Learn about small business loans, funding, and credit options in our guide to business loans. We cover business loan types, eligibility, and how to apply.
Making the decision to take on business financing like a loan, line of credit, or credit card can be daunting. From navigating the paperwork required to apply to knowing where to start, when it comes to business loans, knowing what you don’t know can be overwhelming.
According to the Federal Reserve’s 2020 Small Business Credit Survey, 43% of small businesses applied for new financing in 2019. Of these small businesses, owners applied for financing because they were most concerned about paying operating expenses like wages, securing credit, and making payments on their debt. Loans or lines of credit were the most common type of external financing, followed by credit cards.
For many small business owners, cash flow management problems are a commonly cited source of stress. Loans are one way you can invest in opportunities like expansion or covering your current expenses.
What is a business loan?
A business loan is an agreement between a business owner and a bank or private lender where money is received for future repayment of the principal with interest. Business loans are specifically intended for business purposes.
Business loans can either be secured or unsecured. A secured loan means that the borrower offers collateral if they default on the loan. An unsecured personal loan, on the other hand, does not require collateral. There are many types of affordable loans small businesses ples of the most common types of business loans:
Business credit card: A business credit card is intended for business use rather than personal use and can help business owners build credit, which can translate into better loan rates.
Business term loan: This loan is a lump sum of capital to be paid back in fixed increments over a set amount of time (called a term).
Small Business Administration (SBA) small business loan: The SBA offers several different loans geared toward small businesses, including a general small business loan, micro loans (loans typically under $50,000), and disaster loans.
Equipment loan: Equipment loans are loans specifically designed to enable owners to buy business equipment. A small business ent or update their current equipment.
Accounts receivable financing: Accounts receivable financing allows companies to receive early payment on outstanding invoices. Three common types of accounts receivable financing include traditional factoring, selective receivables financing, and asset-based lending.
Merchant cash advance: A merchant cash advance is a loan repaid through a percentage of your business’s future credit or debit card sales. This type of loan means you are borrowing against your business’s future earnings. This is less of a loan and more of a cash advance but an alternative to more traditional types of financing.
Paycheck Protection Program (PPP) loan: The Paycheck Protection Program is a business loan program established by the 2020 U.S. Federal Government Coronavirus Aid, Relief and Economic Security Act (CARES Act) to help businesses continue to operate during the COVID-19 pandemic. The application deadline for the second round of funding for PPP is , but funds are likely to run out before then.
According to a survey from Square and Wakefield Research, of the 1,000 small business owners surveyed, 50% of women-owned small businesses had never taken outside financing in 2020 or prior to that. Despite the growth of women-owned businesses, it can still be difficult for women business owners to access capital. But there are resources available for those looking into loans for their small businesses.
Women-led businesses are not the only businesses that have look at this web site had difficulty accessing capital. Minority-led businesses have also faced obstacles accessing financing. There are resources available to help bridge the lending gap between minority-led businesses and lenders.
What do you need to apply for a business loan?
As a small business owner applying for a loan, you have several places you can look when seeking a small business loan. Online lenders, banks, peer-to-peer lending sites, and lenders backed by the SBA are just a few of the types of lenders that provide loans. If you are a Square seller or processing with Square, you might be eligible for a loan through Square Loans.
When you apply for any type of loan, here is some of the documentation a bank or other lender may want to see:
Personal background and financial statement: While a lender will likely pull a business credit report, they may also take a look at a personal credit report if you have very little borrowing history.
Resumes: A loan application will include a professional resume as a way to give the lender context for the experience you have in the industry you are operating your business in.
Business loan eligibility
There are a few criteria that lenders consider when determining if applicants are eligible for a loan. Building a strong business credit score is one way to strengthen your case when applying for business credit and loans. Each lender has different minimum requirements and qualifications for what will make an applicant more or less eligible, but they typically include:
Time in business: How many years the business has been operating (for example, if the business just started versus having been in operation several years).
Industry: The industry of your business is composed of a set of businesses that process the same raw materials, goods, or services. For example, you could be operating a business in the food industry or healthcare industry.
Business loan sizing
Business loan sizing refers to the size or dollar amount of the loan, and it can be determined by several factors like debt-to-income ratio, credit score, and others. A lender determines the loan sizing that they might be able to provide a borrower, but this can be a tricky process, as borrowers may be counting on a larger loan than they may ultimately be qualified for. During the first round of the Paycheck Protection Program (PPP), Square facilitated over 76,000 loans with an average of less than $11,000 per loan.
Financing and refinancing business loans
The term “financing” refers to the process of providing funds for businesses. There are two different types of financing – debt or equity financing. Loans fall into the debt financing category, which means they must be paid back with interest. Loans have a range of terms, from as short as a few months to as long as 25 years. Microloans, for example, typically last only a few years.