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When a borrower is especially risky, a lender may ask them to agree to a blanket lien, also known as a general lien or a UCC-1 blanket lien. A blanket lien gives the lender the legal right to seize multiple (possibly even all) assets owned by the borrower should they stop making payments on the loan.

Blanket liens aren’t unusual in the small business lending world, and can give a business with thin or poor credit access to affordable financing. But because these agreements put most, if not all, of your business assets at risk, a blanket lien isn’t something you want to enter into lightly.

Should you agree to a UCC blanket lien to get a business loan? Does having a lien on your business assets affect your credit? If you already have a lien placed on your business, can you get it removed? Here’s everything you need to know about blanket liens as a small business owner.

What Is a Blanket Lien?

Collateral is one way lenders reduce their risk when they loan you money. If your business takes out a loan and fails to repay it according to the terms of the loan agreement, your collateral can potentially be seized and sold to help the lender recover some of its losses.

For some loans, a lien against a single piece of collateral may not be enough to make a lender feel comfortable. Instead, the lender may prefer a type of lien that secures multiple assets your business owns at the same time. This is commonly known as a blanket lien, or UCC-1 blanket lien, after the section of the Uniform Commercial Code that regulates these types of liens.

Under a UCC blanket lien, a lender might ask you to pledge any of the following as collateral when you’re borrowing funds:

•  Accounts receivable

•  All equipment

•  All vehicles

•  Real estate

•  Inventory (current and future)

•  Other business assets

Blanket liens are involved in many types of small business loans, including short-term loans from alternative lenders, loans backed by the U.S. Small Business Administration (SBA), and secured business lines of credit. If you have a loan and aren’t sure if there is a lien against your business, you can do a lien search at your secretary of state’s office. In some states, you can do a lien search online for free.

How Do Blanket Liens Work?

If you agree to pledge multiple assets as collateral for business funding, the lender will typically file a UCC-1 with your secretary of state to stake claim to those assets. The lender must also include a copy of the blanket lien in the loan agreement.

The lien is a public filing that any creditor can look up. Lien records show a prospective lender that another blender has already made a loan to the business and has a security interest in the business’s assets. Because UCC filings are public records, they’re frequently picked up by the commercial credit bureaus. This means UCC liens may appear on your business credit reports.

A blanket lien typically expires in five years. If the loan has a longer term, the lender has to file a renewal to maintain the lien on your assets.

Blanket Lien Regulations

The Uniform Commercial Code, or UCC, is a set of laws that were created to standardize the conduct of lenders and borrowers during commercial transactions. UCC Article 9 specifically lists what assets can and cannot be collateralized for a blanket lien.

A blanket lien cannot, for example, secure any property that would require government consent, such as:

•  Business licenses, such as those issued to independent contractors

•  Patents, such as utility or design patents

•  Trademarks, such as a service mark or certification mark

•  Other government issued permits

UCC Article 9 serves as a guide for the drafting of lien language, but to avoid confusion between parties and to provide clear details, creditors also file a UCC-1 statement. The UCC-1 statement publicly declares a creditor’s right to seize a borrower’s assets if the borrower defaults. A UCC-1 is required for all business loans.

The UCC-1 statement will specifically list what assets are allowed to be seized and in what order. It can also prioritize which lenders are allowed to seize assets first in case there are multiple lenders on the loan. The UCC-1 statement must be filed with local agencies in the state where the business of the borrower is located.

While a blanket lien sounds ominous, most lenders will only enforce them as a last resort. To actually lay claim to any of your assets, the lender has to take you to court and win a judgment against you. If you miss a payment or two, it’s unlikely your lender will go to court to lay claim to your assets. Instead, the lender would likely want to work out a payment plan. The plan might involve extending the term of your loan or lowering your monthly payment. Generally, only if these measures don’t work, would a lender consider enforcing a blanket lien.

Removing a UCC Lien

A UCC lien stays on file for five years. If your loan doesn’t mature until after that point in time, your lender will likely renew it. You can only have a blanket lien removed after you repay your loan in full. Sometimes the lender will remove the lien themselves once your loan is repaid, but if they do not, and you’re still seeing an active lien on your credit profile, there are certain steps you can take to get the lien removed.

Option 1: Call your lender
It’s possible that you haven’t fully repaid your loan. There may be one or two payments to go, or perhaps there are still some outstanding fees on your account. To resolve the issue, call your lender to find out why the lien is still on file and what you need to do to get it removed.

Option 2: Wait
Even if you do nothing, a UCC-1 lien will automatically be removed after the lien’s five-year term expires.

Option 3: Request a UCC-3
If you have fully repaid your loan (including fees), and your lender acknowledges that you have done so, ask them to file a UCC-3. A filed UCC-3 removes the blanket lien on file with your state. You can also request a UCC-3 when you send in your final payment.

Option 4: Dispute the lien
If you can’t resolve the issue with your lender, you can visit your secretary of state’s office to dispute the lien. You’ll have to provide all the paperwork showing you have repaid the loan and swear an oath that all the information is truthful. If a credit bureau is still inaccurately showing the lien, you can dispute the lien with the credit bureau.

Pros and Cons of Blanket Liens

Blanket liens give small businesses that haven’t yet built up credit, have poor credit, and/or lack any single high-value asset access to use as collateral the ability to access financing they would not otherwise be able to get.

Even if you have collateral, agreeing to a blanket lien on a business loan might allow you to get a lower interest rate or a larger loan than you would otherwise qualify for. While it’s often possible to get a loan without collateral or a blanket lien, the drawback is that these types of loans often come with higher costs.

Also keep in mind that, as scary as a blanket lien sounds, a lender would only enforce it as a last resort. If you make all — or most — of your payments on time, you should never lose any of your assets. And, if you did not have the blanket lien, your lender might ask you to sign a personal guarantee. With a personal guarantee, a lender can seize and sell your personal assets (such as your house, car, retirement fund) should you default on the loan, which is similar to a blanket lien.

However, blanket liens also have some definite downsides. The biggest is that they give the lender the legal right to seize many, if not all, of your business assets should you become unable to repay the loan.

On top of that, having a lien on file can make it more difficult for your business to secure additional financing. And, even after you fully pay off the loan, the lien may not immediately come off your credit report. This can make it harder for you to apply for a small business loan in the future.

Comparing Small Business Loan Rates

Before you commit to any small business loan, you’ll want to shop around and compare business loan rates, as well as the terms and requirements of any loan you are considering. If a business loan requires collateral, it means the lender can only seize that particular asset should you become unable to repay the loan. If a loan requires a blanket lien, it means the lender has the right to seize and sell most or all of your assets in the event of a default.

If you’re interested in exploring different types of financing — both with and without blanket liens — SoFi’s marketplace can help.

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.

FAQ

What does blanket inventory lien mean?

A blanket inventory lien on a business loan means the lender can seize and sell all the business’s inventory in the event of nonpayment.

What is a blanket filing?

A blanket filing is when a lender files a UCC-1 with your secretary of state to stake claim to all, or most, of your business assets in the event of default, rather than a single piece of collateral.

What does UCC stand for in regards to blanket liens?

UCC stands for Uniform Commercial Code and is a standardized set of laws and regulations for transacting business. UCC regulates blanket liens on businesses.

Photo credit: iStock/Nuthawut Somsuk

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.

This article is not intended to be legal advice. Please consult an attorney for advice.

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 .

SOSB-Q224-1871621-V1

Whether you’re looking for a $1 million business loan or $5 million business loan, the good news is that there are million dollar business loans available for small business owners who want to invest in a new stage of growth.

Maybe your business has been thriving for years and you’re ready to up your game. Or, perhaps you have the opportunity to acquire another business or want to expand your current business by purchasing a warehouse. Whatever your plans, they’re going to require capital. And, potentially, a lot of it.

Let’s look at how to get a million dollar business loan so that you can get those plans on track.

How Does a Million Dollar Business Loan Differ From a Small Business Loan?

Before we dive into how to get a $1 million business loan, $2 million business loan, or more, let’s look at how such a large business loan compares to a smaller one, besides the amount you’re borrowing.

Because of the risk and the capital outlay, you will typically only find $1 million or more loans from banks, credit unions, and SBA lenders. Online and alternative small business loans tend to focus on smaller loans and may not be able to help if you want to borrow a million or more.

Also, because there is inherently more risk in lending millions to a borrower, banks may require larger-value collateral or a substantial down payment on a million dollar loan, whereas smaller loans may or may not require either collateral or a down payment.

Larger loans for small businesses can also be more difficult to qualify for than smaller loans. Generally, the more you want to borrow, the more assurance lenders want that you will pay back the loan. To that end, they may have higher criteria regarding credit score, time in business, and annual revenues.

Recommended: Loaning Money to Your LLC

Criteria for Million Dollar Business Loans

As far as how to qualify for a million dollar loan, requirements will depend on the lender and the type of business loan. Here are some of the key factors that lenders look at.

1. Credit Score

When you’re applying for a million dollar loan, a lender may look at both your personal and your business credit score.

Business Credit Score

Credit scoring firms calculate business credit scores based on a company’s credit obligations and repayment histories with lenders and suppliers, as well as any legal filings (such as tax liens or bankruptcies). Instead of ranging from 300 to 850, business credit scores typically range from 1 to 100, as follows:

•  Good: 80-100

•  Fair: 50-79

•  Bad: 0-49

For million dollar loans, your business will most likely need a “good” credit score.

If you don’t yet have business credit scores, you can work on building them by opening a business bank account, taking out business credit cards, and getting smaller business loans and repaying them on time. This may help you qualify for larger loans later.

Personal Credit Score

If you don’t have a business credit history, lenders will likely look closely at your personal credit scores. For a $1 million business loan or more, you generally need a personal FICO credit score of 650 or higher.

If you run a sole proprietorship or partnership, or if you personally guarantee a business loan, you may want to keep in mind that taking out a business loan can affect your personal credit. It could, for example, increase your debt-to-income ratio, which could make it more challenging for you to take out a mortgage or personal loan.

Recommended: Free Credit Score Monitoring

2. Time in Business

Business loans under $1 million dollars typically require you to have been in business for at least two years (sometimes less in the case of some online lenders). However, for $1 million dollar business loans or more, that requirement can increase to at least three years.

The longer your business history, the better you can demonstrate to lenders how financially responsible you are, which makes you less of a risk as a borrower.

3. Collateral

Another way lenders mitigate risk in giving you a $1 or $2 million business loan is to require collateral against the loan.

For example, the Small Business Administration (SBA) requires collateral for its 7(a) program for loans between $350,000 and $5 million. The fixed assets (e.g., buildings, equipment, land) put up as collateral need to meet the full value of the loan, otherwise the lender may include trading assets (at 10% of current book value) and available equity in personal real estate as additional collateral.

4. Loan Purpose

When a lender is giving you a $1 million-plus loan amount, they will generally want a sense of how you will spend that money. As a result, you will likely need to present a detailed business plan outlining how you’ll spend the loan proceeds and how the investment will lead to increased profits, along with a detailed budget for your plan.

Creating a plan and budget doesn’t only benefit the lender; it can be helpful to you, too. This is a good exercise to go through even before you start applying for a loan, since it will help you think through why you want the loan and exactly how much you will need to borrow.

Recommended: Business Cash Management: Tips for Managing Cash

5. Financial Documentation

Lenders may ask for financial statements, such as bank statements going back four months, balance sheets, profit and loss statements, and tax returns going back several years. All of these give them a better sense of how financially stable your company is.

If you’re not accustomed to reviewing these statements, you may want to spend some time getting to know them before applying for a loan. How will a potential lender view your company’s financial well-being? Do you meet the qualifications for the loan you’re looking at?

For example, an SBA CDC/504 loan requires a borrower’s net worth not exceed $15 million and their average net income not exceed $5 million after taxes for the past two years. You may want to ask an accountant to review your financial documents and provide input, too.

6. Business Documentation

You may also be asked for certain business documents, such as your articles of incorporation if you run a corporation, or your articles of organization if your business is an LLC. In addition, you may need to submit business licenses and permits, disclosure of other debt, and any other legal contracts and agreements.

Recommended: 3 Year Business Plan

Pros and Cons of Million Dollar Business Loans

Before we dive into how to get a million dollar business loan, let’s first weigh the benefits and drawbacks to borrowing such a large amount of money.

Pros

With a million dollars or more, there’s a lot you can do in your business. You might be able to acquire another company, purchase real estate, buy high-dollar equipment, or expand your company significantly faster than you could on your own.

Often, the larger the loan (and the longer the repayment period), the lower the interest rate you can get, assuming your credit is outstanding.

Cons

While having access to a large amount of capital can help you do more, that money has to be repaid. And, if your investment isn’t yet reaping financial reward, paying back that loan may be a challenge. If you should run into difficulty making monthly payments, you could default on the loan and risk losing your collateral.

Even with a low interest rate, you’re still paying a percent of what you borrowed, which is a lot. The more you borrow and the longer you take to repay the loan, the more you’ll spend in total interest.

Lending Options for a Million Dollar Loan

There are a few resources where you can find large loans of a million or more for small businesses, including the SBA, banks, and credit unions. Online lenders are also an option, assuming they offer loans backed by the SBA.

Each lender may have slightly different criteria as to who can qualify for a business loan of $1 million or more.

SBA

The U.S. Small Business Administration (SBA) guarantees SBA loans, which are offered by banks and online lenders it partners with to help serve small businesses. SBA loans go as high as $5 million and have capped interest rates, which keeps them more affordable for small businesses. Repayment terms are up to 25 years, helping keep payments low. Fees, which include the SBA Guaranty Fee (up to 3.75% of your loan’s guaranteed amount), also tend to be lower than other lenders.

However, the application and approval process for an SBA loan can take several months, and businesses must meet strict eligibility requirements from both the lender and the SBA. To qualify for an SBA loan, you typically need to have been in business for at least four years, have an annual revenue over $180,000, and a credit score of at least 680.

Banks

Many banks offer loan amounts up to $5 million, though they typically have strict requirements to qualify. A bank loan is typically best for a business that has been in operation for many years with a track record of positive financials. Banks will also require a good business credit score, as well as a strong personal credit score from the individual who’s representing the business. Businesses also typically need to have low debt-to-net-worth ratios to qualify for a large bank loan.

Credit Unions

If you are a member of a credit union that offers business financing services, you may want to reach out and see if they can meet your larger loan needs. Like banks, credit unions typically offer larger loans at attractive interest rates for qualified borrowers.

Applying for Million Dollar Business Loans

Getting approved for a million dollar loan generally requires jumping through a few more hoops than getting a smaller loan. The process of applying for business loans varies slightly from one lender to another. Generally, however, you will need to gather a fair amount of documentation in order to complete the application. This may include:

•  Business bank account statements

•  Tax returns and supporting IRS documents for both your business and personal tax accounts

•  Accounts receivable and balance sheets

•  Proof of collateral

•  Copy of your commercial lease, if applicable

•  Any applicable licenses and registrations for doing business in your state

•  Disclosure of other debt

•  Any legal contracts (such as franchise, incorporation, leasing)

•  Updated business plan with details on your growth and marketing strategies

•  Plan for how you will use the loan

Once you’ve gathered all the paperwork you will need, the next step is to fill out the application. Depending on the lender, you may be able to do all or some of this online, or you may be required to visit a local branch. Filling out the application will likely take some time, but having all your documents at the ready can help simplify the process.

When will you get an answer? Million dollar-plus loan applications tend to take longer to process than applications for smaller loans, so it may be weeks before you get a response from the lender and even months before you get an approval.

Once you are approved, you’ll need to review the loan agreement. This will outline details on how much you were approved to borrow, your interest rate, and what your monthly payment will be. The final step is to sign the document and wait for the funds to be disbursed.

Alternative Funding Options

If you’re looking for a large infusion of capital but your business or startup doesn’t qualify for million dollar loans, you’re not necessarily out of luck. There are other ways you may be able to get access to a large amount of capital. Here are two options to consider.

Outside Investors

An investor, such as a venture capitalist or an angel investor, may be able to provide the high-dollar capital you need for growth. These investors may also be able to connect you with industry contacts and helpful resources that can help you expand or launch your venture.

However, an investor will want a slice of the pie in exchange, typically in the form of equity in your business. And because they’re invested in your success, they may want to have a say in decisions you make about the business. You’ll have to consider whether giving up a portion of ownership and control of your business is worth getting access to a large amount of capital.

Crowdfunding

Crowdfunding can be a viable way to get capital that doesn’t necessarily need to be repaid. There are crowdfunding platforms where you can list a project, such as the launch of a new product line. Anyone who’s interested can contribute to the project. Some types of crowdfunding do need to be repaid, while others just require you to provide a token of appreciation to investors/donors.

Crowdfunding might be a good stop-gap between where you are and the millions you need. You can also get feedback on a new product from the market before investing in developing it.

The Takeaway

Banks and SBA lenders offer $1 million to $5 million loans to small businesses, but they can be tough to get. There are typically pre-set criteria regarding your credit score, annual revenue, and years in business. In addition, you will likely have to put up collateral, provide a detailed plan for how you will use the funds, and supply documentation that supports that your business can operate successfully with an additional large debt.

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.

FAQ

Are there unsecured $1 million business loans?

There are some banks that offer unsecured $1 million business loans. However, loans for amounts larger than that tend to be secured business loans.

Can startups get million dollar business loans?

It may be challenging for businesses that have been in operation for less than two years to qualify for a loan of a million or more. There are lenders that will work with startups, but they may charge higher interest rates and require collateral.

Can you get $1 million business loans with bad credit?

Loans of $1 million or more tend to have stringent qualification requirements, including good credit. There are some alternative lenders who may offer loans of lesser amounts to businesses with bad credit, albeit with high interest.

How much will it cost to pay back a $1 million business loan?

It will depend on the loan’s interest rate and the fees, but you can quickly figure out the total cost of a million dollar loan with an online loan calculator. You just need to input the loan’s annual interest rate, fees, loan amount, and loan term.

What’s the monthly payment on a $1 million dollar business loan?

Many factors determine what your monthly payment will be, including the total loan amount, the interest rate, and the length of the loan. As an example, if your interest rate was 6% and your term was 25 years, your payment on a $1 million loan (not including fees) would be just over $6,400 a month.

Photo credit: iStock/VioletaStoimenova

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.

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.

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 .

SOSB-Q224-1858436-V1

When you’re starting a new business or expanding an existing one, you may find that funding is one of the biggest hurdles to overcome. While bootstrapping is an option, it’s not always necessarily realistic when cash supplies run short. Small business grants or loans, however, can help close many financial gaps for business owners.

Whether you decide to use a grant or a loan – or a combination of both – may depend on where you are in your business’s life cycle, what your needs are, and what type of funding you’re able to qualify for. To determine the best financing approach for your business, it’s important to understand the differences between loans vs. grants.

What Are Business Loans?

A small business loan is a sum of money that a financing institution, such as a bank, credit union, or online lender, extends to a small business with the expectation that it will be paid back over time, plus interest. The proceeds from the loan can be used for nearly any business purpose, and the repayment term typically ranges between five and 10 years.

How Business Loans Work

For a secured small business loan, you need to put up a business asset (such as equipment, a vehicle, or real estate) as collateral for the loan. Should you become unable to repay the loan in full, the lender can seize that collateral to recoup their losses.

Unsecured business loans don’t require the borrower to pledge collateral, and are based only on a borrower’s creditworthiness. In some cases, you may be asked to sign a personal guarantee for a business loan, which states that you are personally responsible for repaying the loan should your business default.

For a standard term business loan from a bank, you will generally pay a fixed amount each month (including principal and interest) for the duration of the loan term.

Pros of Business Loans

There are a number of benefits to taking out a small business loan. Here are a few to consider.

•  Expedite business growth: The funds from a business loan can allow you to put your plans into action sooner, rather than having to wait until your business has generated enough profit to fund expansion yourself.

•  Maintain business ownership: With a loan, you can get an injection of capital without bringing on any investors. This enables you to keep full control of your business and retain all the profits as your company grows.

•  Flexible use of the funding: If you receive funding from an investor or a grant, you may be limited in how you can use the money. When you borrow from a lender, so long as the loan isn’t specifically for business equipment or real estate, there are typically no restrictions on how you can spend those funds.

Cons of Business Loans

Small business loans also have some downsides. Here are some to keep in mind.

•  Application process can be extensive: For a bank or Small Business Administration (SBA) loan, you’ll not only need to fill out an application, but will also likely need to provide two or three years of tax returns and financial statements, as well as a business plan.

•  You could lose assets if you default on payments: If you put a business asset up for collateral, you could end up losing it should you default on the loan. If you sign a personal guarantee, the lender can potentially come after your personal assets.

•  Interest rates can be high if you don’t have strong credit: Interest rates typically depend on your credit score, both your business’s score as well as your personal score. While banks often offer lower interest rates than other funding options, it’s not always easy to qualify for those favorable rates. If you have a below-average rating, you could end up paying more for the loan than you’d like.

What Are Business Grants?

Small business grants provide funding to businesses without any requirement that the money be paid back. It is essentially free money that’s provided to business owners who meet specific criteria and agree to use the money for a certain purpose. There are grants available for all types of small business owners, including women, minorities, veterans, and disabled Americans.

How Business Grants Work

Typically, a grant becomes available when a government agency, nonprofit organization, or private business chooses to set aside grant money for a particular need or area of concern. For example, a grant might be set up to encourage minority entrepreneurship in a community, foster research and development in a specific industry, or reward innovation.

Whatever the cause, the agency or business will start a grant by setting aside funds and setting up qualifications and an application process. Unlike loans, grants can’t be spent in any way the business sees fit. The funds must be used as specified in the application.

Pros of Business Grants

Grants have many benefits. Here are some to consider.

•  It’s free money: The biggest advantage of a grant is that, unlike a loan, the money does not have to be repaid.

•  Accessible information: There is extensive information available online about where, how, when, and who to get grants from. This is important, because you generally need to do a lot of searching to find the right grant for your business. (Two good places to start: grants.gov and the SBA’s grant page.)

•  Gain credibility: Receiving a grant increases your business’s visibility. It helps promote your business and idea and lets others know that your work is important. And, once you’ve been awarded one grant, you are generally more likely to receive others, since other organizations will see you as a reliable candidate.

Cons of Business Grants

Grants do have some downsides, however. Here are a few to keep in mind..

•  Applications can be time-consuming: Grant applications usually require a lot of paperwork. In addition to the application, you and your small business will also have to provide additional documentation, such as demographics of your market, your specific reasons for applying for the grant, and exactly how you will use the grant funds.

•  Difficult to receive: Because grants are free money, there are a large number of small businesses like yours trying to get them. As a result, competition for grant approvals can be stiff.

•  Strings attached: Grant money typically comes with specific restrictions and conditions about how they money should be used. In addition, you may be asked to do monthly or quarterly check-ins to provide proof of things such as marketing efforts, publicity, and other steps toward goals outlined in the grant.

Business Loans vs Grants: 7 Important Differences

The biggest difference between a loan and a grant is that a loan must be repaid, and a grant does not. But there are some other things that set them apart from one another. As you explore small business financing possibilities, here’s a closer look at grants vs. loans.

1. Grant vs. Loan Eligibility Requirements

Grants

Small business grants can come from nonprofit organizations, for-profit organizations, and government agencies. Note that the federal government doesn’t make grants (or loans) to businesses directly but assist with programs that do.

Each organization offering a business grant can establish criteria to determine who qualifies. Only businesses operating in select industries and locations or whose owner meets specific demographic requirements may be eligible for specific grants. For example, some organizations may exclusively offer small business grants for women. Others may provide small business grants for minorities. Still others may cater to veterans or disabled entrepreneurs, or businesses that operate in certain industries or communities.

While a lot depends on your business’s industry, focus, and location, it can generally be tougher to qualify for a grant than for a loan.

Loans

With small business loans, lenders are more interested in the fundamentals of the business and the business’s (and business owner’s) financial health. For example, when you’re applying for a small business loan lenders may review your:

•  Business credit score

•  Personal credit scores

•  Personal income or business income

•  Profit and loss statement

•  Cash flow statement

•  Business or personal assets

Recommended: Typical Small Business Loan Fees

2. How Grant vs. Loan Funding Can Be Used

Another important difference between grant and loan options for small business has to do with how you can put the funds you receive to work.

Grants

Small business grants often come with restrictions for how the funds can be used. For example, you may be able to use a grant only to fund efforts to grow your business. Or, some grants may limit you to expenses related to the cost of starting a brand-new business from the ground up.

Loans

With a small business loan, you generally have a lot of control over what you do with the money. For example, you might use a small business loan to upgrade your computer equipment, purchase business vehicles, or open a second business location.

If you’re looking for more flexibility in how you can spend funding, then a small business loan may be a more useful option than a small business grant.

3. Funding Amounts

When considering grants vs. loans, it’s important to understand how much money you may be able to access.

Organizations that make grants to small businesses can limit how much they offer. So for example, you might be limited to receiving $5,000 or $10,000, though some may offer $25,000 or more. The upside is that you don’t have to pay grant money back. However, that money may not be enough to fully meet your funding needs.

With small business loans, lenders can typically set the borrowing limit much higher. SBA 7(a) loans, for example, have a maximum cap of $5 million.

4. Repayment Requirements

As mentioned, the chief difference between a grant and a loan is that a loan has to be repaid while a grant typically does not. But it’s also important to note that small business loans are not all identical when it comes to their repayment requirements.

Short-term loans, for example, may have repayment periods lasting less than one year. Long-term loans may have repayment periods extending over several years. With SBA 7(a) loans you can take up to 25 years to repay what you borrow, depending on what you’re using the loan proceeds for.

5. The Application Process

Regardless of whether you decide to pursue a loan or a grant, you’ll have to apply for it. There are some differences to consider when it comes to applying for a small business loan vs. applying for a grant.

For loan funding you’ll need to meet the lender’s criteria for things like credit score, revenues, and time in business. As you compare small business loan options, it’s wise to take time to check the minimum qualification requirements carefully to weed out loans that you’re less likely to qualify for. Bank and SBA loans typically have stricter qualification requirements than loans from online lenders.

When you’re applying for a small business grant, your business’s financial situation may be less relevant. But it’s key to make sure that you understand the eligibility requirements for the grant and that you meet them before applying. Small business grants meant for women, for instance, generally require businesses to have one or more women owners. Depending on the grant, you will likely be asked to show proof of your eligibility, so bear that in mind.

While some grant applications can be simple, others require writing a grant proposal, which can take weeks to complete.

6. Interest

With a business loan, the interest rate represents the amount you will pay back to the lender on top of principal; it’s usually calculated as a percentage of the total amount borrowed.

Business loan interest rates can vary widely depending on the borrower’s financial history, the lending institution, and what’s happening in the economy.

Annual percentage rate (APR) is the total cost of a loan, including the interest rate and any added fees (such as an origination fee and application fee), and is generally the best measure for understanding and comparing business loan interest rates.

Interest rates on small business loans may be fixed (the interest rate remains the same over the life of the loan) or variable (the rate will change based on current market rates at a predetermined date).

Recommended: APR vs Interest Rate: What’s the Difference?

7. Availability

When debating whether to pursue a loan or grant, you may want to consider how quickly you need the capital. Grantors typically take much longer to approve applications and disburse funds than lenders do. If you need money immediately, a loan may be the only option. Keep in mind, though, that SBA and bank loans can also take a few months to fund. Loans from online lenders, however, often take just a few days to process.

Here’s a side-by side comparison of business grants vs loans.

Choosing Between Business Loans vs Grants

What makes the most sense for your small business depends on a lot of variables that are unique to your situation. As you’re making your decision, some questions you may want to ask yourself might include:

•  Can I earmark these funds for a specific purpose?

•  How much money do I need?

•  Are there any grants for which my small business is eligible?

•  Will my business be able to pay back these funds?

•  Do I have the time to search out and apply for grants?

•  Do I have a personal or business credit score that will allow me to get good terms on loans?

Finding the right option for your small business can take some time. Just remember, you may be able to combine options if that makes the most sense for you – taking out a loan to ramp up inventory, for example, while applying for a grant to help you launch a new product.

Different Types of Grants and Loans

There are myriad different type of grants, including:

•  Federal business grants

•  State business grants

•  Local business grants

•  Small business relief grants

•  Corporate business grants

•  Specialty business grants

There are also many different types of business loans. These include:

•  Term loans

•  SBA loans

•  Business line of credit

•  Equipment loan

•  Invoice factoring

•  Merchant cash advance

•  Microloan

EIDL Grants vs Loans

While the SBA’s COVID EIDL (Economic Injury Disaster Loan) is no longer available, the SBA continues to offer EIDLs to small businesses located in a declared disaster area, These loans are designed to help small businesses that have suffered economic losses due to a disaster such as a severe storm, flooding, or wildfire get back on their feet.

You can apply for a non-COVID EIDL relief loan through the SBA. The loan amount will be based on your actual economic injury and your company’s financial needs, regardless of whether the business suffered any property damage.

The Takeaway

Choosing between grants and loans ultimately comes down to knowing what your business needs are and what type of funding fits best in your overall financial strategy. Remember that you can combine more than one option – and that your needs may change over time.

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.

FAQ

Are grants better than loans for businesses?

It depends. Grants are better than loans in that they do not need to be paid back. However, grants can be difficult to get, may require an extensive application process, and typically come with restrictions on how you can use the money that’s awarded.

Is it harder to apply for business grants or loans?

It can be. While the application process varies considerably from grant to grant, in some cases. you will be required to submit a formal grant proposal which could take weeks to prepare.

Are you supposed to repay business grant money?

No, business grant money does not need to be paid back.

Photo credit: iStock/MicroStockHub

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.

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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If your small business hits a slump, due to a crisis, pandemic, or other unfortunate circumstance, any employees you let go will be able to file for unemployment benefits.

You may wonder, however, if the same applies to you: Can small business owners file for unemployment? Is your only option small business bankruptcy?

In some cases, small business owners may be able to file for unemployment. It just depends on how you’ve been paying yourself and whether you’ve paid into unemployment insurance.

How Do Unemployment Benefits Work?

When employees are laid off or let go from a company, they are typically entitled to temporarily receive a portion of their previous salary in the form of unemployment benefits. People who quit their jobs or were fired because of poor performance are generally not eligible.

Unemployment benefits vary from one state to another, but generally can last up to 26 weeks. To qualify, individuals must be ready and willing to work and unable to find comparable employment. There may be additional requirements depending on which state you live in.

Unemployment insurance is financed by taxes paid by employers.

Types of Business Owners Who Are Eligible for Unemployment

Whether or not a small business owner can file for unemployment will depend on what state they live in, how their business is set up, and how they pay themselves. Here are some general guidelines that can help you decide if you should apply for benefits.

1. Sole Proprietorships

If you are the sole proprietor of a business, you likely do not pay yourself wages and unemployment taxes. If that’s the case, you probably do not qualify for unemployment for small business owners.

2. S Corporations

If you operate as an S corporation, you may be required to pay yourself wages, as well as state unemployment insurance tax on those wages, just as you do any other employee. If so, you can likely qualify for unemployment benefits.

You may want to keep in mind, however, that generally a business owner has to cease business operations entirely in order to be eligible. This shows that you are, indeed, separated from the company. “Firing yourself” due to a slowdown in business is not likely to make you eligible for unemployment.

3. Business Owners Not Earning Wages

If you operate your business as a partnership (such as an LLC or LLP) or a corporation, but haven’t been drawing a regular paycheck or contributing to your state’s unemployment insurance fund, you are likely not eligible for unemployment benefits.

If you only take money from your company as you need it, or only take money through distributions or dividends, you’re generally not considered an employee unless you are also drawing regular employee wages.

Changing your status and making yourself a W-2 employee of your company shortly before shutting it down isn’t likely going to help your case either. Many states have rules about required minimum lengths of employment to qualify for benefits.

Recommended: Business Loan Defaults Explained

Requirements for Small Business Owners Applying for Unemployment

Requirements for small business owners to qualify for unemployment are dictated by the state. Typically, however, a business owner will only be eligible for unemployment benefits if they are an employee within their own business.

This means that if you meet these requirements:

•  You worked as a wage-earning employee of the company on a W-2 (not 1099)

•  You had a title and a role with defined responsibilities (such as CEO or president)

•  You paid federal and state unemployment taxes

•  You lost your status as an employee

•  You can prove that you’re seeking alternative employment

If you’ve been compensating yourself through dividends or distributions, rather than wages, or you’re a sole proprietor, you likely will not be eligible to file for unemployment as a business owner.

How Small Business Owners Can File for Unemployment

If you believe you qualify for unemployment benefits, you may want to start by visiting your state’s Employment Development Department (EDD) website to review requirements and to start the application process.

You’ll likely need to have certain documents on hand, such as your driver’s license, Social Security card, and/or passport, and need to submit certain information, such as details on your last employer (that’s your company), the last week you worked, and your total gross earnings for the last week you worked.

You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. Some states may require you to have an interview with a representative from the EDD.

Once approved, you may need to verify whether you have looked for work or worked at all during a given pay period so your unemployment benefits can be accurately calculated.

What Kinds of Unemployment Benefits Can Business Owners Expect?

If you’re eligible for unemployment benefits as a business owner and your claim is approved, you’ll receive the benefits available in your state. Benefits can typically last anywhere from three to six months.

The actual amount of weekly unemployment benefits you’ll receive as a business owner will depend on where you live and your prior earnings. The maximum weekly benefit amount can range from $215 to $900-plus depending on the state where you file.

Once your benefits run out, you generally cannot file another claim until a year after your original claim.

Other Small Business Financial Relief Options

If you don’t qualify for unemployment benefits, but still need a solution to cover a gap in income until business picks up, there are a number of small business funding options to consider.

SBA Disaster Loans

The COVID Economic Injury Disaster Loan (EIDL) offered by the U.S. Small Business Administration (SBA) is no longer available. However, the SBA continues to offer traditional EIDL loans for business owners that have been affected by a natural disaster, such as a flood, drought, or hurricane. You can learn more on the SBA’s website.

Other SBA Loans and Grants

In addition to the EIDL program, the SBA offers many other loans to small businesses, such as the 7(a) loan program. SBA loans tend to offer the largest loan amounts and have the lowest interest of all your options.

In addition, the SBA offers a small number of grants to small businesses that do not have to be repaid.

Small Business Loans

You may qualify for a traditional small business loan from a bank, credit union, or online lender. Some require higher credit scores, while others have less stringent requirements, though may offer less favorable terms. You may also be able to get a personal loan while unemployed.

Recommended: What to Know About Short-Term Business Loans

Emergency Funding Options

If your revenues and credit scores are down, you may be limited to applying for higher-interest options, like a merchant cash advance.

Even if you have to pay higher interest, an emergency business loan could ensure you have the money you need to pay yourself and your business expenses until you once again have a successful small business, especially if you don’t qualify for unemployment.

Business Insurance Policies

Business insurance helps protect your business’ financial assets should you face an unfortunate (and costly) event, such as a lawsuit, property damage, theft, loss of income, and employee injuries or illnesses. A general business owners policy (BOP) typically includes:

•  General liability insurance

•  Commercial property insurance

•  Business interruption insurance (which helps you recover lost business income if your business is unable to open because of a problem such as a fire)

Crowdfunding

Crowdfunding is the use of small amounts of capital from a large number of individuals (a.k.a., the “crowd”) to finance your business. If you opt for reward-based crowdfunding, investors receive a reward for investing and you get to keep ownership of your business. To go this route, you typically have to create a campaign on a crowdfunding site that gets people excited about your business.

The Takeaway

Whether or not you can file for unemployment as a business owner generally depends on whether you get a regular paycheck from your company and pay unemployment taxes. It can be a good idea to check in with your state, since these benefits are administered at the state level. If you don’t qualify, there are other ways to help keep your business afloat during a slump.

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.

FAQ

Can small business owners file for unemployment?

It depends. Generally, a business owner will only qualify for unemployment benefits if they have been paying themselves as a W-2 employee.

How can small business owners apply for unemployment?

If you think you may qualify for unemployment benefits as a small business owner, you can start by going to your state’s Employment Development Department (EDD) website to review requirements and to start the application process.

To apply, you will generally need your driver’s license, Social Security card or passport, details on your last employer (your company), the last week you worked, and total gross earnings for that week.

You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. In some states, you may need to have an interview with a representative from the EDD.

Are unemployment benefits for business owners different from employees?

No. If you qualify for unemployment benefits as a business owner, you will have access to the same unemployment benefits as any other eligible applicant in your state.

Photo credit: iStock/andresr

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.

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.

SOSB-Q224-1883354-V1

Small business loans can be used for a variety of business expenses. But it’s not just up to the business owner. Depending on the lender and type of loan, some business-loan lenders may place restrictions on what you can and can’t use the loan proceeds for.

Let’s look at both what a business loan can be used for and what it can’t.

1. Daily Operations

There’s a cost to running a business, and it’s not always the large, one-time expenses like new computers that can break the bank. Paying rent or a mortgage, utilities, and payroll each month can eat up a large portion of your revenues.

Luckily, a small business loan can be used for any of the daily operations of running a business, including inventory, marketing and advertising, maintenance and repairs, payroll, legal fees, office supplies, and more.

2. Equipment

Equipment might be something as large and complex as a crane or as simple as computers for your staff. If you have a company vehicle, that is also considered equipment, and you can use a loan to pay for it.

There are small business equipment loans specifically to help with these expenses. To put what equipment financing is in a nutshell, you use the equipment you’re purchasing as collateral for the loan, which can help you secure lower interest rates.

3. Business Improvements/Enhancements

A business loan can provide the capital you need to improve or enhance your business. These may include additions to your store space or remodeling your existing space, for example. As long as the enhancement or improvement is to your business (you can’t use it to put a new roof on your home), it qualifies as a business expense.

4. Production

If you sell products, you might need to purchase supplies to create your finished product.

For instance, maybe you sell custom clothing. Production expenses would include things like fabric, thread, packaging, and labels. You could even include the cost of shipping your finished products in this category. A short-term business loan is a great way to cover these expenses until you recoup your investment.

5. Debt Refinancing

If you’ve taken out high-interest loans in the past, you might be paying more than you should in interest and fees. Some business loans allow you to use the funds for debt refinancing.

Debt refinancing is taking out one loan to pay off another that has higher interest. You can also use one loan to consolidate multiple loans so that you have one low interest rate for your entire debt.

Recommended: Types of Business Loan Fees

6. Inventory

An inventory loan is a small business loan that’s designed for purchasing inventory. This kind of business funding is flexible, since you can use it to pay for different kinds of supplies needed to run your business.

7. Marketing

You will have trouble establishing your business if you can’t attract customers. Marketing will help you get the word out about your business and gain customers.

Branding, sales, and engagement are all enhanced through marketing. Funding a well-planned campaign with the use of a small business loan can make a big difference.

8. Business Expansion

Many loans are intended for helping a business grow. It could be more staff, more inventory, or more products offered. Some small business loans can even be used to help you purchase a second location or expand your existing one. The building is typically used as collateral to secure your loan, which could get you a better interest rate.

9. Acquisition

If the opportunity arose today to buy a competing company and capture more of the market, could you afford it? Many businesses don’t have the capital on hand to make an acquisition purchase and therefore have to miss out on what might have been a significant opportunity to grow.

A business loan gives you the ability to jump on such good fortune. And since acquiring another business should expand profits, you may be able to pay back the loan easily.

10. Startup Costs

Some of your largest expenses will happen upon launching. From renovating commercial space to stocking up on supplies and products and hiring staff, these expenses can be in the tens of thousands, if not hundreds of thousands. Most new entrepreneurs don’t have that kind of cash lying around, which is where financing comes in handy.

Remember, every investment you make in your business will be recouped if and when you hit profitability. Consider what expenses are necessary to start your business off on the right foot and which are just nice-to-haves (for example, maybe you don’t need that $5,000 espresso machine in the break room just yet).

Recommended: Equipment Financing for Bad Credit

What Not to Use Business Loans For

Now you have a grasp on what business loans can be used for, but what about what they can’t be used for? The biggest no-no is typically personal expenses.

What Counts as a Personal Expense?

Below are three scenarios in which a business loan can not be used for.

Using a Business Loan to Purchase a Personal Home

If you need property for your business, that’s allowed. A home for your personal use, however, is not.

Using a Business Loan to Purchase a Personal Vehicle

This is also against the rules. You can form a business entity to purchase a car if it’s strictly for your business, but that is a whole procedure of its own.

Using a Business Loan to Pay Off Personal Debt

Business loans cannot be used to pay off personal debt, including credit cards, mortgages, student loans, and more.

SBA 504 Restrictions

Small Business Administration loans are extremely helpful to entrepreneurs, but SBA loans have many rules. If you take out the 504 loan from the SBA, there are restrictions on what you can and can’t use the proceeds for that are stricter than the rules for many other loans. You cannot use the loan to pay for:

•  Start-up costs

•  Office supplies

•  Business acquisition

•  Working capital

•  Inventory

SBA 7(a) Restrictions

You can, however, use an SBA 7(a) loan for the expenses excluded by the 504.
With 7(a) loans, you cannot use the loan proceeds for an illegal business or to pay delinquent taxes.
Bottom line: Read the fine print before taking out a loan so you can be sure what you want to use it for is approved.

Recommended: Business Loan Down Payment

Reasons to Get a Business Loan

First, taking out a small business loan may provide your business with more opportunities. If there’s something that could help your business grow faster — be it a speedier computer or buying another business — having access to working capital can make that happen.

There are a variety of types of loans, so even if your business is new and not yet established or you don’t have great credit, there’s likely a financing option for you, whether that’s invoice
financing, short-term loans, or a merchant cash advance.

Needs vary. Perhaps you are best served by a microloan — or by a million-dollar business loan.

The point is it’s always a good idea to look to the future. Revenues can be like hills and valleys, and if you hit a dip in revenues, you want to ensure you have the cash you need to pay your staff and bills.

The Takeaway

A small business loan can be used for almost anything that makes your company stronger. But different loans come with different rules as well as different rates, so you need to shop around to find one that will work for you and your business’s needs.

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.

FAQ

Can you use a business loan to pay off personal debt?

No, for tax reasons and other reasons. Paying off personal debt with a business loan is against the rules if you’re getting a loan through the Small Business Administration, and other lenders frown on this to the extent that if a lender finds out about a business owner using a business line of credit for personal use, they will call in the balance of the note.

Can you use a small business loan to purchase a house?

If the real estate is needed for your business, then it could fall within the rules of what is allowable. You cannot buy a house for personal use or as an investment with a small business loan.

What can SBA loans actually be used for?

SBA loans, depending on the type, can be used for many things: start-up, expansion, equipment purchases, working capital, inventory, or commercial real estate purchases.

Photo credit: iStock/panida wijitpanya

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.

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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