What Happens if Business Loans Default?

A small business loan can be a game-changer — it can ease a cash flow crunch, allow you to invest in new equipment, and help you seize new opportunities for your business. However, taking on debt always involves some risk. What happens if your company hits a road bump and you miss one, two, or more loan payments?

The consequence of missing a loan payment depends on how the loan is structured, how your business is structured, and whether or not you put up collateral or signed a personal guarantee for the loan. Here’s what you need to know about what happens to a loan if a business fails to keep up its payments.

Key Points

•  Business loan default is defined as missing several loan payments over a period of time, typically determined by your lender.

•  Defaulting on a business loan can result in severe consequences, including legal action from the lender, seizure of collateral, and damage to the business’s and owner’s credit ratings.

•  A default negatively affects the credit scores of both the business and its owner, making it more difficult to secure future financing and potentially leading to higher interest rates on future loans.

•  To avoid default, businesses should communicate with lenders at the first sign of trouble and explore options like loan restructuring or refinancing to manage debt more effectively.

What Does It Mean to Default?

A single late or missed payment is typically defined as loan delinquency. A loan in default, on the other hand, is often defined as missing several payments over a period of time. However, whether your small business loan is considered delinquent or in default depends entirely on your specific lender and the lender’s policy.

What Does It Mean to Be Delinquent?

Being delinquent on a small business loan means that the borrower has failed to make one or more scheduled payments by their due dates. Delinquency typically begins the day after a missed payment and can have serious consequences if not addressed promptly.

Fortunately, missing one payment shouldn’t result in too many repercussions. You may have to pay a late fee on your next payment, and you may receive a call from your lender asking you why you missed your last payment. If you just simply forgot, tell them and make the payment. However, if you’re unable to make a payment, explain the situation to them. They may be able to help you, whether that means allowing for partial payment, extending your due date, or even pausing your payments until your business is back on track.

If you miss many payments, however, your small business loan is at risk of going into default. To find out exactly when your lender considers your loan to be in default, look at your loan terms or reach out and ask them about their policy.

Once your business loan is in default, the lender will certainly reach out to you. They’ll want to know why you’ve missed payments, and, in some cases, they’ll offer assistance or adjustments in terms that could help you more realistically reach your payments. If they don’t offer you anything, try to give them a timeline of when they can expect to start receiving payments again.

By working with your lender, you can hopefully bounce back from a couple of missed payments and get back on the repayment track.

The biggest consequence of several missed payments is that your business credit score will likely take a hit. The reason is that most lenders report defaults to the various credit reporting bureaus. This could make it harder (and more expensive) to take out a business loan or get a business credit card in the future.

Depending on how your business is structured, defaulting on a business loan can affect personal credit, as well. Some structures, such as a limited liability company (LLC) offer liability protection to owners. Sole proprietorships, on the other hand, leave the owner personally responsible for business debts.

Recommended: Free Credit Score Monitoring

What Are Some Options If You Can’t Pay Back a Loan?

Hopefully, you can recover quickly from a missed loan payment or two without too much damage to your credit score or funds lost on late payment penalty fees. But what if your company’s financial problems continue and there is no way it can repay the business loan in full?

The best solution is to speak with your lender. Your lender may allow you to defer payments, make interest only payments, or even renegotiate the loan terms to help your business avoid default. If your lender doesn’t offer you any options, you might consider refinancing the loan, seeking the help of outside investors, or crowdfunding to raise money for repaying the loan.

If, worst case scenario, you’re on the verge of business failure, you may want to consider filing for business bankruptcy. Some debts can be discharged through bankruptcy, but not all of them. For more information, speak with a lawyer to weigh the pros and cons.

Recommended: Guide to Insolvency vs Bankruptcy

What Happens If You Default on a Business Loan?

While lenders will typically do their best to work with you, continued missed payments will result in more aggressive collection practices from your lender.

After a certain amount of time (how long will depend on the lender), your business loan will be considered a “charge off,” which means the lender doesn’t expect that you’ll ever pay your business loan back. The lender will then take measures to recoup their losses incurred by your loan default.

Exactly what that looks like will depend on the circumstances of your loan. Here are four different types of business loans and what defaulting on each may look like:

Secured Business Loan

If you have a secured business loan, that means your loan is secured by some sort of collateral, such as a vehicle, business equipment, or savings account. The lender will take possession of the asset to recoup their losses.

Unsecured Business Loan

If you did not secure the loan with any assets, you have an unsecured business loan and your lender will likely sue your business to collect on the loan. In this case, they are allowed to seek compensation not only for the outstanding balance of the loan, but also for interest, penalties, and fees. Alternatively, your lender may hand the collection process off to a collection agency, who will take legal steps to recoup the debt and fees in place of the lender.

Business Loan With a Personal Guarantee

If you signed a personal guarantee for your unsecured loan, the stakes can be higher. Typically, a personal guarantee doesn’t involve putting up one particular asset but, rather, gives a lender the right to seize any personal assets (including cash and property) until they’ve made their money back.

SBA Loan

If you have an SBA loan, the process will look a bit different. At first, the lender who funded the loan will begin the collection process and take possession of any collateral attached to the loan.

They will then submit a claim to the SBA, who will pay the lender the portion of the loan they guaranteed. The SBA will then contact you and request payment to cover their expenses. You can then resolve the situation by paying what you owe or negotiating with them so that they accept a smaller payment. If you and the SBA don’t find a resolution, however, the government could garnish your wages.

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Tips for Recovering From Business Loan Defaults

Even if you are able to negotiate with your lender and resume your loan payments, a loan default will have a negative impact on your business and/or personal credit. How can you recover?

To build back your credit profile, you’ll want to make sure you make all future payments to creditors on time. It can also be helpful to use your personal and business credit cards for various expenses and then pay them off fully and on time every month. Little by little, you will be able to add positive information to your credit reports and reduce the impact of the default.

To make sure you don’t default on loan payments again, it can be a good idea to look closely at your business’s monthly cash flow and see if you can find any ways to trim expenses. You may also want to hire a CPA to take a close look at your company’s finances. Another option is to bring in an angel investor who understands your industry. You will lose some equity, but their input and expertise may be able to turn your business around.

The Takeaway

One missed or late loan payment won’t likely result in any serious consequences, but two or more missed payments may be considered a loan default, which can impact your credit and put your business and personal assets at risk.

If you know you won’t be able to make a payment on your business loan, it’s a good idea to contact your lender right away. They may be willing to set up an alternate payment plan or adjust your loan to help your business avoid default.

One way to reduce the risk of defaulting on business debt is to find a loan that fits both your needs and your budget.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

Can you get out of business loans?

Typically, no. But if you’re up front with your lender about your business’s financial difficulties, they may be willing to work with you and make your repayments easier to manage. In some cases, eligible debts may be written off if you file for bankruptcy.

Why is defaulting on loans bad?

A loan default will negatively affect your credit scores. It can also put your professional and personal assets at risk.


Photo credit: iStock/designer491

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Delayed Draw Term Loan (DDTL): Defined and Explained

A delayed draw term loan (DDTL) is a type of business term loan that lets you draw funds several times over the term of the loan. This can be helpful if you plan to expand your business by making multiple acquisitions or capital investments over time. It can also help you handle any unforeseen expenses that crop up in the future.

Delayed draw term loans typically come with strict eligibility requirements and complex loan terms. Read on for a closer look at how these loans work, their pros and cons, plus how they compare to revolving business lines of credit.

Key Points

•  Delayed draw term loans allow borrowers to withdraw predefined funds over a set period of time. Unlike traditional small business loans, the entire loan amount is not given to the borrower up front.

•  Delayed draw term loans allow borrowers to save on interest, since the interest only accrues on the amount that’s withdrawn as opposed to the entire loan amount.

•  Cons of delayed draw term loans include strict eligibility requirements and they can only be used for large loan amounts.

•  Delayed draw term loans differ from business lines of credit in that they are designed for acquisitions, whereas business lines of credit are ideal for short-term financing.

•  Alternatives to delayed draw term loans include SBA loans, business lines of credit and short-term business loans.

What Is a Delayed Draw Term Loan?

A delayed draw term loan allows borrowers to withdraw predefined amounts of a total approved loan amount over time, rather than receive the full loan amount upfront. The withdrawal periods are set in advance and may occur every three, six, nine, or 12 months.

A delayed draw term loan allows you to draw funds incrementally to meet your company’s funding needs.

How Does a Delayed Draw Term Loan Work?

A delayed draw term loan is structured so that a business can draw funds on specific dates, rather than whenever they want to draw funds. In some cases, the lender will have certain requirements your business must meet (such as reaching certain financial milestones) in order to be eligible for draws. By the time the loan reaches maturity, the entire loan amount (including interest) must be paid off.

A delayed draw term loan generally allows you to pay less in interest compared to a traditional term loan, since you only pay interest on the amount you draw rather than the full amount of the loan. However, these loans often come with fees, including a “ticking fee.” The ticking fee is based on the undrawn amount of the delayed loan, and generally grows over time. Once you draw the entire loan amount (or terminate the loan), you no longer have to pay ticking fees.

Recommended: Small Business Loans for Small Proprietors

Pros and Cons of Delayed Draw Term Loans

As with all types of small business loans, delayed draw term loans come with both benefits and drawbacks. Here’s a look at how they stack up.

Pros Cons
May pay less in interest Strict eligibility requirements
Offers withdrawal flexibility Only available for large loans
Can access funds quickly Terms can be complicated

Delayed Draw Term Loan vs Revolving Lines of Credit

Both delayed draw term loans and revolving lines of credit are flexible forms of financing. Both allow you to use the funds when you need them and only pay interest on the amount you draw. However, there are some key differences between these loan products.

For one, delayed draw term loans are generally harder to qualify for than business credit lines. In addition, they usually have more complicated loan terms and conditions.

Another distinction is that revolving credit is designed for short-term capital needs like working capital, not for acquisitions. Delayed draw term loans, on the other hand, are considered long-term loans and are often used for acquisitions.

And, while revolving credit allows you to draw funds, repay those funds, and draw them again, delayed draw term loans do not. Once the delayed draw term loan is repaid, the funds are no longer available for use.

Delayed Draw Term Loan

Revolving Credit

Interest Lower Higher
Flexibility Less More
Funds renew? No Yes
Can they be used for acquisitions? Yes No
Qualifying Harder Easier
Rules Simple Complicated

Recommended: How Trial Balance Sheets Work

Delayed Draw Term Loan Example Agreement

As an example of a delayed draw term loan, let’s take a computer software company that is looking to borrow money to expand its product line. A lender agrees to give them a $5 million dollar, five-year term loan. However, since the technology is constantly evolving, the company decides they would rather not make a large, one-time acquisition but, rather, several smaller acquisitions over time.

Instead of a traditional term loan, they negotiate a delayed draw term loan that allows them to access $1 million every year, as opposed to $5 million upfront all at once. This allows them to take advantage of purchase opportunities as they come up and pay less total interest over the life of the loan.

Applying for Delayed Draw Term Loans

Generally, delayed draw term loans are only offered to businesses with high credit scores that are interested in getting a large term loan to finance future acquisitions or expansion.

If you think you might qualify, applying for a delayed draw term loan is similar to applying for any business loan. You’ll likely need to provide basic information about your business, your company’s financial statements, information about you and any other owners, and information about collateral, if required.

Alternatives to Delayed Draw Term Loans

Delayed draw term loans are one of many types of business loans that can help you grow your business. Here’s a look at some other options.

SBA Loan

Because SBA loans are guaranteed by the U.S. Small Business Administration (SBA), they represent less risk to lenders than other types of small business loans. As a result, SBA loans generally offer large loan amounts and attractive rates and terms. With an SBA 7(a) loan, for example, eligible businesses can borrow up to $5 million for a range of business purposes.

Term Loan

A traditional term loan is a small business loan in which you receive a lump sum of capital upfront, then pay it back (plus interest) in regular installments over the term of the loan. Term loans are offered by banks, credit unions, and online lenders. The funds can typically be used for any business purpose. Repayment terms can be up to 10 years.

Short-Term Loan

If you need access to cash quickly, you might consider a short-term business loan. These loans are typically easier to qualify for than traditional term loans and can be used for virtually any business purpose. Repayment periods are often between three and 18 months. With some online lenders, qualifying businesses might be able to access funding in as little as one day.

Business Lines of Credit

A business line of credit is a form of revolving credit. You receive access to a set credit limit and can access what you want (up to your credit limit) when you want it. You only pay interest on what you borrow. As you repay the money you owe, you can access that money again throughout the draw period. Once the draw period ends, you can no longer access the credit line. At that point, the repayment period begins.

Recommended: Unsecured Business Line of Credit for Startups

When Are Delayed Draw Term Loans a Good Option?

A delayed draw term loan can be a good option if:

•  Your business has strong credit.

•  You need a large loan to expand your business.

•  You want to make several acquisitions or capital investments over time.

Unlike a traditional term loan, you won’t have to pay interest on the full loan amount. You’ll only pay interest on the portion that you borrow.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

What are ticking fees on delayed draw term loans?

Ticking fees on delayed draw term loans are fees that accrue on the undrawn amount of the delayed loan. Once you draw the entire loan amount (or terminate the loan), you no longer have to pay ticking fees.

What is delayed drawdown?

A delayed drawdown occurs when a borrower doesn’t receive all the proceeds of a term loan upfront. With a delayed draw term loan (DDTL), a borrower receives a certain portion of the loan at set intervals, which may be every three, six, nine, or 12 months.

Do delayed draw term loans amortize?

Some delayed draw term loans amortize, but it depends on the lender and the terms of the loan.


Photo credit: iStock/Tero Vesalainen

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Guide to Trade Working Capital

Working capital is the difference between a company’s current assets and its current liabilities. Assets include cash and other assets that can be converted into cash within a year, and liabilities include payroll, accounts payable, and accrued expenses. A business that maintains positive working capital has the ability to cover its short-term financial obligations as well as invest in future growth.

There are different types of working capital, however, including trade working capital. You calculate trade working capital in the same way as working capital, except you only consider assets and liabilities directly associated with your daily business operations.

Read on for a closer look at trade working capital, including how it differs from working capital, how it’s calculated, and why it’s an important performance metric for business owners to know.

Key Points

•  Trade working capital is the difference between a company’s assets and liabilities that are linked specifically to day-to-day operations.

•  Current assets include inventory and accounts receivable; current liabilities include accounts payable.

•  Positive trade working capital allows you to see how much cash your business has on hand for short-term commitments and investments.

•  Negative trade working capital means your business may have to take on additional debt to meet financial obligations or is at risk of going bankrupt.

What Is Trade Working Capital?

To understand trade working capital, it’s important to know what working capital is. Simply defined, working capital (also known as net working capital) is a financial metric calculated as the difference between current assets and current liabilities. The formula for working capital is:

Current Assets – Current Liabilities = Working Capital

A current asset is any asset that can be converted into cash within a year, while a current liability is any amount owed to a creditor within a year. These items are listed on a business’s balance sheet.

So, what is the difference between working capital and trade working capital?

Like working capital, trade working capital is defined as the difference between a company’s current liabilities and current assets. Unlike working capital, trade working capital only considers liabilities and assets that are directly linked to day-to-day business operations.

Recommended: Insolvency vs Illiquidity

How Trade Working Capital Works

Trade working capital specifically looks at the difference between current assets and current liabilities directly associated with a company’s core operations.

As a result, the only current assets you include when using the trade working capital formula are:

•  Inventories: These are unsold products waiting to be sold.

•  Accounts receivable: This is the balance of money due to your company for goods or services delivered or used but not yet paid for by customers.

For current liabilities, the trade working capital formula only includes:

•  Accounts payable: This is the amount your company owes its vendors for inventory-related goods, such as business supplies or materials.

To calculate trade working capital, you simply add inventories and accounts receivable together and then subtract accounts payable.

Business owners, as well as investors and lenders who offer small business loans, might use this more refined version of working capital because the items listed above are the major drivers of a company’s working capital. As a result, calculating trade working capital vs. working capital might better reflect the company’s financial position.

Trade Working Capital

Working Capital

Incorporates all current assets X
Incorporates all current liabilities X
Only includes assets directly related to day-to-day operating activities X
Only includes liabilities directly related to day-to-day operating expenses X

The key difference between trade working capital vs. working capital is what’s included in the “current assets” and “current liabilities” parts of the working capital equation.

Trade working capital only looks at assets and liabilities related to a company’s daily operations. Working capital, on the other hand, takes into account all current assets (including cash, marketable securities, accounts receivable, prepaid expenses, and inventories) and all current liabilities (including accounts payable, taxes payable, interest payable, and accrued expenses).

Like working capital, trade working capital represents the amount of excess capital a company possesses. But since trade working capital is a narrower definition of working capital, it’s seen as a more stringent measure of a company’s short-term liquidity.

Recommended: What Is a Factor Rate?

How to Calculate Trade Working Capital

Here is an example of how to calculate trade working capital using a fictional company called XYZ that manufactures boxes.

Company XYZ has $20,000 in account receivables associated with daily operations and $5,000 in unsold inventory. It also has $7,000 in account payables associated with daily operations. Therefore, it’s trade working capital is:

$20,000 + $5,000 – $7,000 = $18,000

Recommended: Net Present Value: How to Calculate NPV

What Trade Working Capital Indicates and Why It Matters

Like working capital, trade working capital is important to know because it tells you if your company has enough cash on hand to manage its short-term commitments. Positive trade working capital also indicates that your business has the ability to invest in new equipment and assets that can increase revenues and profits.

If, on the other hand, your company’s current liabilities exceed its current assets (in other words, you have negative trade working capital), your company may need to take on additional debt in order to avoid defaulting on its bills or, worst case scenario, could be at risk of going bankrupt.

It’s important to keep in mind, however, that there is such a thing as too much trade working capital. This can be a sign that your company is not investing its extra cash strategically and may be missing out on opportunities for expansion and growth.

Recommended: What You Should Know About Short-Term Business Loans

The Takeaway

Working capital is a financial metric calculated as the difference between current assets and current liabilities. If your business has positive working capital, it means the company can pay its bills and also invest to spur business growth.

There are several types of working capital, including trade working capital. With trade working capital, you only consider current assets and current liabilities that are associated with daily business operations.

Businesses will often calculate both forms of working capital to assess their financial health at a given moment in time. If you’re in the market for any type of small business loan, lenders may look at your working capital and/or trade working capital to assess your firm’s ability to cover new debt on top of its current financial obligations.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

How is trade working capital calculated?

Trade working capital is typically calculated by adding inventories and accounts receivable together, then subtracting accounts payable.

How are trade working capital and net working capital different?

While the equation is the same (current assets – current liabilities = working capital), there is a slight difference between trade working capital and net working capital. Trade working capital only looks at assets and liabilities related to a company’s daily operations, whereas net working capital takes all current assets and all current liabilities into account.

Is high trade working capital a good thing? When isn’t it?

It’s a good thing to have positive trade working capital because it means your company has access to enough funds to meet its day-to-day operating expenses, plus invest in the future. High trade working capital, however, isn’t necessarily a good thing. This can indicate that your company is favoring liquidity over investing in new assets and growing the business.


Photo credit: iStock/maroke

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Can You Get a Small Business Loan With Just EIN?

Is it possible to get a business loan with an EIN only? Yes, but it can be difficult unless the business has been around for a long time.

Lenders like to use a variety of factors to determine whether a borrower is a good candidate for a small business loan. When those factors are restricted to only a business’s financial history, it makes it harder to determine whether the applicant is a good investment. However, it is possible.

Below, we discuss how to apply for a startup business loan with an EIN and why you may want to consider doing so, as well as what you can do if your application is denied.

Key Points

•  An EIN, or employer identification number, is a nine digit number given to a business, similar to a SSN given to individuals.

•  While it may be possible to get a loan with just an EIN, most lenders will also want to look at your credit history, business financial statements, length in business, and business plan.

•  Business loan options that may only require an EIN include equipment financing, invoice financing, invoice factoring, and merchant cash advances.

•  To get the best rate on a small business loan, you’ll want to show lenders more than just your EIN, though. You’ll want to present a strong credit profile, solid financial statements, and a comprehensive business plan.

What Is an EIN?

EIN stands for employer identification number. It’s a nine digit number assigned to businesses by the IRS. Contrary to popular belief, you don’t need to have employees to obtain an EIN.

There are a few reasons why you may want an EIN:

1.   Makes filing taxes easier

2.   Enables business owners to open a business bank account

3.   Helps business owners open a business credit card

Is it possible to apply for a business loan with an EIN? Yes, but to improve your odds you’ll want to ensure your business has a financial history. You can begin doing this long before your company is ready to make its first sale.

Does Your Business Have an EIN?

Unless you have specifically applied for an EIN, it’s unlikely your business has one. To get an EIN, you will need to submit an application through the IRS. If you have lost your EIN and can’t find the appropriate paperwork, you may be able to contact the IRS directly and obtain it. Otherwise, your EIN is a nine digit number that is unique from your SSN.

Can You Get a Small Business Loan With Just an EIN?

Obtaining a small business loan with just an EIN is possible, but it often requires more than just the EIN to secure financing. The EIN, issued by the IRS, is primarily used for tax purposes and identifies a business entity. While it is an essential piece of information for loan applications, lenders typically require additional documentation and criteria to approve a loan.

In addition to an EIN, lenders will look at:

•  The business’s credit history: A strong personal credit score can provide assurance to lenders about the borrower’s ability to repay the loan. In the absence of an established business credit history, personal credit becomes even more critical.

•  Business financial statements: This includes profit and loss statements, balance sheets, and cash flow statements. These documents help lenders assess the financial health of the business and its ability to repay the loan.

•  A business plan: A comprehensive business plan may also be required to demonstrate the company’s strategy for growth and its potential for generating revenue.

•  Collateral to secure the loan: Collateral can be business assets like equipment, inventory, or real estate. This provides security for the lender, reducing their risk in case the business fails to repay the loan.

While it is theoretically possible to get a business loan using just an EIN, the reality is that additional factors, such as credit history, financial documentation, and possibly collateral, play a significant role in the approval process, as well.

Recommended: 15 Types of Business Loans to Consider

How to Apply for a Startup Business Loan With an EIN Number

Applying for small business loans can be done with only an EIN, but it does take time to establish a business credit history. To improve your odds, follow the steps below:

1.   Apply for an EIN.

2.   Open a business bank account.

3.   Apply for a business credit card with your EIN.

4.   Make all payments to vendors and credit accounts through your business bank account. Ask vendors to report your on-time payments to Dun & Bradstreet, Experian®, and Equifax®.

5.   Check on your business’s credit score.

6.   Once your business has an established credit score, apply for start up business loans using your EIN number.

Why Should You Use EIN Over SSN?

Startup business loans with the EIN number only have a few benefits:

•  Personal credit history may not be a factor

•  Borrowers who don’t have a SSN can still apply for a business loan

•  Application process may be easier

However, before you decide to solely rely on your EIN, using your SSN also has some benefits you may want to consider:

•  Credit score may improve loan terms

•  More financing options may be made available

•  Eligibility requirements may not be as difficult to reach

Best Small Business Loans for EIN

Because some borrowers using only an EIN may seem to be more of a risk for lenders, it’s not uncommon for lenders to prefer loans that pose less of a risk.

The top business loans for 2024 for borrowers applying only with an EIN are:

•  Equipment loans: Equipment loans are secured with the equipment itself, which makes them less of a risk to the lender. However, lenders may still impose a cap on how much they are willing to loan to borrowers applying only with an EIN. The good thing about equipment loans is that the loan term often mirrors the equipment’s useful life.

•  Invoice financing: Use unpaid customer invoices as collateral to secure a business loan. Once payment is received, full repayment of the loan is expected.

•  Invoice factoring: Sell unpaid invoices to a third party at a discount. That company collects payment on your behalf. Once they receive payment, they forward any remaining amount to you minus any fees.

•  Merchant cash advances: With a merchant cash advance, borrowers receive a lump sum of cash from a lender. Instead of making monthly payments, a small percentage of each credit card sale is automatically sent to the lender. Neither monthly payments nor collateral is required since payment is guaranteed through sales.

Will My Loan Be Limited?

While it’s certainly possible to get a business loan with only an EIN, keep in mind that lenders use things like personal information, personal guarantees, and collateral to help protect themselves from lending to subprime borrowers.

Therefore, as a small business borrower, your financing options may be limited by only using an EIN during the application process because the lender has less information to go on. If your business has a short financial history, it’s safer to assume you pose a certain amount of risk.

Borrowers applying only with an EIN may find that there are less loan options, higher interest rates, and shorter loan terms.

Recommended: What to Know About Short-Term Business Loans

What to Do If You Aren’t Eligible

If your application is declined, you may consider remedying any issues with your personal credit report while also continuing to build your business’s credit score.

Remember, your credit report and your credit score are two different things. Your score is a result of the information within your credit report. Therefore, first check your credit reports and see if there are any errors. You can do so for free once a year through www.annualcreditreport.com. If you see any information that should not be there, begin the dispute process.

If there aren’t any errors, you may need to pay down your debt and begin to make all of your payments on time moving forward. If you have any older credit accounts, keep them open even once they are paid down. Also, if any friends and family have strong credit profiles and have accounts that have been open for a few years, you may ask to become an authorized user on their account. Their positive history will boost your personal credit profile.

Aside from bootstrapping and asking for help from friends and family, other options include small business grants and crowdfunding. Both are highly competitive, so you will want to consider still moving forward with the above recommendations just in case.

The Takeaway

An EIN is required for certain businesses, especially any that have employees. An EIN is a nine digit number that is essentially a social security number for your business.

Some business loans can be obtained with only an EIN, but many small business owners will find that their options are limited if they don’t also provide their personal information. Generally, businesses need strong, lengthy credit histories to obtain business loans with only an EIN.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

Can you build business credit with just EIN?

Yes, it is possible to build business credit with just an EIN. However, the first step would be to open a bank account using the EIN. From there, the business owner would make all payments to their accounts from that business bank account.

Can you get a small business loan with a bad credit score and just an EIN?

While it is possible to get a business loan with bad credit and just an EIN, loan options are likely to be limited.

What is the average time it takes to get approved for a small business loan with just an EIN?

The average amount of time depends on the loan and the loan amount. Some loans are disbursed within a very short amount of time, while others require a lengthier underwriting process and can take up to several months.

Can you apply for a SBA loan with just an EIN online?

You can apply for a business loan with only an EIN, but you will need to provide other information as well, such as a social security number or tax ID number and a written out business plan.

Are there any added fees to a small business loan with just an EIN?

Each lender may or may not have unique fees associated with the application process. However, applying with just an EIN is not normally the cause or justification behind standard lender fees.


Photo credit: iStock/JLco – Julia Amaral

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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13 Types of Business Loans and Alternative Loan Options

Small business owners rely on various types of business loans to help them manage cash flow, cover daily expenses, expand, remodel, or invest in equipment or property. Many factors contribute to the type of small business loan you choose, including your industry, how much cash you need, your business’s financials, and what you need funding for.

With so many different types of business loans, deciding which one is right for you can be challenging. In this guide, you’ll learn about the small business loans that can help you meet your goals.

types of small business loans

1. Term Loan

Term loans are the most common types of loan for businesses. With these loans, you receive a sum of money upfront and agree to repay the funds, with interest, over a set period. Banks and alternative lenders offer business term loans in varying amounts depending on the type of business loan, applicant’s qualifications, and terms and conditions.

There are both long- and short-term loan options available. Short-term loans are ideal for smaller financial needs like inventory purchases or unexpected expenses. They have fewer requirements and often take less time to fund. Long-term loans often have a stricter approval process and usually require collateral. That’s because they’re typically used for larger expenditures and pose more risk for the lender.

Advantages: Predictable payments over the life of the loan and higher borrowing amounts.

Disadvantages: May require collateral to secure the loan.

Who it’s good for: Small businesses with strong credit and a desire to expand.

2. SBA Loan

A SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. The SBA has numerous loan programs with loan amounts of up to $5 million available for everything from working capital to commercial real estate investments.

There are a few key differences between SBA loans and conventional loans. Most notably, SBA loans are government-backed, resulting in lower interest rates and more flexible terms than conventional loans. A few SBA business loan examples include:

•  7(a) loans: Cover general expenses and is the SBA’s most common type of business loan offered.

•  504 loans: Cover fixed assets, like real estate purchases. Offered in partnership with certified development companies.

•  Microloans: Cover working capital costs up to $50,000 and are only offered on a small scale.

Advantages: High borrowing amounts and moderate interest rates.

Disadvantages: May be difficult to qualify and the application process can be lengthy.

Who it’s good for: Borrowers with strong credit who don’t need cash quickly.

3. Business Line of Credit

A business line of credit is a type of business loan that gives borrowers access to cash up to a set credit limit. Like a credit card, a line of credit charges interest only on the money you borrow. Most lines of credit are revolving, while others may end after you’ve spent and paid off the full credit amount.

A business line of credit offers great flexibility, especially with repayment options. You can withdraw any amount needed, up to your credit limit, at any time. Payments can be structured in a few ways, often with minimum monthly payments that include the principal and interest amounts. As the principal is paid off, the business can borrow again, making these lines of credit ideal for handling ongoing expenses.

Advantages: Flexible borrowing for short-term expenses.

Disadvantages: Lower borrowing limits and typically higher interest rates.

Who it’s good for: Businesses that need funding for small ongoing expenses, assistance managing cash flow, or emergency expenses.

4. Equipment Financing

An equipment loan can be used to purchase or upgrade necessary business equipment. The equipment acts as collateral for the loan, and the length of the loan is often equal to the expected life span of the equipment. Rates vary depending on the type of equipment and your business’s qualifications.

Equipment loans cover a wide variety of necessities. This can include kitchen equipment like commercial ovens, medical equipment like X-ray machines, and more. For this reason, these types of business loans are helpful for most businesses that require equipment.

Advantages: Allows small businesses to build equity without having to put down additional collateral.

Disadvantages: Loans can only be used for the purchase of equipment.

Who it’s good for: Small businesses that want to invest in equipment rather than lease.

5. Merchant Cash Advance

Like a business line of credit, a merchant cash advance offers a borrower cash upfront, but payments are made to the lender with a percentage of future credit card sales. This means your payment amount will fluctuate, as the percentage is calculated based on the amount of revenue your business brings in. Automatic withdrawals can be set up directly from your bank account on a daily or weekly basis.

Merchant cash advances are relatively easy to qualify for, as the loan amount is based on your business revenue. One thing to keep in mind: Merchant cash advances are among the most expensive types of business loans. For this reason, you may want to research different types of business loans before deciding on a merchant cash advance.

Advantages: Fast cash, often within 24 to 48 hours of applying.

Disadvantages: Frequent payments with potentially high fees; lack of regulatory oversight could result in undesirable lending practices.

Who it’s good for: Borrowers who struggle to qualify for other types of business loans.

6. Invoice Financing

Invoice financing is a type of business loan in which businesses use their outstanding invoices as collateral to obtain a cash advance from a lender. This allows them to unlock cash tied up in unpaid invoices.

Invoice financing is helpful for businesses with long payment cycles. By converting invoices into immediate cash, businesses can meet their short-term financial obligations, invest in growth opportunities, or handle unexpected expenses without waiting for clients to pay their invoices.

The advance is typically a percentage of the invoice value, with the remaining balance paid to the business once the invoices are settled, minus fees and interest.

An important note: The business owner is responsible for collecting invoice payments to repay the money borrowed with this type of loan.

Advantages: Access to funds from unpaid invoices, flexible use, and quick access.

Disadvantages: Higher fees and interest rates and reliance on customer payments.

Who it’s good for: Businesses with cash-flow issues related to slow-paying clients.

7. Invoice Factoring

Similar to invoice financing, invoice factoring allows you to get fast cash upfront in exchange for unpaid customer invoices. This type of business loan can help business-to-business (B2B) companies that deal in customer invoices and irregular billing cycles maintain regular cash flow. The companies that buy unpaid invoices are known as lenders, factors, or factoring companies.

In this case, unpaid invoices are sold to another company to collect on your behalf. At the point of sale, your business receives approximately 70–90% of the total value of the invoice. You will receive the remaining value, minus applicable fees, once the invoice has been paid.

Advantages: You don’t have to wait for customer invoices to be paid for access to business funding.

Disadvantages: Can be costly and you don’t control collection practices.

Who it’s good for: Small businesses that process invoices regularly and have customers who reliably pay their invoices.

8. Microloan

Microloans are business loans, typically $50,000 or less, often given by nonprofit organizations or mission-based lenders. These can be great types of loans to start a business or for newer businesses in underserved communities.

Microloans shouldn’t be confused with SBA microloans, as SBA microloans are a subset of SBA loans used in specific cases and are government-backed. Many other lenders offer microloans in addition to the SBA.

Advantages: Credit requirements tend to be lower than with traditional loans, and microloans may come with additional services, such as counseling.

Disadvantages: Lower borrowing amounts typically with above-market interest rates.

Who it’s good for: Startups and newer businesses that don’t have established business history.

9. Commercial Real Estate Loan

A commercial real estate loan is used to purchase or improve a building or property that’s used for business purposes. Getting one may help a small business expand and build equity.

These different types of business loans may have different rates, terms, conditions, and purposes, depending on the lender.

•  Long-term commercial real estate loans: Have terms between five and 25 years and set repayment schedules. Ideal for construction, land development, or property purchases.

•  Short-term commercial real estate loans: Have terms anywhere from one to five years. Best for borrowers who need commercial real estate financing more quickly or who don’t qualify for a long-term loan.

Advantages: Business loan options designed specifically for commercial real estate needs.

Disadvantages: Can be difficult to qualify for.

Who it’s good for: Established small businesses who want to transition from leasing to owning their commercial property or expand their business.

10. Working Capital Loan

A working capital loan is a common loan type for small businesses that need assistance managing cash flow fluctuations as they build their businesses. These types of business loans can be any loan product used to cover everyday expenses, such as payroll, monthly bills, or repairs.

For example, a business owner could opt for a short-term business loan to cover immediate expenses. These loans are typically 18 months or less and given to the borrower in one lump sum. Payments are made monthly, and the interest rate is determined by the market and the borrower’s business financial profile.

Advantages: Quick access to funding for maintaining positive cash flow.

Disadvantages: Short-term and, depending on the type of financing, may be more costly than a longer-term option.

Who it’s good for: Small businesses with seasonal revenue or ones that want to expand and need cash to handle daily expenses during growth.

11. Restaurant Loan

Running a restaurant business requires a significant investment in equipment, inventory, and staffing. Restaurant loans can be helpful in starting, expanding, or supporting various aspects of a restaurant business. These types of business loans can be from traditional banks, alternative lenders, or peer-to-peer (P2P) lenders.

Restaurant loans offer multiple financing options, such as lines of credit, equipment loans, and working capital loans, to address the unique needs of the food service industry. These loans provide flexibility, support for significant purchases, and solutions for managing daily operational expenses.

Advantages: Numerous business loan options to choose from.

Disadvantages: Requires financial stability to ensure repayment of long-term loan options.

Who it’s good for: Startups and established restaurants that want to expand, remodel, or manage cash flow during business fluctuations.

12. Franchise Financing

Franchising loan options are offered by several sources, including traditional banks, online lenders, franchise financing companies, and sometimes even the franchisors themselves. These types of business loans can help cover the many costs associated with opening a franchise location.

Advantages: May be easier to obtain financing as a franchisee than it would be for an independent small business seeking a different loan type.

Disadvantages: May be expensive to start a business under a larger franchise.

Who it’s good for: New franchise owners who need help covering franchise fees and other startup costs.

13. Personal Loans for Business

Using personal loans for business purposes can be a viable option when traditional business financing is not accessible. These loans are unsecured, meaning no collateral is required, but they often come with higher interest rates and lower borrowing limits.

It’s important to remember that this type of loan directly impacts personal credit scores and financial health. Mixing personal and business finances can complicate accounting and tax reporting. Business owners should carefully evaluate their financial situation and consider all alternatives before opting for a personal loan to fund their business.

Advantages: Typically offers a simpler application process and faster approval times than traditional business loans.

Disadvantages:

•  Usually has higher interest rates and lower borrowing limits, and can negatively impact personal credit scores.

•  Some lenders specify personal loans can’t be used for business purposes.

Who it’s good for: Business owners who need quick funding and may not qualify for traditional business loans.

15. Alternative Lending Options

Alternative Lending Options

Alternative small business loans are any offered by lenders other than a traditional bank or credit union. Some alternative business loans examples include:

•  Peer-to-peer lending: Connects borrowers directly with individual investors through online platforms.

•  Online business loans: Provide fast, accessible funding through digital platforms with streamlined application processes and quick approval times.

•  Business credit cards: Offer revolving credit lines for businesses to cover everyday expenses, often with rewards or cash-back programs.

•  Crowdfunding: Raise small amounts of money from a large number of people to fund a business project or venture.

•  Angel investors: Individuals who provide capital to startups, often bringing expertise and mentorship.

•  Venture capitalists: Professional investors who manage pooled funds to invest in high-growth startups in exchange for equity.

•  Contributions from friends and family: Informal loans or investments from personal connections to help start or grow a business.

•  Grants: Nonrepayable funds provided by governments, nonprofits, or corporations to support businesses that meet specific criteria or objectives.

Advantages: Many alternative business loan options are faster to get than traditional loans.

Disadvantages: Depending on the type of loan, borrowing limits may be lower and interest rates higher.

Who it’s good for: Small business startups or borrowers with poor credit who don’t qualify for a bank or SBA loan.

Recommended: Comparing Personal vs Business Loans

How to Choose the Right Loan for Your Business

As you consider different types of business loans, these five questions can help you clarify your needs and qualifications so you can narrow in on the types of business loans that may be right for your operation.

•  What Industry Is Your Business in? Certain types of small business loans are better suited for certain industries, and some lenders have rules about which industries they will lend to. Check that potential lenders work within your industry before applying.

•  How Much Funding Do You Need? Know how much money you need before choosing a loan type or a lender. This will show a lender that you understand your business needs and help narrow your search to loans matching your funding needs.

•  What Are Manageable Loan Terms for Your Business? Ask yourself if your business is in a position to take on long-term loans or if you should consider short-term options. A term loan, for example, sets a specific amount of time. If you have a five-year loan term, you’ll make regularly scheduled payments for five years. The term also affects your monthly payment. Typically, the longer the term, the lower the monthly payment.

•  How Soon Do You Need Money? How quickly you need funding may influence how expensive a particular type of business loan is for you. Typically, the faster you get the money, the more expensive the loan due to interest rates and loan fees. If you’re able to wait, it may help you secure a less expensive loan.

•  What Are the Costs of Different Business Loan Types? The cost of a small business loan goes beyond interest rates and monthly payments. It’s also good to know if the type of business loan you choose has additional costs, like fees or penalties.

While you cannot use a personal loan for business expenses, it could help you to consolidate high-interest credit card debt you might have incurred, for instance.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.


With one simple search, see if you qualify and explore quotes for your business.

FAQ

What type of loan is an SBA loan?

An SBA loan is guaranteed by the U.S. Small Business Administration and offered by approved sources, including banks and some online lenders. It offers up to $5 million to cover everything from working capital to commercial real estate investments.

What’s the most common type of SBA loan?

The most common SBA loan types are 7(a) loans, which cover general expenses.

What’s the difference between an unsecured vs. secure business loan?

An unsecured business loan does not require collateral, while a secured business loan requires assets as collateral, offering lower interest rates but risking asset loss if the loan defaults.

How do I apply for a small business loan?

Gather your financial documents, business plan, and credit history, then complete an application with a lender.


Photo credit: iStock/ FG Trade

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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