Take Control By Knowing Your Business Loan Options
Borrowing can be a smart move for your business, especially when you're in the early stages of growth. Lending partners can support you by providing fast access to capital, and in most cases, you won't have to give up any equity in your company.
But borrowing can also be a challenge! There are thousands of commercial lenders in the United States and many of them offer a diverse suite of financing options. In this guide, you'll find out how to navigate this crowded market and find the best small business loans for your growth strategy.
- How to choose the best business loan
- Main types of business loan
- Alternative types of business loan
- How to apply for a business loan
How to choose the best business loan
Before you start assessing business loan options, you need to assess your needs and capabilities. Why do you need a loan? And how do you intend to repay it?
“Match the timing of your need to the time frame of the loan,” advises Will Howard, VP of Relationship Management at Foro. “If you have a long-term need, you’ll need long-term financing. For example, you don’t want to be looking for a line of credit to complete an acquisition or buy a building. Similarly, a term loan would be entirely unsuitable for financing your inventory or your accounts receivable.”
Here are some factors to consider or discuss with your leadership team:
- Loan purpose: How does this loan support your long-term plans? In most cases, lenders will ask to see your business plan before they approve your loan.
- Loan urgency: When do you need access to capital? Some lenders offer fast approvals and same day funding. But some options, such as Small Business Association (SBA) loans, might take a few months to process.
- Credit profile: Lenders base their loan decisions on your company’s credit profile. You can borrow higher amounts at favorable interest rates if you have a strong credit profile. The main factors that go into credit profiles include cash flow, leverage, and liquidity.
- Ability to repay: Loan repayments are an additional operational cost for your business. As with any expenditure, you have to ensure this is sustainable in relation to your cash flow.
- Repayment flexibility: Are you likely to make early repayments? Some loan products allow you to do so without incurring penalties.
Remember: business loans are there to help your business grow. With the right loan at the right time, you may see a return on investment that more than justifies the costs of the loan. That's why it's helpful to think about how each loan fits into your broader strategy.
Main types of business loan
The commercial lending market is sophisticated and competitive. Lenders offer a multitude of products, with great variation in:
- Loan amounts: Some loan products have an upper lending limit, while others can provide $100 million or more.
- Collateral: Almost any part of your business can be used as collateral, including property, equipment, equity and accounts receivable.
- Interest rates: Interest rates tend to be higher for higher-risk loans to compensate for the risk of default.
- Repayment terms: Loan products may allow you to defer payments or repay early.
Traditional business loan options include:
- Term loans
- Commercial line of credit
- Construction Loans
- Bridge loans
- Small Business Administration loans
Let's look at each of these in turn.
Term loans provide you with a lump sum of capital, which you agree to repay over a specified term. Interest rates usually depend on the loan term, with lower rates for longer terms. This type of loan is often secured against a specific asset. For instance, a commercial property loan will give you the capital you need to purchase a new building. That building will then act as your collateral for your loan.
Pros of term loans
- Higher lending limits
- Predictable repayments
- Choose the term that suits your business
Cons of term loan
- Collateral at risk if you default on payments
- Subject to strict credit checks
- Early repayment penalties
Bridge loans offer fast access to capital when you need it — they "bridge" the gap when you have a temporary shortfall. You can use commercial property as collateral for a bridge loan. A good example would be a business owner using a bridge loan to purchase a new commercial property prior to selling their current property. The loan bridges the gap between the purchase of the new property and the sale of the old one.
Pros of bridge loans
- Fast access to capital (some lenders offer same day payments)
- Relaxed lending criteria
- No early repayment penalties
Cons of bridge loans
- You may forfeit assets in the event of default
- Higher costs and interest rates than term loans
Small Business Association loans
Small businesses often have a hard time finding loans. Lenders want to see a good credit record and tangible assets; small businesses often have neither. The federal Small Business Administration (SBA) aims to help people in this situation by acting as a guarantor on loans. The maximum amount depends on the type of loan you are applying for — for a Standard 7(a) loan, it’s $5 million.
Pros of SBA loans
- Access to capital that may not be available to a small business through traditional lenders
- SBA acts as a guarantor, reducing lenders’ risks and increasing your chances of being approved for the loa
- Interest rates are capped by the SBA
- Can provide access to additional resources, such as mentoring and business development advice
Cons of SBA loans
- Loan approval can be lengthy due to additional SBA-specific documentation that is required for underwriting
- May require a personal guarantee from the business owner
- May require a higher credit score than a traditional loan
Commercial line of credit
Banks often provide business customers with an overdraft, allowing them to borrow and repay on their own schedule. A commercial line of credit works in much the same way, except at a much larger scale — sometimes up to $100 million. Commercial lines of credit are short-term (1-2 years) but are frequently renewed at each maturity.
Pros of commercial lines of credit
- Access to additional funds when needed
- Make principal repayments whenever you want (though interest is still due monthly or however scheduled)
- Commercial lines of credit can be approved quickly, sometimes in a matter of days
Cons of commercial lines of credit
- Interest rates are floating (variable) and therefore subject to change over the term of the loan
- Businesses can be tempted to borrow more than they need from their line of credit
- Advances are limited to a certain percentage of current working capital (A/R & Inventory)
Growing businesses often need to invest in expensive equipment, such as IT systems, machinery and vehicles. You may be able to lease the equipment, but an equipment loan allows you to purchase it outright.
Pros of equipment loans
- Full ownership of all equipment
- More flexibility with rate structure compared to other types of financing (can be fixed rate, floating, or a floating-to-fixed)
- Allows you to execute a large-scale upgrade or expansion
Cons of equipment loans
- Often come with higher fees such as origination fees and prepayment penalties
- Cannot be used for other business expenses
- Requires collateral
Alternative types of business loan
The loans listed above are suitable for most scenarios in which you might wish to borrow. Lenders also offer more specialized products that can be useful in specific circumstances. You might consider some of these options if you're looking for a more complex financing arrangement.
Mezzanine debt is a type of financing that is typically used by businesses to fund expansion, acquisitions or other growth opportunities. It’s a hybrid form of financing that combines elements of both debt and equity financing, hence the name.
Mezzanine financing is typically provided by a junior lender, which means that it is positioned lower in the capital structure of a company compared to senior debt (banks). In the event of bankruptcy or some other financial crisis, mezzanine debt holders will only be able to recoup their investment after the claims of senior debt holders have been satisfied.
“Mezzanine financing is fantastic as a filler,” says Will Howard. “It can bridge the gap between what a bank will offer you in traditional debt and the total that you need to raise. Mezzanine financing is most effective when used in conjunction with senior lending.”
Pros of mezzanine financing
- Unsecured lending for companies that don't have available tangible assets
- Keep full control of your equity if you repay the loan in full
- Provides financing flexibility as lenders can structure terms to meet the borrower’s needs
Cons of mezzanine financing
- Higher interest rates than traditional debt financing
- Lender may impose conditions on your business activities
- If you default, you may forfeit equity in your business
Purchase order financing
Purchase order financing is a common option when there is a long lead time on goods. For example, if you order stock from overseas, you may have to wait weeks or even months for your cargo to arrive. In PO financing, the lender settles the cost of goods on your behalf, usually making payments directly to the supplier. You then repay the lender when you've settled with your clients.
Pros of purchase order financing
- Access capital to fulfill large orders that would otherwise be out of reach
- PO lenders often have expertise in dealing with suppliers
- Flexible financing option that can be tailored to your needs
Cons of purchase order financing
- Lenders typically require collateral to secure the loan
- Cost of financing is usually high
- Repayment terms are usually short
Invoice financing uses your accounts receivable as collateral. It’s a popular option among companies with a long working capital cycle. Consider invoice financing if you need to improve timing of cash flows or have customers that pay on longer terms.
Pros of invoice financing
- Access to capital while waiting for clients to settle invoices
- Available to small businesses with no tangible assets
- Rapid application approval process
Cons of invoice financing
- Higher interest rates
- Cuts into margins on accounts receivable
- May require a personal guarantee from the business owner
How to apply for a business loan
Before you apply for a business loan, make sure you're prepared to have a conversation with lenders about your financing requirements. Here are some steps to consider if you're wondering how to get a business loan:
Define your lending needs
Try to have clarity about:
- How much you need to borrow
- How you will use the loan proceeds
- How monthly repayments will affect cash flow in the short, medium and long-term
Work with your financial team to assemble hard data that makes a case for your loan.
Develop the business case for your loan
Some lenders may ask to see a business plan so they can learn more about how you plan to invest the capital. Even if that's not a loan requirement, it's important to have a detailed business plan before you borrow. Look at details like:
- Borrowing vs. other types of financing, such as equity
- Expected return on investment
- Opportunity costs of not borrowing — for example, you might lose clients if you don't purchase up-to-date technology
Making a business case helps you see if debt financing is the best option available to you, and if a loan suits your long-term goals.
Review your financials and credit status
Lenders need to know that you're a reliable client. They will ask for all relevant paperwork, and they will research your credit history. It's a good idea to get ahead of this and gather up all relevant information, such as:
- Financial statements: Any relevant documents, including certified accounts and bank statements
- Asset valuations: Up-to-date valuations will give you an idea of your potential lending limits
- Credit history: Banks will check your business credit rating and may also look at your personal credit score
For arrangements such as factoring loans, you will also need to prepare any relevant invoices or purchase orders.
Talk to Foro
Finding the right finance partner can be a challenge, especially in such a competitive market. That's why it makes sense to seek advice and support from experts who can help you find the best small business loans.
A digital platform like Foro can help you find the right loan in minutes. Foro uses artificial intelligence technology to match your lending needs with suitable lenders and financing products. You will quickly receive loan recommendations, and our experts will guide you through the process so that you can compare offers and choose with confidence.
“Business owners don’t have time to engage in endless conversations with potential lenders who will never be a good fit for them,” says Will Howard. “They just want to run their company. What Foro does is eliminate all those frustrating hours you would otherwise spend finding the right partner. Our platform cuts out the noise and gets straight to the signal — a potential lender that is genuinely interested in supporting you. Right away, you’re having direct and meaningful conversations with a bank that wants to talk to you. We’re focused on driving and building those relationships.”
What does the business loan application process look like?
Every lender has its own application process. Most loan providers will try to make the experience as user-friendly as possible, and some may offer an instant decision.
You'll often apply through the lender's online portal, where you can also submit documents and track your application's progress. The lender might assign a loan consultant to your case for large loans or complex applications.
How do I get a business loan?
Securing a business loan is often a matter of preparation. Before approaching a lender, it's important to know:
- What's the business case for a loan?
- What collateral do you have?
- When do you expect to repay?
- Do you qualify for the SBA loans program?
- What kind of loan product do you need?
Having a clear understanding of your needs will help you narrow down the options to find the right loan partner. Try using a platform like Foro to match with the best small business loans instantly.
How hard is it to get a small business loan?
Several factors affect your chances of accessing the best small business loans. Lenders will consider things like:
- Your credit history
- Your cash flow
- Your business plan
- Your assets
- Investment purpose of the loan
Ultimately, lenders want to provide financing to you — so long as you can repay them in full. If you have a solid business strategy, you have a much better chance of securing a business loan.
How much can I get approved for a small business loan?
A growing business can borrow as much as the lender is willing to offer. However, some business loan products are capped, including:
- SBA loans: The most common SBA loan program, the 7(a), is capped at $5 million
- Commercial property loans: Usually capped at a percentage of the property valuation
- Factoring: Based on the current total value of your accounts receivable
Otherwise, a lender will assess your ability to repay the loan and set lending limits accordingly.
About The Author: Ber Leary
Ber Leary worked in investment management for over ten years. He's now a full-time content marketing consultant specializing in finance technology and management strategy. Connect with Ber on LinkedIn.