growth plans and need to hire new employees. A term loan typically offers a lower interest rate than other types of financing, and the duration of the payback period can, in most cases, be pre-negotiated. 

The potential drawback of considering term loans to cover payroll is that they are the most difficult type of financing to obtain – they often require a good- to excellent credit score, and if you’re applying for one through a traditional bank, you will often face a lengthy, paperwork-heavy application process.  

Business Line of Credit

A business line of credit gives you access to a predetermined amount of revolving credit and is a flexible financing tool if your business is seasonal and you need cash to pay your employees during the slow periods of the year. You are only charged interest on the amount you use, and you don’t have to borrow the full amount when you draw on it.

The potential drawbacks of using a line of credit for payroll is that it typically comes with a higher interest rate than a term loan, and some lenders may require tight repayment terms when compared to a term loan. In many cases, you will likely have to renew the line of credit once at least once a year. Both traditional and alternative lenders offer business lines of credit.

Working Capital Loan 

A working capital loan is a short-term loan from a reputable alternative lender that can be used if you’re facing an unexpected cash crunch and need quick funds to meet your payroll. If your business suffered a slower-than-expected month or quarter or had to deal with an unexpected expense, working capital loans typically have less restrictive requirements than a term loan or line of credit, and the payback period is often 6 months or less. 

The potential drawback of using a working capital loan for payroll financing is that it comes with high interest rates when compared to a bank loan or line of credit.

Invoice Factoring 

With invoice factoring, small business owners can receive cash upfront from an alternative lender for their unpaid invoices in exchange for a factoring fee, meaning that the lender gets to keep a small percentage of the invoices when they get paid in full. This is a good option for small business owners who are facing a cash crunch due to slow or late invoice payments and will enable them to meet expenses – such as payroll – while waiting for customers to pay. What may make this option even more attractive is that borrowers are not held to the same lending requirements as they would be with a typical bank loan, and they can get the funding they need quickly.  

The potential drawback of invoice factoring for covering payroll is that it is usually significantly more expensive than a bank loan or a line of credit. Additionally, some lenders might want long factoring contracts, so carefully consider the terms of any deal you have on the table before signing on the dotted line.. 

Revenue-Based Financing

In a revenue-based financing deal, small business owners sell a portion of their future sales at a discounted rate in exchange for a lump sum of cash upfront. This can be a good option for small business owners that have a strong sales history, but who are facing a cash crunch due to an unforeseen expense or other extenuating circumstance that is keeping them from meet their payroll deadline. 

The potential drawbacks of such a revenue-based financing arrangement for payroll is that, like invoice factoring, it can be significantly more expensive than a term loan and, in most cases, you will give up a percentage of your daily sales until you have met your obligation to the financing company. 

Before considering any of these financing options, small business owners should carefully consider why they are currently unable to meet payroll.  This will help in selecting the best financing type and borrowing terms for their situation. 

Obtain Financing Before it’s too Late

As a small business owner, your payroll is one of your most important expenses. If you find yourself in a position to have to borrow money to meet your payroll, it’s important to plan to prevent a situation in which your employees are not getting their paychecks. Not paying them may not only cause them to quit, but it can also hurt your business’ reputation among future potential employees and customers. This can be especially harmful if your business operates in a tight-knit community because word can travel fast that you don’t pay your employees.  

If you have to use financing to cover your payroll, carefully evaluate all of your options and choose the financing that best suits your business and its current situation. This includes choosing the payback option that you’re most comfortable with and the fees and interest rates you’re willing to pay.

Needing new employees because your business is growing is a great spot to be
How to Use a Business Loan to Hire Employees
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One of the most exciting times for any small business is when it has the opportunity to grow – be it from better-than-expected sales; the development of a new product or service; or physical expansion such as getting a bigger space or a second location. Business growth, however, usually requires the hiring of additional staff, which can be expensive. 

Fortunately, small business owners have a wide array of financing options that can help them expand their staff and facilitate their growth plans. Depending on your credit score and the strength of your business plan, a small business loan, a business line of credit, or even an SBA loan can help you hire the team that you need to meet your growth expectations. 

Types of Financing

If you’re looking to take your small business to the next level and need to hire additional employees, several types of financing options could be right for you depending on your specific situation. 

SBA 7(a) loans

SBA 7(a) loans are perhaps the best financing option when it comes to growing your business and hiring new employees because they generally offer the lowest interest rates and are flexible when it comes to the duration of the loan. Take note, though, that the SBA does not directly administer the loans, rather, they guarantee a large portion of loans given by qualified lenders. 

Keep in Mind: These loans require an excellent credit score, a strong business plan, and an excellent cash flow history. They can also take weeks to fund once you’ve been approved, so if you are planning to apply for an SBA 7(a) loan, make sure you have the qualifications beforehand and that you’re not in a hurry to receive the funds. 

Traditional loans

Traditional loans, or term loans, are similar to SBA 7(a) loans but they aren’t guaranteed by the SBA. They are offered by both traditional banks and alternative lenders, and like the 7(a) loan, they offer a lump sum of cash upfront to be paid back over a predetermined time frame and a pre-agreed upon interest rate. 

Keep in Mind: Traditional banks may require a business plan, especially if you’re borrowing for long-term growth, as well as excellent credit, and will charge an interest rate that is generally higher than a SBA 7(a) loan. An alternative lender won’t require a business plan and may grant you a loan with a lesser credit score than a bank, but if approved, will charge a higher cost of capital. 

Business line of credit

A business line of credit is, perhaps, the most flexible financing tool for small business owners seeking to hire new employees as part of their growth plan. A line of credit gives you quick access to cash that can be used to hire new employees as your growth plan progresses – and you’re only charged interest on the amount you borrow. 

Keep in Mind:  A business line of credit may charge a higher interest rate than a bank loan, and payback and renewal terms can be complicated, so really examine the terms of the line of credit before you sign up for one. You may be able to get a higher line of credit and a lower interest rate with a traditional bank if you secure your line of credit with collateral. 

Short-term Loans 

Short-term loans, also known as working capital loans, are typically loans with a 6-month duration or less. These types of loans can help you quickly hire new employees as you grow. They are almost exclusively offered by alternative lenders, so the requirements for these loans are usually not as strict as for a bank loan. 

Keep in Mind: Short-term loans often charge a higher interest rate than your standard bank loan. Additionally, if you believe a short-term loan is best for you,  carefully research the lender, as there are some bad actors in the online lending space.

Define Your Needs Beforehand!

If you’re seeking to expand your business by hiring new employees, there are several types of lending products for you to consider. But, before you begin evaluating your different options,  it’s important that you carefully define what your needs are. Doing so beforehand can help you determine factors such as the loan amount you are seeking, whether a traditional bank or online lender is best for you, and the type of financing you need. 

The factors you need to define before you delve into the lending market are:

  • How many new employees do you need to hire and what will they cost? This seems straightforward, but keep in mind that you shouldn’t just consider what you’re going to pay them, you also need to factor in payroll taxes, whether they will be full-time, part-time, or contracted workers, and any benefits you may want to offer them. This should help you determine how much you need to borrow. 
  • Do you have a strong growth plan? In other words, can you make a strong case that your growth plan will succeed with the addition of new employees? If you plan to apply for a business term loan with a traditional bank or go to an SBA lender for a SBA 7(a) loan, they are going to want to see a convincing business plan that demonstrates how you plan to grow your business and that you’re going to make money to cover the cost of your loan. 
  • What is your credit score? The strength of your credit will be a determining factor in the cost of capital for your loan. Put simply, the higher your score, the lower the interest rate you’re going to have to pay, no matter what type of financing you’re seeking. Check your credit score with all three credit bureaus (Experian, Transunion, and Equifax), as well as your business score with Dun & Bradstreet. If it’s low, examine ways you can improve it, or determine if you have collateral in case a lender will only offer you a secured loan or line of credit. 
  • How strong is your cash flow? If you’re seeking to hire temporary seasonal workers, that means your business probably has an uneven cash flow. If you decide to take out financing to pay for seasonal workers, make sure that your cash flow is strong enough during your busy season to justify taking on that debt. 
  • What type of business do you own? The type of business you operate is important because some types of small businesses are considered riskier than others. Restaurants, transportation companies, and real estate brokerages are generally considered among the riskiest industries, and if your business fits in one of these industries, you may have trouble securing a loan with a reasonable interest rate. If you are in any of these industries, it’s especially important to make sure you have an excellent business plan, a strong cash flow and that you can demonstrate future success with your growth plan. 

A great small business starts with great planning. Defining your needs before you look to financing will help you select the best financing option as well as keep your cash flow strong while you grow your team. 

taxes small business hiring loans
Using Business Loans to Cover Your Taxes
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As a small business owner, you may run into a crisis every now and then, and one of those crises could be a surprise tax bill. This situation may arise if you didn’t file your quarterly taxes properly or you spent a long period of time charging incorrect sales tax rates.  Figuring out how much you owe to the IRS or your state can be a complicated process and while you want to try to avoid them at all costs, mistakes can and do happen.  

If your business is stable but you get a surprise, overdue tax bill that you can’t immediately cover, one of your options is to get financing to pay it. Financing, perhaps in conjunction with a tax relief service that can help negotiate a settlement on your behalf, can get you over the hump and avoid the ugly possibility of having a lien put on both your personal and business finances or, worse yet, your business going under due to an unmanageable tax burden. 

What Kind of Financing Can You Use?

There are certain types of financing you can apply for to pay your taxes, but first, it should be noted that there are others that you won’t be able to use. Specifically, bank and SBA loans are out of the question to try and pay off tax debt. Both of those financing tools will require you to provide a specific reason as to why you need to borrow money, and lenders will not consider having to pay off taxes a valid reason. 

So what financing options are you left with if you have to pay off a large tax bill? The best ones are those that allow your small business the flexibility to use borrowed funds for whatever purpose it needs to, while also offering convenient payback options.

  •  A business line of credit. A business line of credit is perhaps the most flexible and affordable way to immediately pay an unexpected tax bill. It is a set amount of credit that you can borrow against at any time for any reason, and interest is only charged on the amount you borrow. Both traditional banks and alternative lenders offer lines of credit. For an unsecured line of credit, however, you will need a strong credit score, and for a secured line of credit, you will need to put up collateral. 
  • A working capital loan. A working capital loan is a short-term loan (often up to six months) that gives you a lump sum of cash upfront to pay for immediate operational expenses such as payroll, rent, and, yes, taxes. This type of financing typically charges a higher interest rate than a bank loan but comes in handy if you have consistently strong cash flow but can’t immediately afford to pay for upfront expenses. Working capital loans are usually offered by alternative lenders. 
  • Revenue-based financing. Revenue-based financing (RBF) can give you a lump sum of cash upfront in exchange for a portion of your future receipts, which is referred to as a “factoring fee.” This can be a good option if your business has a strong sales history but is hit with a large, unexpected tax bill that needs to be paid off quickly. The drawbacks are that the factoring fees are usually significantly more expensive than the interest charged on a bank loan or business line of credit.

Additionally, RBF is offered exclusively by alternative lenders, but since it’s less regulated than other types of financing, you have to watch out for bad actors. If you opt for RBF, make sure you are dealing with a reputable lender by checking reviews and doing the proper due diligence. 

  • Invoice factoring. Invoice factoring is when a lender gives you a portion of the cash you are owed for unpaid invoices. This can be a flexible option for you if your business is owed a large amount of cash from customers who are slow to pay or if you can’t afford to wait until the payment due date on your customers’ outstanding invoices. 

Much like RBF, invoice factoring can be more expensive than a bank loan or line of credit since it charges a factor fee, but it does provide convenience because it will give you cash upfront to immediately pay your unsettled tax bill. Additionally, when applying for invoice factoring, your credit rating matters far less than it would when applying for a bank loan or line of credit since the lender considers your customer’s creditworthiness over yours. 

  • A home equity line of credit. If you have an unpaid business tax bill that you need to pay off quickly, desperate times may call for desperate measures. One of your options may be a home equity line of credit. If you own your own home, a traditional bank can give you a line of credit against the equity you have in your home. This can give you quick cash to settle a large tax bill, but should only be used if your small business is doing well and you’re confident that you can pay yourself and your bank back, otherwise, you could face a foreclosure on your home. 

Financing May Not be an Option

In some cases, if you have a large, unexpected tax bill, it usually isn’t a good idea to use financing to pay that bill, as it may put you in a financial hole that you can’t get out of. In this case, you may have no choice but to declare bankruptcy and start over. 

However, the IRS would rather get something than nothing, so another option may be to try to negotiate with the IRS on a payment plan for a reduced amount. There are also reputable tax attorneys who can negotiate with the IRS to try to reduce your tax debt and create a manageable payment plan with them. These could be better options for you if your unpaid tax situation is severe enough. 

How to Avoid Large Tax Bills

While there are financing options available to you if you suddenly get an unexpected tax bill, using financing to pay your taxes is not a scenario that you want to be in, and it means you’re not operating your books the way you should be. Still, it’s no secret that running a small business isn’t easy, and one of the more complicated aspects of it is declaring your income and figuring out how much you owe in taxes every quarter. 

Whether you operate as a sole proprietor or an llc, it’s strongly recommended that you:

  • Keep careful records of your transactions. Poor bookkeeping is one of the most common ways small business owners can get into trouble with the IRS. Make sure you record every sale that you make every quarter along with the amount of sales tax that you owe on it. If you’re a sole proprietor or run a pass-through business, proper bookkeeping will give you a clear paper trail to determine how much you owe in both business and personal taxes. Hiring an experienced bookkeeper and/or account can help you with this.
  • Make sure to remit your payroll taxes. The IRS reported that in 2022, 31% of unpaid taxes from small businesses resulted in the failure to pay part or all of their payroll taxes. If you have employees and take payroll tax out of their paychecks, you are required to set aside those funds and pay them to the IRS on a quarterly basis. Some small business owners may be tempted to use those funds on immediate business expenses with the intent of paying that tax later. It is highly recommended that you don’t fall into this trap, as the IRS can be relentless in enforcing penalties for not paying those taxes on time. 
  • Classify your workers properly. Some small business owners may get confused when classifying their workers as independent contractors and employees, with some classifying part-time workers as independent contractors rather than employees. Each has different tax classifications, and misclassifying them – even if it’s an innocent mistake – can lead to huge fines by the IRS. If you are confused by the difference between an employee and an independent contractor, it’s best to refer to the IRS’ definition of each.
  • Keep up-to-date on deductions. Make sure you or your accountant stay up-to-date on what expenses can and cannot be deducted as a business expense, as the IRS often changes its guidelines on an annual basis. One of the most frequent ways small businesses get into trouble with taxes is by overstating their deductions, or not understanding what is and isn’t deductible. 
  • Make sure you have good accounting software or a reputable accountant. Even if you believe that you know what you’re doing when it comes to bookkeeping, you should still have very good business accounting software. Some of the top-rated business accounting software includes QuickBooks, Zoho Books and Oracle NetSuite. 

Don’t Wait Until it’s Too Late

Getting a surprise tax bill is unpleasant, but you do have convenient financing options to pay that bill. It’s strongly recommended, however, that you consider all of your options to carefully determine if using financing is the best choice. No matter the case, however, you also need to figure out why you got into trouble with your taxes in the first place – be it poor bookkeeping, overstating your deductions, and so on – and avoid running into that problem again.

a woman holding and showing American dollar banknotes for money
The Advantages of Online Lending
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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.

Business Loan Documents Checklist
Small Business Loan Application Checklist
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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. 

Bad credit business loans
Getting a Business Loan with Bad Credit
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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. 

Should I get my business loan from a bank or an alternative lender?
Traditional Bank vs. Alternative Lender
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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:

  1. If you have the time and meet the criteria, traditional banks are probably the best bet for financing. 
  2. 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.
  3. 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.
  4. 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.
  5. 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. 
  6. 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. 

 

Understanding small business loan requirements.
Understanding Business Loan Requirements
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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: 

  1. 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.
  2. 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. 
  3. 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. 
  4. 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. 
  5. 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:

  1. 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. 
  2. 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.
  3. 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. 

 

 

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.
Types of Small Business Loans and How to Choose One
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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. 

 

 

 

A guide to small business loans for veterans
A Guide to Small Business Loans for Veterans
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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.

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Copyright 2024 Strategic Funding Source, Inc. All rights reserved. Kapitus and the Kapitus logo are registered trademarks of Strategic Funding Source, Inc. Loans made or brokered in California are made or brokered pursuant to California Finance Lenders License No. 603-G807.