How To Get A Small Business Loan In America
How To Get A Small Business Loan In America

Small business loans let business owners borrow funds to cover company-related purchases and operating expenses. Whether you’re just starting your business or trying to grow, the best small business loans can help you access the capital your business needs to thrive. Finding a loan in America might be difficult, and in the article, we will explain how to get the small business loan that is available.

Small-business loans can help you start or expand an existing business. And during the coronavirus pandemic, small-business financing could help your business stay afloat amid disaster. Loan programs from direct lenders and the Small Business Administration, including the SBA Paycheck Protection Program, can infuse working capital loans and other financial support when you need it the most, according to U.S News.

How Small Business Loans Work in America?

Photo:  Bank of America
Photo: Bank of America

Small business loans help companies make large purchases and cover the cost of doing business. Loans generally are issued as a lump sum that can be used to make a specific purchase or manage cash flow and then repaid with interest. However, there are other types of small business loans—like lines of credit, merchant cash advances, and invoice financing—that can be used to access cash more quickly and on an as-needed basis.

The best loan for a business depends on a number of factors, including its creditworthiness, how much it needs to borrow, what the funds will be used for, and how quickly it needs access to loan proceeds.

Types of Business Loans In America

There are many different types of small-business loans — everything from a business line of credit to invoice factoring to merchant cash advances — each with its own pros and cons. The right one for your business will depend on when you need the money and what you need it for.

1. Term loans

A term loan is a common form of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period.

Online lenders offer term loans up to $1 million and can provide faster funding than banks that offer small-business loans.

Pros:

  • Get cash upfront to invest in your business.
  • Typically allow you to borrow a higher amount than other types of loans.
  • Funding is fast if you use an online lender rather than a traditional bank; typically a few days to a week versus up to several months.

Cons:

  • May require a personal guarantee or collateral — an asset such as real estate or business equipment that the lender can sell if you default.
  • Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks.

2. SBA loans

The Small Business Administration guarantees these loans, which are offered by banks and other lenders. Repayment periods on SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years for buying equipment and 25 years for real estate purchases.

Pros:

  • Some of the lowest rates on the market.
  • You can borrow up to $5 million.
  • Long repayment terms.

Cons:

  • Hard to qualify.
  • Long and rigorous application process.

3. Business lines of credit

A business line of credit provides access to funds up to your credit limit, and you pay interest only on the money you’ve drawn. It can provide more flexibility than a term loan.

Pros:

  • Flexible way to borrow.
  • Typically unsecured, so no collateral is required.

Cons:

  • May carry additional costs, such as maintenance fees and draw fees.
  • Strong revenue and credit required.

4. Equipment loans

Equipment loans help you buy equipment for your business, sometimes including semi truck financing. (Business auto loans are available for cars, vans, and light trucks.) An equipment loan's term typically is matched up with the expected life span of the equipment, and the equipment serves as collateral for the loan. Rates will depend on the value of the equipment and the strength of your business.

Pros:

  • You own the equipment and build equity in it.
  • You can get competitive rates if you have strong credit and business finances.

Cons:

  • You may have to come up with a down payment.
  • Equipment can become outdated more quickly than the length of your financing.

5. Invoice factoring

Let’s say your business has unpaid customer invoices, which are typically paid in 60 days. If you need cash now, you can get money for those unpaid invoices through invoice factoring.

You’d sell the invoices to a factoring company, which would be responsible for collecting from the customer when the invoice is due.

Pros:

  • Fast cash for your business.
  • Easier approval than traditional funding options.

Cons:

  • Costly compared with other options.
  • You lose control over the collection of your invoices.

6. Invoice financing

Invoice financing is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance.

Pros:

  • Fast cash.
  • Your customers won’t know their invoice is being financed.

Cons:

  • Costly compared with other options.
  • You’re still responsible for collecting the invoice payment.

7. Merchant cash advances

You get a lump sum of cash upfront that you can use to finance your business.

Instead of making one fixed payment each month from a bank account as you would with a term loan, you make payments on a merchant cash advance either by withholding a percentage of your credit and debit card sales daily or by fixed daily or weekly withdrawals from a bank account.

Pros:

  • Fast cash.
  • Unsecured financing.

Cons:

  • Some of the highest borrowing costs — up to 350% in some cases.
  • Frequent repayments can create cash flow problems.

8. Personal loans

It is possible to use a personal loan for business purposes. It’s an option for startups, as banks typically don't lend to businesses with no operating history.

Approval for these loans is based solely on your personal credit score, but you’ll need good credit to qualify.

Pros:

  • Startups and newer businesses can qualify.
  • Fast funding.

Cons:

  • High borrowing costs.
  • Small borrowing amounts of up to $50,000.
  • Failure to repay can hurt your credit.

9. Business credit cards

Business credit cards are revolving lines of credit. You can draw from and repay the card as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.

They are typically best used for financing ongoing expenses, such as travel, office supplies and utilities.

Pros:

  • Earn rewards on your purchases.
  • No collateral is required.

Cons:

  • High cost, with a variable rate that may rise.
  • Extra fees may apply.

10. Microloan

Microloans are small loans — $50,000 or less — offered by nonprofit organizations and mission-based lenders.

These loans typically are available to startups, newer businesses and businesses in disadvantaged communities.

Pros:

  • Low cost.
  • Other services may be provided, such as consulting and training.

Cons:

  • Smaller loan amounts.
  • You may have to meet stringent eligibility requirements.

How to get a small-business loan from a bank in America

Photo:  Business First Family
Photo: Business First Family

An existing relationship. Most banks require you to have at least a business checking account at their institution. While you can simply open an account at some banks to meet this qualification, others want a longer-term relationship. For example, you need an account with Wells Fargo for at least 12 months to receive some kind of financing.

Good credit. You’ll likely need a personal credit score in at least the 700s. Potential deal-breakers could include too much debt, too many open accounts or negative marks — like late payments, loan defaults, and bankruptcies. The bank will check your business credit score for similar red flags.

Strong revenue. When you apply for a small-business loan, the bank will look to see whether your business is in good shape and has enough revenue to support how much you want to borrow. For example, Bank of America’s unsecured business loans require at least $100,000 in annual revenue; its secured options increase that number to $250,000.

Enough time in business. Two years under the same ownership is the standard. But there are exceptions — in both directions. For example, some U.S. Bank lending products are available if you’ve been in business for six months, whereas PNC Bank generally requires at least three years of operations for you to qualify.

Collateral. You don’t necessarily need to put up business collateral like commercial property or equipment to get a bank loan. Some banks offer both unsecured and secured business loans. But the bank may fund larger amounts for secured loans, while also providing longer terms and lower interest rates to make payments more affordable.

Read More: How To Get A Small Business Loan: Best Tips for Startup Success

How to Qualify for a Small-Business Loan In The Unites States?

Getting a small-business loan can be a time-consuming process. By knowing whether you'll meet a lender's qualifications ahead of time, you can avoid potential frustration.

Here are five steps to help you qualify for a small-business loan in America:

1.Build personal and business credit scores

Personal credit scores indicate your ability to repay personal debts, such as credit cards, car loans and a mortgage. Small-business lenders require a personal credit score because they want to see how you manage debt.

FICO scores, commonly used in lending decisions, range from 300 to 850 (the higher, the better). You can get a free credit score on NerdWallet and a free copy of your credit reports at AnnualCreditReport.com.

Fast ways to improve your personal credit include disputing any inaccuracies in your report and paying bills on time and in full.

More-established companies will have business credit scores (which generally range from 0 or 1 to 100) with credit bureaus such as Experian, Equifax and Dun & Bradstreet. Steps to building business credit include establishing trade lines and keeping public records clean.

You’ll likely need excellent business credit and good personal credit to qualify for a government-backed SBA loan or traditional bank small-business loan. Online lenders may be more lenient with credit scores, emphasizing your business’s cash flow and track record instead.

2.Know the lender’s minimum qualifications and requirements

You'll typically need to meet minimum criteria around credit scores, annual revenue and years in business to qualify for a business loan, though some lenders may be flexible if you underperform in one area but overperform in another.

Qualifications can also vary by the type of business loan you want. For example:

  • For loans backed by the U.S. Small Business Administration: Your business must meet the SBA's definition of a "small" business, operate as a for-profit company and can’t be an ineligible business, like life insurance companies and financial businesses such as banks. You must also be current on all government loans with no past defaults — you’ll be disqualified if you’ve been late on a federal student loan or government-backed mortgage, for instance.

  • For bank and online business loans. Banks and online lenders typically underwrite loans based on traditional factors, but online loans carry less stringent requirements. For example, some online lenders offer bad credit business loans or may approve companies that haven't been in business as long. On the downside, this ease of qualification typically comes with a more expensive loan.

3.Gather financial and legal documents

Banks and other traditional lenders typically require a wide range of paperwork when you apply for a small-business loan. The financial and legal documents you may need for a small-business loan include:

  • Personal and business income tax returns.

  • Balance sheet and income statement.

  • Personal and business bank statements.

  • A photo of your driver’s license.

  • Commercial leases.

  • Business licenses.

  • Articles of incorporation.

  • A resume that shows relevant management or business experience.

  • Financial projections if you have a limited operating history.

Online lenders may provide a streamlined application process with fewer documents and faster underwriting. If you have good credit and strong business finances, some online lenders may offer you rates comparable to bank loans.

When getting a business loan, be sure to compare options to find the lowest cost loan that fits your company's needs.

4.Develop a strong business plan

Lenders will want to know how you plan to use the money and see that you have a strong ability to repay. They may require a solid business plan that details the purpose of the loan and how you expect it to increase profits.

You business plan should also include the following:

  • Company description.

  • Product and/or service description.

  • Management team.

  • Industry analysis.

  • Facilities and operations plan.

  • Current and projected financials.

  • Promotional, marketing and sales strategy.

  • SWOT analysis (strengths, weaknesses, opportunities, threats).

Your business plan should clearly demonstrate that you will have enough cash flow to cover ongoing business expenses and the new loan payments. This can give the lender more confidence in your business, increasing your chances at loan approval.

5.Provide collateral

To qualify for a small-business loan, you may have to provide collateral to back the loan. Business collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments. It’s a way lenders can recover their money if your business fails.

For example, SBA 7(a) loans above $25,000 require collateral, plus a personal guarantee from every owner of 20% or more of the business. A personal guarantee puts your credit score and your personal assets on the hook.

Some online lenders do not require collateral but may want a personal guarantee. Others may also take a blanket lien on your business assets — essentially another form of collateral — giving the lender the right to take business assets (real estate, inventory, equipment) to recoup an unpaid loan. Each lender has its own rules, so ask questions if you're unsure what's required.

Where Are Small-Business Loans Available in America?

Photo: Getty Images
Photo: Getty Images

Small-business loans can be obtained from banks, credit unions, online lenders, and alternative lenders. Understand what you should expect from each.

Banks and credit unions. Banks and credit unions typically serve larger, more well-established businesses, including those that are categorized as small businesses. You’ll have a better chance of getting funding from a traditional bank if the loan is backed by the Small Business Administration. SBA loan programs reduce the risk for the lender and can make it easier to get approved for a small-business loan. Approval may be easier if you have an existing relationship with the lender, such as a business bank account.

Online lenders. Online small-business lenders typically offer products similar to those of banks and credit unions – but without a branch. Expect a quick and easy online application process for term loans, lines of credit and other small-business financing options. Some online lenders are considered alternative lenders, which offer more flexibility than commercial banks as their loan products are less regulated. Alternative lenders provide loans to borrowers who otherwise may not have access to small-business financing, such as startups or businesses with a shaky financial history.

“Small businesses should be aware there are multiple channels available for borrowing needed funds,” says S. Michael Sury, lecturer of finance at the University of Texas--Austin.

Online lenders may offer SBA loan programs. You can also find peer-to-peer small-business lenders online, which connect your business with several investors who usually have a diversified loan portfolio made up of small portions of loans. Borrowing criteria for peer-to-peer small-business lending is usually less stringent than at traditional brick-and-mortar banks, but because small-business financing through a P2P marketplace poses a larger risk to lenders, often the interest rates start higher than traditional business loans.

Best Banks for Small-Business Loans in America

Photo:  US Chamber of Commerce
Photo: US Chamber of Commerce

1. Bank of America

The Bank of America Corporation (simply referred to as Bank of America, often abbreviated as BofA or BoA) is an American multinational investment bank and financial services holding company headquartered in Charlotte, North Carolina. The bank was founded in San Francisco and took its present form when NationsBank of Charlotte acquired it in 1998. It is the second-largest banking institution in the United States, after JPMorgan Chase, and the eighth largest bank in the world. Bank of America is one of the Big Four banking institutions of the United States. It serves approximately 10.73% of all American bank deposits, in direct competition with JPMorgan Chase, Citigroup, and Wells Fargo. Its primary financial services revolve around commercial banking, wealth management, and investment banking.

Bank of America offers both fixed-rate secured and unsecured term loans. Its secured loan requires greater annual revenue: $250,000 versus $100,000 for the unsecured option. But it offers higher borrowing limits — up to $250,000 — and a potentially lower interest rate. Both business loans require at least two years in business and can have repayment terms of up to five years, which is less than other banks may offer.

Bank of America also offers secured and unsecured business lines of credit, with the same revenue requirements as its term loans. The secured line of credit comes with additional borrowing power — starting at $25,000 compared with $10,000 for the unsecured option. There is no set borrowing maximum. Both have revolving terms, meaning you use the money as needed, that renews annually.

2. JPMorgan Chase

JPMorgan Chase Bank, N.A., doing business as Chase Bank or often as Chase, is an American national bank headquartered in Manhattan, New York City, that constitutes the consumer and commercial banking subsidiary of the U.S. multinational banking and financial services holding company, JPMorgan Chase. The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in 2000. Chase Manhattan Bank was formed by the merger of the Chase National Bank and the Manhattan Company in 1955. The bank merged with Bank One Corporation in 2004 and later acquired the deposits and most assets of Washington Mutual.

Chase has business and commercial lines of credit. Its business line of credit provides $10,000 to $500,000 in funding on a renewable five-year revolving term. The commercial line is $500,000 and up, with one- to two-year terms that may be renewed.

Chase is an SBA-preferred lender and funds multiple types of SBA loans. That includes SBA Express loans and credit lines, which offer faster funding of up to $350,000.

3. Citibank

Citibank is the consumer division of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City Bank of New York. The bank has 2,649 branches in 19 countries, including 723 branches in the United States and 1,494 branches in Mexico operated by its subsidiary Banamex. The U.S. branches are concentrated in six metropolitan areas: New York, Chicago, Los Angeles, San Francisco, Washington, D.C., and Miami.

Citibank offers two business lines of credit, with amounts ranging from $10,000 to $3 million. Both lines come with variable interest rates and revolving terms and require a personal guarantee.

4. Wells Fargo

Wells Fargo & Company is an American multinational financial services company with corporate headquarters in San Francisco, California, operational headquarters in Manhattan, and managerial offices throughout the United States and internationally. The company has operations in 35 countries with over 70 million customers globally. It is considered a systemically important financial institution by the Financial Stability Board.

Wells Fargo has three different lines of credit — one unsecured and two secured by collateral — ranging from $5,000 to $500,000. Credit lines of up to $100,000 have variable rates and are revolving. Those greater than $100,000 have a one-year term. You’ll typically need at least $2 million to $5 million in annual sales to qualify for Wells Fargo’s most generous business line of credit. Fees vary by product.

5. U.S. Bank

U.S. Bank has fewer locations than other brick-and-mortar banks, including Bank of America and Wells Fargo. But if there’s a branch near you, U.S. Bank may be a good choice for startups with collateral, as you may be able to qualify for an SBA loan with less than a year in business.

Term loans. U.S. Bank offers fixed-rate, secured term loans of up to $1 million. It doesn't have an unsecured business loan. If you need fast access to working capital, the bank has a quicker version of its term loan product. The Quick Loan has a lower borrowing maximum ($250,000) but a faster application process. It’s best for companies in business for at least two years.

Business lines of credit. U.S. Bank’s business line of credit also goes up to $1 million and has an interest-only payment option. The bank’s revolving line of credit, called CashFlow Manager, goes up to $250,000 and is for companies that have been in business for at least two years. That product has a $150 annual fee if the line of credit is less than $50,000.

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Alternatives to bank business loans

Photo: NAV
Photo: NAV

If you can’t get a business loan from a big bank, consider these alternatives:

Community banks. Business loan applicants report higher approval rates with smaller banks than big-name financial institutions, as well as greater overall satisfaction, according to a 2020 Federal Reserve survey. However, the number of community banks is dwindling, and a local bank may lack the benefits you want — like online loan management or multiple locations.

Online lenders. Online business loans come with faster funding and higher approval rates than bank loans. Some online lenders even specialize in small-business loans. For example, as of September 2020, Live Oak Bank is the most-active SBA 7(a) lender by loan volume. Online lenders are also less likely to require traditional collateral and may provide funding for newer businesses. But the trade-off will likely be higher costs than a traditional bank offers.

Microlenders. Nonprofit organizations offer microloans, and these can be a good choice for startups or small businesses that need working capital but can’t qualify for a bank business loan. Microloans are typically less than $50,000 and come with short repayment terms. Their costs will also likely be higher than a bank business loan.

Who Can Apply for a Small-Business Loan?

Not every small-business lender offers loans to all types of businesses. You must convince the lender that your business is worth the risk. To understand your eligibility, you’ll need to know how much your business needs to borrow and have good credit and a solid business plan.

Determine how much funding your business needs. Examine your business expenses and consider how much of a loan payment you can afford. You can find out how large of a loan your business can afford by calculating your debt service coverage ratio.

The formula is a simple one: net operating income / total annual debt = DSCR.

Lenders are looking for borrowers with at least a 1.0 ratio. This means your cash flow is equal to your monthly loan payment. However, it’s ideal to have a bit of a buffer, so lenders prefer a 1.35 DSCR. For example, if your annual net operating income is $135,000 and your total debt is $100,000, your DSCR is 1.35.

Check your credit score. Your personal credit score is a crucial part of the small-business loan application process. Lenders often consider your personal credit, especially with startup business loans, though your business credit score may also be used if you have one. The minimum credit score required for approval varies, but in general, the higher your credit score, the better the repayment terms and the lower the interest rates you’ll get on a small-business loan. It’s important to clear credit inaccuracies before beginning the application process.

“As a sole proprietor, your personal credit may be considered in the business loan application if you are using personal credit to secure the business debt,” says Rod Griffin, director of public education for Experian, one of the three major consumer credit bureaus. “Doing so is fairly common for a small-business owner. Note that if the loan is made using your personal credit, failing to pay it may affect your personal credit history and your ability to qualify for new credit in the future.”

Draft a strong business plan. A solid, comprehensive business plan is the foundation of your small business and shows potential lenders your financial projections. Lenders will want to see your estimated costs and projections for revenue and balance sheets for at least two years.

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