Business Loan Calculator

Types of Small Business Loans

There are many reasons why businesses may need to borrow money.  Business owners may need cash to finance inventory purchases for a big order or they may need to borrow money to purchase equipment or to expand their operations.  Some businesses need loans in order to help cover business expenses while they wait for their customer invoices to be paid.  No matter the reason, a small business loan can help a business achieve important objectives.

While there are dozens of small business loan variations, debt financing sources for small companies can be divided into three broad classes based upon the type of lender:

• Traditional bank loans/lines of credit: These bank loans have the lowest interest rates and allow you to borrow up to $5 million, but they also have the most extensive and inflexible qualifying requirements. Good to excellent business and personal credit scores are needed to qualify, especially for the best loans that are backed by the Small Business Administration.
• Community-based and Non-Profit Microlenders: A slightly more expensive but easier to qualify for alternative to banks are the many local and non-profit lenders operating at the city, county and state level. Many of these programs are designed to finance traditionally underserved businesses, such as ultra-small companies or those run by minorities, female entrepreneurs, veterans or the disabled.
  While usually more flexible towards startups, these microlenders still require detailed and well-organized business plans and financial records.
• Online lenders: If you’re short on collateral, have a less than excellent credit history, short business record and/or need financing fast, then an online small business lender is the most flexible option. Their application approval process is lightning fast compared to other lenders and they will often waive risk factors that would disqualify you from other forms of small business financing. However, do bear in mind that as a lender of “last resort,” online firms will charge a hefty premium for this convenience and the risk they are taking.

There are several financing options for small business owners. These choices have different implications on cost, term and structure. Be sure to consult with a financial professional to help you sort through your choices and make the best decision.

Eligibility Requirements for Small Business Loans

While every lender has their own specific requirements, that often vary from region to region, there are some common minimum eligibility requirements for small business loans.

• Credit history: Since the personal credit of the owner/partners will need to be checked alongside the business’s credit rating, all these credit scores should be as high as possible. While most lenders require a minimum credit score of at least 680 to even qualify for a loan, the higher your score and cleaner your payment history, then the better interest rate you can qualify for.
• Age of Business: Debt-financing for brand new startups is difficult, since most startups fail within their first year. Banks typically want to see you’ve been in business for at least two years and even online lenders usually require at least one year of business history. Of course it’s still possible to secure financing, especially from non-profit microlenders, but expect to pay a serious premium for the risk they’re taking.
• Minimum annual revenue: Every lender has their own unique requirements, but most want to see some minimum level of annual revenue, usually at least $50,000 before offering a loan.
• Thorough documentation: Professionally prepared and well-organized balance sheets, financial statements, business plans and supporting documents are crucial to navigating the application process. The better you can articulate every aspect of your company’s finances, the better the terms you can negotiate with the lender.
• Ability to pay: Similar to income verification for a personal loan, you’ll need to prove your average monthly income exceeds your monthly expenses by a certain amount, including the new loan’s payments. The minimum threshold is usually at least 1.25x your operating expenses for bank loans. So for example, if your company’s operating expenses, including the new loan payments are $5,000 a month, you’d need to bring in at least $6,250 a month to qualify for the loan.
• Collateral: If the company is new or has a less than perfect credit rating, the loan term is longer than 12 month or the loan is used to purchase equipment, or does not seem risk-free, lenders just about always require some form of collateral. This usually requires putting a lean on real estate, inventory or some other physical asset of the company at a reduced markup value.
  For example, when taking out a loan for a new machine costing $10,000 and using the equipment as collateral, that collateral would only be valued at 75%, so the maximum you could borrow would be $7,500.