SMB Archives | Page 36 of 42

May

2024

Small Business Loans and Grants for Veterans

As a veteran with a small business, you need funding. This may include startup financing or money to purchase property, buy inventory, or pay employees, among other needs.

Not only are there business loans to know about but also grants, government funding, and private business options. These funding sources could make a big difference to a veteran-owned business. Read on to learn what’s out there.

4 Types of Small Business Loans for Veterans

The Small Business Administration (SBA) offers programs to support veterans, including small business loans specifically for veterans with disabilities, reservists, active-duty service members, people transitioning out of service, and dependents or survivors.

To learn details about the educational programs, funding options, and counseling available to veterans, you can . contact your local Veterans Business Outreach Center (VBOC).

Here are four loan programs aimed at veterans.

Recommended: Online Business Loans

1. SBA 7(a) Loan

What is it?

These are government-backed loans of up to $5 million that can be used for almost any business-related costs, including purchasing commercial real estate.

Why choose it?

If you need more capital, the SBA 7(a) loan program gives you access to funds you can use toward a variety of business expenses. Because these loans are backed by the government, SBA loans tend to have favorable terms and rates.

Borrowers who qualify for the Veterans Advantage program can also take advantage of reduced fees.The fee reduction can be applied to the SBA 7(a) loan.

Keep in mind

Application turnaround time is 5 to 10 business days. If you need a relatively small amount of capital in a shorter period of time, consider an SBA Express Loan.

SBA loans can be competitive. Lenders usually require borrowers to have strong credit, an established business, and some form of collateral to offer.

Recommended: P2P Business Loans

2. SBA Express Loan

What is it?

These small business loans are backed by the SBA and offered by banks, credit unions, and other approved lenders. SBA Express Loans come with an application review time of 36 hours and offer a maximum loan amount of $350,000.

Why choose it?

The SBA Express loans can help those in need of immediate funding.

Keep in mind

There are differences to consider between the standard 7(a) loans and Express Loans. For example:

The maximum amount you can borrow:

• Standard: $5 million

• Express: $350,000

The maximum amount guaranteed by the SBA:

• Standard: 85% for loans up to $150,000; 75% for loans greater than $150,000

• Express: 50% for all loan amounts

The duration of revolving lines of credit (excluding extensions):

• Standard: Up to 10 years

• Express: Up to 7 years

Recommended: Restaurant Loans Guide

3. Military Reservist Economic Injury Disaster Loan (MREIDL)

What is it?

The MREIDL loan program is offered to small businesses with an essential employee who is “called up” to active duty due to his or her position as a military reservist. These loans provide working capital to cover necessary business payments until the essential employee returns from active military duty.

You cannot use an MREIDL loan to:

• Cover lost income or profit

• Expand your business

• Refinance long-term debt

• Replace typical commercial debt

Why choose it?

If you or a vital employee is on active duty in the military, the MREIDL may help support your business. The funds may help prevent losses that would be incurred in the absence of essential employees by offering loans to cover your business’s necessary obligations.

Keep in mind

If your small business can access capital from non-government sources or you’re able to fund your own recovery, you should pursue that option first, as in those cases you will not be eligible for a MREIDL loan. Additionally, MREIDL loans over $50,000 require real estate as collateral.

4. Non-Government Small Business Loans for Veterans

If you’re having trouble qualifying for a government-backed small business loan, there are still a number of lending options. A few to consider include:

• Loan from an online lender: These lenders tend to have less stringent qualification requirements than physical banks. However, their interest rates may be higher and borrowing amounts could trend lower.

• Business line of credit: It’s similar to a personal credit card, with a credit limit and interest accrual only on the expenses you have not repaid. Banks and online lenders both offer business lines of credit.

• Peer-to-peer network: This type of funding matches borrowers with independent investors. Because it doesn’t involve borrowing from a bank or an online lender, a peer-to-peer network may be a good option when it comes to small business loans for veterans with either brand-new businesses or credit that needs work.

Recommended: Fast Business Loans

Applying for Veterans Advantage

If you plan on applying for an SBA 7(a) or Express loan, it’s a good idea to review the Veterans Advantage eligibility requirements to see if you qualify.

SBA Veterans Advantage: Eligibility Requirements

To apply, you and your business must meet the eligibility requirements outlined below.

The business needs to be 51% or more veteran-owned. This includes owners who are:

• Active duty

• Service-disabled

• Reservists and/or active National Guard members

• A spouse of a service member

Small Business Support for Veterans with Disabilities

To further support veterans, the SBA offers the Service-Disabled Veteran-Owned Small-Business Program, which allows eligible veteran-owned small businesses to compete for contracts set aside specifically for disabled veterans.

Eligibility requirements:

• The company must operate as a small business.

• The business must be owned and controlled by one or more service-disabled veterans, at a minimum of 51%.

• One or more service-disabled veterans must be responsible for managing operations and making long-term decisions.

• Eligible veterans must have a disability connected to their past service.

For additional information on business contracts for veterans, visit the Office of Veterans Business Development.

Recommended: Understanding the Cost of Capital

How to Get a Small Business Grant for Veterans

Unlike a loan, a grant doesn’t have to be paid back. It is essentially debt-free financing that allows you to have the capital you need to start or grow a business.

Almost any business can apply for a grant, but there are some specifically geared toward veteran-run businesses. Given the amount of competition the average federal grant inspires, you may have more of a fighting chance of getting one if the pool is limited to only veteran business owners.

Grants provide capital that can be used for many purposes, from covering startup costs to allowing you to hire employees. You could use the funds to buy equipment or technology that helps you work more productively—it all depends on the grant itself.

Grants to Help Vets Start a Business or Expand One

There are many government small business grants available to veterans. It’s just a matter of knowing where to look in order to find the right one for you and your business. Here are some resources to get a start on your search.

Grants.gov

Grants.gov is a large database of all the federal grants available to anyone, including veterans. You can search by agency, category, or eligibility. Each grant has different eligibility requirements, and only certain types of organizations may apply. It’s important to read those requirements carefully to make sure you qualify.

GrantWatch

Another database to spend some time on is GrantWatch. Here, you can find grants from federal, state, and local government agencies, as well as foundations and corporations in each state.

Your State’s Veteran Business Outreach Center

Most states have web portals with resources for veterans living in that state. For example, California has CalVet, which lists resources for veterans and service-disabled vets, which may include self-employment grants for service-disabled veterans. You can also find local Veteran Business Outreach Centers (VBOCs) by zipcode here.

How to Get a Small Business Grant for Veterans

There are small business grants for veterans in a variety of situations, from disabled vets to those starting a brand new business. Requirements will vary, but most require you to be a veteran, reserve, or transitioning active duty member of any branch of the U.S. military. Some grants are also open to spouses or children of military members.

Reviewing Requirements

To apply, first review the eligibility requirements. Pay attention as well to deadlines so you don’t waste time filling out paperwork for a grant that’s already closed its window for applications.

Putting Together Your Proposal

Gather the required paperwork, which might include a business plan, key financial statements, and mission statement. Next, allot plenty of time to write your grant proposal and/or fill out the application. You may be asked how your business started or what you plan to do with the funds. Answer honestly, but don’t be shy about singing your company’s praise. This is your opportunity to display what is unique about your business.

Reviewing and Polishing

Finally, carefully review your application and make sure you include everything required. Proofread your proposal, maybe asking a colleague to provide a second set of eyes. You want your application to be as flawless and engaging as possible.

You may also consider hiring a grant writer. This is someone who fills out grant applications for a living. They will likely be more familiar with the process and what reviewers are looking for in an application.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Get personalized small business financing quotes with SoFi's marketplace.

FAQ

Does the VA offer business loans for military veterans?

No, the Veterans Administration does not provide loans for businesses. The Small Business Administration (SBA) has a special loan program for veterans. Veterans can borrow up to $500,000 through the SBA’s Express loan program.

Is it easier or harder for veterans to get business loans?

There is no special barrier for veterans to overcome and actually there are programs targeting them through the SBA. However, ultimately they will need to present the same creditworthiness and financial profile as any other successful loan applicant to secure funds.

Can you use your GI Bill to start a business?

This is something that many veteran groups and legislators support: expanding GI Bill benefits to assist entrepreneurial veterans in obtaining access to small business capital. It is not yet in place but may be possible within the next few years.

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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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 .

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.

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May

2024

Online Business Loans: Compare and Apply

By Sarah Brooks | SMB | Comments Off

Online business loans can help you quickly get the funding you need for your small business. A variety of loan options are available for qualified borrowers, with competitive rates and terms, and fast funding times.

Keep reading to learn more about what online business loans are, how they work, the different types, and more.

What Is an Online Business Loan?

An online business loan may help small business owners secure funding quickly and easily without ever having to visit their local bank. Using systems that take creditworthiness, business performance, and other factors into account, many online lenders are able to quickly provide small business owners with funding options.

The application process is completed online and gives potential borrowers the opportunity to compare a range of financing choices that may work for their needs.

Recommended: Microloans

Common Uses for Online Business Loans

Online business loan applicants are generally more likely to receive expedited funding even if they can’t obtain loans from banks or have bad credit. Online business funding can be used for common business-related expenses, including:

• Working capital: Funds to help maintain short-term, daily business operations such as payroll, rent, marketing, and insurance. Working capital is the value of a business’ current assets minus current liabilities.

• Equipment: Funds can help purchase items like office equipment, tools, vehicles, kitchen appliances, and more.

• Inventory: Funds can help with stocking up on inventory either in preparation for a busy season or to capitalize on a good deal from a manufacturer or wholesaler.

• Cash flow management: Having funds to maintain cash flow is crucial to running a business. Online loans can help small business owners manage their cash outflows without putting as much strain on business finances.

Recommended: First-Time Business Loans

Who Benefits from Online Business Loans?

Virtually any business can apply for business loans online and benefit from them, and there are many types of businesses that may be good candidates. These may include:

• Small business startups: These businesses have a growth mindset but may not have the history or business credit to get approved for a bank loan. Startups can use online business loans to increase their chances of approval and get their business up and running.

• Businesses with poor credit or no credit: Small businesses that don’t have enough credit history may not qualify for large bank loans. Additionally, a business with poor credit will often struggle to find adequate financing. Bad credit business loans from online small business lenders may offer the necessary financing needed to grow or start your operation, regardless of creditworthiness.

• Businesses needing funds quickly: One of the biggest advantages of online business loans is their quick review and approval process. Bank loans can take weeks or even months to be approved, leaving businesses without necessary funding for extended periods of time. Online lenders can often approve and fund loans within days, and sometimes even within a few hours.

• Businesses needing short-term financing: For businesses who don’t want to commit to a long-term business loan, online lenders also offer short-term financing, or loans that can be paid back in less than 18 months. Keep in mind that short-term financing typically comes with high APRs.

If you think your business may benefit from online business loans, it’s important to weigh the pros and cons of this type of financing. We’ll cover that next.

Bank Loans vs. Online Business Loans: What’s the Difference?

The biggest and most obvious difference between bank loans and online business loans are the lenders themselves. Bank loans are funded by traditional banks or credit unions and typically have to be applied for in-person. Online small business loans, on the other hand, are offered by a variety of financial technology companies and lenders, and can be applied for using an online application.

The convenience of getting an internet business loan can be very attractive, but like any financing, you must use caution.

To help you further understand how bank loans and online business loans differ, we’ll go over a few of the advantages and disadvantages to online funding in relation to traditional bank lending.

Recommended: Business Loans and Grants for Veterans

Online Business Loan Advantages

• Flexible: Online lenders typically go beyond traditional bank offerings, which include term loans, lines of credit, and credit cards. With online business loans, you likely have more flexibility with loan amounts, terms, qualifications, and loan products, including cash advances and peer-to-peer lending.

• Fast: Compared to bank loans, online business loan applications typically require less paperwork and can be processed much faster due to technology.

• Able to compare multiple options: With online lender comparison tools, you can compare different lending options matched to your qualifications and needs quickly and easily.

• Readily available: Online business loans are available at various rates, terms, and conditions for businesses of any size and with various funding needs. No matter what your business needs and goals are, there’s likely an online lender who can help.

• May be easier to qualify for: Compared to traditional banks, online small business lenders may be more likely to provide funding to medium- or high-risk applicants because they consider factors beyond credit score, like education, job history, and business revenue. It may also help that online lenders typically offer smaller loan amounts, which are less risky to them.

Online Business Loan Disadvantages

• May be more expensive: Rates and fees for online business loans can be higher than those of bank loans, due in part to their greater accessibility. Generally, the riskier it is to lend to a borrower, the higher the interest rates and fees are.

• Limited in-person interaction: Because they don’t have storefronts like traditional lenders (e.g. banks, credit unions), your face-to-face interaction with alternative lenders may be limited if possible at all. Some business owners may prefer the in-person interaction to build a relationship and trust with a potential lender.

• Less established: Some online small business lenders could be small businesses themselves. Certain online lenders may not have the same financial stability or safety that traditional banks can offer.

Recommended: Small Business Loans for Women

Types of Online Business Loans

Term Loans

Online lenders offer term loans for small business owners who need a fixed amount of funding. The borrower pays back the loan (plus interest) in installments over a specified repayment schedule. Lenders set interest rates and terms based on a borrower’s qualifications, loan amount, and other conditions.

Business Line of Credit

Online small business lenders offer business lines of credit, which can help maintain cash flow by covering small, short-term costs or unexpected expenses. Lenders approve a maximum amount from which you can draw from on a revolving basis, with interest only charged on unpaid balances. Even though business lines of credit are similar to business credit cards, they often offer cash advances in higher amounts and with lower rates.

Equipment Financing

Equipment financing is a type of small business loan for purchasing necessary business-related supplies and machinery. They are typically short- to medium-term loans that are paid off within a few years. The equipment acts as collateral on the loan, so they can be relatively low-risk for lenders.

Inventory Financing

Inventory financing is an asset-based term loan or line of credit that a business receives in order to purchase more inventory, maintain cash flow, or support working capital. Usually, the inventory being purchased acts as collateral for the loan. The borrower then uses the revenue from selling the inventory to pay back the loan or line of credit.

Invoice Factoring or Financing

Invoice factoring involves selling your invoices to a factoring company who then collects payment from your customers. With invoice financing, you use unpaid invoices as collateral to receive cash from a lender. Invoice factoring and financing can both be helpful financing options for small B2B businesses that deal regularly with invoices or irregular payment schedules.

Peer-to-Peer (P2P) Lending

Another category of online business loans is peer-to-peer (P2P) lending. P2P lending networks match borrowers directly with individual investors, cutting out the financial institution “middle man.” Loan applicants and lenders create profiles on P2P websites, where they can search for funding and causes that match their preferences.

SBA Loans

SBA loans are guaranteed by the U.S. Small Business Administration, making them low-risk and highly sought-after lending options. Their most popular options are the 7(a) loan programs, which offer short- and long-term financing. Since these are government-backed, they typically take longer to be approved and may have stricter eligibility requirements than non-SBA loans.

Merchant Cash Advance

A merchant cash advance allows small businesses (“merchants”) to get a cash advance in return for a portion of their future sales or receivables. As such, these aren’t technically loans because the merchant only makes payments on what they sell, as opposed to on a set repayment schedule.

Tips for Selecting the Right Online Lender

While many online lenders are trustworthy, you are still sharing personal, business, and financial information that you want to make sure is being used responsibly. Additionally, you want assurance that you will be treated fairly throughout the online business loan process. The following tips may help you decipher which online lenders are the most credible.

• Make sure they are registered in your state: All lenders are required to register to do business in their respective states. Contact your state attorney general’s office or banking/financial regulation department to confirm the lender you’re considering is legitimate.

• Look for well-known lenders: A good place to begin your search is with lenders you’ve heard of and who come highly recommended. Their reliance on reputation often leads to more credible practices.

• Read their Better Business Bureau (BBB) rating: Whether you’re familiar with a lender or not, it’s a good idea to check their BBB rating before applying for a business loan online. You can view any past complaints and get a good idea of what their reputation is.

• Read customer reviews: Customer and expert reviews can be a great resource when you’re comparing online lenders. If you’re trying to choose between similar lenders, lender reviews may help you come to a final decision.

• Check for media presence: Check if the lender has received media attention in the past, and if so, what it was for. If an online small business lender receives repeated bad press, it may be wise to search for another.

• Do they support the Small Business Borrowers’ Bill of Rights?: Some lenders choose to abide by the Small Business Borrowers’ Bill of Rights. You can check if a lender is a signatory to see if they ascribe to these fair lending practices.

Possible Red Flags

If you come across an online lender that seems too good to be true, your instincts might be right. Here are a few red flags to be aware of when you’re comparing small business lenders online:

• They don’t ask for your credit history: Very rarely will you come across a potential lender who doesn’t ask for your personal and/or business credit scores during the application process.

• They offer you a loan over the phone: It’s illegal for lenders to do business (offer loans or credit and ask you to pay for it) over the phone.

• Their name is deceivingly similar to that of another lender: Scam lenders may try to confuse applicants by using copy-cat names that sound similar to legitimate online lenders.

• They tell you to pay via money order or wire transfer: It can be difficult to track and recoup money transferred via wire or money order, which make these preferred payment methods for illegitimate lenders.

• They tell you to pay an individual: Trustworthy lenders will not ask you to pay an individual person. You should be making payments to the lending institution. Even in the case of P2P loans, the payments are done through the lending network provider.

How to Apply for an Online Business Loan

One of the many benefits of online business loans is how easy it is to apply. Depending on the type of financing and lender, you can apply in as little as a few minutes.

Typically, you’ll answer a few questions about yourself and your business, and then a soft credit check will be run by the lender. If you prequalify, you’ll submit the required paperwork, the lender will run a hard credit check, and you’ll receive a lending decision within a few hours up to a few days.

You may be asked to submit the following documents:

• Personal and business credit ratings

• Personal and business tax returns for the previous 1 to 2 years

• Business bank account statements

• Profit and loss statements

• Identifying documents like a government issued ID

It’s a good idea to have these documents handy in case you want to move forward with the loan. If you are fully approved for the loan, you should receive funding within a few business days. Some lenders even offer same-day funding*.

The Takeaway

Online business loans are simply small business loans you get through an online lender (as opposed to a bank or credit union). Because everything’s done online, approval is often instantaneous and funding can take place within 24 hours* of loan approval with certain lenders. As with any type of financing, though, it’s always best to shop around so you can find the best rate and terms for your situation.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

How do online business loans work?

Online business loans work similarly to business loans from a bank, except everything is done online. You’ll get prequalified, apply, and submit the required documentation via your computer. Online business loans are typically fast, and approval can happen instantly. From there, funds can be disbursed in as little as one business day depending on the lender.

Can you get a business loan for an online business?

Yes, it is possible to get a business loan for an online business. As long as your business meets the qualification requirements of the lender, it does not matter whether your business is based in an office or on the internet.

What is the fastest way to borrow money to start a business?

The fastest ways to borrow money to start a business include startup business loans, online business loans, online personal loans, and borrowing money from a friend or family member.

Can you get an online business loan with a 500 credit score?

While it can be tougher to get an online business loan with a low credit score, it’s not impossible. There are online lenders that specialize in bad credit business loans. Keep in mind, though, that you’ll usually receive a higher interest rate if your credit profile isn’t strong, as that makes the loan more risky for the lender.

Photo credit: iStock/shapecharge

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.

Small Business Loans
*Reference to “same day funding” or “funding within 24 hours” describes a general capability of many lenders you can reach through SoFi’s marketplace. This funding timing is not guaranteed. Your experience with any lender will vary based on requirements of the lender and the loan you apply for. To determine the timing of funds availability, you must inquire directly with any lender. In addition, your access to any funds from a loan may be dependent on your bank's ability to clear a transfer and make funds available.

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.

SOSB0224023

May

2024

All About Getting a First-Time Business Loan

By Kevin Brouillard | SMB | Comments Off

Many business owners use financing at some point, whether it’s to help them launch their companies or to fund expansion further down the line. No matter what stage your business is at, however, applying for your first business loan can feel overwhelming and intimidating.

While there’s no one-size-fits-all solution to getting a first-time business loan, this guide will break down what kinds of funding you may want to consider, where to find a first-time business loan, and what you can expect during the loan application process.

How Do You Apply for a First-Time Business Loan?

There are many different kinds of small business loans, and the application process can vary somewhat for each one. However, here are some basic steps that can help you find and apply for the right small business loan.

Check Your Credit Score

Your credit score is one of several factors that lenders consider when assessing how risky you are as a potential borrower. From the lender’s perspective, a borrower with poor credit has a higher risk of defaulting on loan repayments.

For a first-time business loan application, a lender may look at your personal rather than your business credit score (which you may not have established yet). Ranges vary depending on the credit scoring model, but generally fall between 300 and 850. A credit score of 700 or above is usually considered good, while a score over 800 is considered excellent. Credit scores are calculated from your payment history, credit usage, length of credit history, and recent credit history (such as applying for new accounts).

If you need a business loan for the first time and your business lacks credit history, there are some things you can do to establish a business credit score. Getting a business credit card and maintaining a successful record of paying it off each month is one strategy that can help you build credit over time.

Recommended: Debt-to-Income Ratio

Figure Out How Much Money to Apply For

When you’re applying for a first-time business loan, it can be helpful to identify how much money you need to start your business and what the funds will be used for. Being able to provide justification for the amount you are requesting can improve your chances for loan approval.

For example, obtaining price quotes for new equipment or providing comparable listings for a real estate purchase can demonstrate your preparedness as a first-time business owner and/or borrower, as well as justify your need.

Debt-Service Coverage Ratio (DSCR) and How to Calculate It

The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current debt obligations. Knowing what yours is can help you assess how much debt you want to take on. Lenders may also weigh your business’s DSCR as they make their decisions about offering financing.

DSCR is calculated by dividing the sum of a business’s earnings (before interest, taxes, depreciation, and amortization) by its current and proposed debt obligations. Even if this is your first time getting a loan, you may have short-term debt to factor in, such as rental agreements or outstanding credit card payments.

Borrowers may need a minimum DSCR to receive a loan. The threshold can vary by lender, requested amount, and current economic conditions. Generally, however, a DSCR below 1 indicates that a business might not be able to cover its debt payments in full. Therefore, applicants may need a DSCR above 1 to qualify for a first-time business loan.

Gather Documentation

The paperwork you need to submit for a first-time business loan will depend on the type of loan, lender, and amount requested. In many cases, however, you need to provide:

• Business licenses and registration

• Commercial lease agreement

• Business plan

• Up to one year of business bank statements

• Personal and business tax returns from the most recent three years

• Business financial statements

• List of current accounts receivable

• Schedule of business debts

• Proof of collateral

Types of First-Time Business Loans

Different types of business loans have different requirements, repayment terms, interest rates, and conditions. Here’s an overview of some leading options for first-time small business loans.

Bank Loans

Regardless of the age of your business, seeking a loan from a bank or credit union you already have an account with can be a logical place to start. Bank loans can come in various forms, including term loans and business lines of credit.

Term loans give businesses a lump sum that is repaid (plus interest) over a designated period of time (known as the term). Generally, repayment is on a monthly basis. Term lengths can range from several months to multiple years.

A business line of credit provides access to a set credit limit. You can draw what you need when you need it and only pay interest on the amount you borrow. As you repay what you borrow, the funds become available to borrow again.

Both options can offer businesses some flexibility as to how they spend their financing. This may be advantageous for businesses with a wide range of operational and/or startup needs.

Banks often offer the best interest rates on business loans. However, they generally have strict qualification requirements, such as at least two years of business history, excellent credit, and a minimum amount of annual business revenue.

SBA Loans

SBA loans are business loans that are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, which can be banks or online lenders. Because the government will cover a large portion of the loan in the event of default, SBA loans represent less risk to lenders. As a result, you may have better luck qualifying for an SBA loan than a traditional bank loan.

SBA loans break out into four categories:

• 7(a) loans: The most common SBA loan, 7(a) loans can be an ideal option for business financing due to their long repayment terms and low interest rates. Plus, 7(a) loans can be used for a variety of purposes, including working capital, business expansions, or purchasing equipment and supplies. The maximum loan is $5 million.

• 504 loans: These SBA loans offer affordable financing for large equipment or real estate-related purchases. Terms can be as long as 25 years, with maximum loan amounts up to $5.5 million.

• Microloans: These small loans (up to $50,000) are targeted specifically to startups. The SBA microloan program is fully funded by the SBA and administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks.

• Disaster loans: These low-interest loans provide up to $2 million to assist small businesses that have been negatively impacted by a declared disaster.

Getting an SBA loan is typically a time- and work-intensive process. However, it can be worth the effort due to their high loan amounts and favorable interest rates and terms.

Recommended: Small Business Grants for Women

Business Acquisition Loans

Not every first-time business owner is starting from scratch. Purchasing an existing business may eliminate startup costs and allow for quicker cash flow.

A business acquisition loan is a tool for doing just that. Potential lenders will likely consider the existing business’s financial performance, as well as the applicant’s finances and proposed plan for the business under new ownership.

Recommended: Online Business Loans

Invoice Financing

If your business is already serving customers, invoice financing can be a way to get a cash advance to tackle pressing needs. With this type of financing, you use your outstanding customer invoices as collateral for a loan. Typically, the lender will advance a large percentage of your unpaid invoice amount — potentially as much as 90%. When your customer pays the invoice, you receive the remaining percentage, minus the company’s fees.

You’re still responsible for collecting payment from your customers unless you choose invoice factoring, a form of invoice financing in which the invoices are sold outright to a factoring company.

Because your invoices serve as collateral, invoice financing can be easier to qualify for than other small business loans. However, borrowing costs tend to be higher than other financing options.

Recommended: Business Loans for a Rental Property

Equipment Financing

Purchasing equipment can be a significant cost for starting, maintaining, or expanding a business. Equipment financing is a type of loan that lets business owners make these essential, but costly, purchases without depleting their savings. You can use an equipment loan for anything from office furniture to medical equipment to farm machinery. Typically the equipment itself serves as collateral for the loan.

Equipment loans are provided by banks, SBA lenders, and equipment finance companies that focus solely on this type of small business loan. Depending on what you want to purchase and your company’s qualifications, you may be able to get an equipment loan that covers up to 100% of the value of the equipment you’re looking to purchase. You repay the loan over time, with interest.

Recommended: Cost of Capital

Alternatives to First-Time Small Business Loans

If your business is still a startup, you may face difficulties obtaining traditional funding. But there are still more options you could consider.

• Personal loans for business: These are traditional loans that you may be able to get as an individual. Not all lenders will allow you to use a personal loan for business use, so it’s important to check before you apply. And note that, while paying your installments promptly for a personal loan may help your personal credit, it won’t help your business establish an independent credit history.

• Crowdfunding: For this funding option, you set a monetary goal and create a marketing campaign to solicit funds online through a crowdfunding site. With rewards-based crowdfunding, people contribute to your project or business and get a gift or reward in return. Crowdfunding can help you raise excitement about your business and test the waters to see how interested people are in your idea. However, it can take a fair amount of time and effort to run a successful crowdfunding campaign.

• Loans from family and friends: Supportive friends and family members may be willing to loan you small amounts of money to help you get your business up and running. If you go this route, it can be a good idea to write up a promissory note so the amount of the loan and terms of repayment are clear, and there are no misunderstandings that could jeopardize your relationship.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

How does someone get a loan for the first time?

Requirements vary by lender and type of business loan. But you generally need to have a good-to-excellent personal credit score, strong business financials (or at minimum, a solid business plan), and proof of collateral to qualify for a first-time business loan.

How much can you borrow to start a business?

The amount you can borrow to start a business will depend on numerous factors, including your personal credit, your revenue history, the type of business it is, and the lender. Startup loans can range from $1,000 to $5 million. In some cases, you may have to use financing from multiple sources to get the funds you need.

What is a first-time business loan?

A first-time business loan is the first loan a business takes out, whether it’s a startup or an already established business. A first-time business loan can be virtually any type of business loan, including a Small Business Administration (SBA) loan, term loan, business line of credit, equipment loan, or business acquisition loan.

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May

2024

Understanding Business Debt Consolidation Loan Options

By Susan Guillory | SMB | Comments Off

As a small business owner, you may have taken out a loan or line of credit, and you may also have charged expenses on business credit cards. Having multiple payments to make on all these debts can complicate your small business financing and negatively impact your cash flow.

Small business debt consolidation allows you to combine your debts into one loan that you pay off at one (ideally lower) fixed rate and with only one payment per month. This can potentially shorten your repayment periods, reduce your monthly payments, or both. However, business debt consolidation isn’t right for all small businesses. Here’s what you need to know.

Recommended: LLC Business Loans

What Is Business Debt Consolidation?

Business debt consolidation, also called commercial debt consolidation, refers to a loan you can use to pay off other loans, lines of credit, and/or credit cards. Once you receive the business debt consolidation loan funds, you use the proceeds to pay the balances you owe on your other business debts. You then only make payments on the new loan.

A business consolidation loan, just like other types of business financing, charges interest. It may also require you to pay an origination fee, which some lenders charge to process the loan application. Even considering these costs, though, it may end up totaling less overall than what you would pay across the board for your multiple debts. It can also simplify your payments.

Recommended: How Does Debt Consolidation Work?

Pros and Cons of Debt Consolidation Loans

There are a variety of factors to keep in mind when you’re considering taking out a debt consolidation loan.

Pros of Debt Consolidation Loans:

• A debt consolidation loan can make your loan payments simpler to manage.

• Ideally, a debt consolidation loan will allow you to lower the interest rate you’re paying on your business debts.

• Paying back your consolidation loan promptly each month may help you build a positive personal or business credit history over time.

• A lower monthly payment can help free up cash that you can use to cover day-to-day operating expenses.

Cons of Debt Consolidation Loans:

• When you apply for a new loan, it can have a temporary negative impact on your credit.

• Before taking out a loan for consolidation, you need to make sure the lender allows the funds to be used for that purpose.

• Some of the loans you’re trying to pay off may have prepayment penalties, and there may be an origination fee attached to your consolidation loan.

• You could end up with a longer repayment term. While that can lower your monthly payment, you can end up paying more in interest over the course of the loan.

Recommended: Business Acquisition Loans

Is Business Debt Consolidation the Same as Refinancing?

If you’ve been researching how to refinance a business loan, you might wonder if debt consolidation is the same thing. It’s not. Refinancing a business loan is typically done to pay off one single debt and secure a lower interest rate. Debt consolidation, however, is designed to help you roll all your debts into one monthly payment, ideally at a lower rate. And some may consider it primarily as a tool to streamline their business finances.

Will a Business Debt Consolidation Loan Help My Credit?

Applying for a debt consolidation loan will trigger a hard credit inquiry, which can have a temporary negative impact on your credit. Over time, however, you may see an improvement in your (or your business’s) credit score, since your credit reports will reflect that you paid off your outstanding debts, and, with only one monthly payment due, it may be easier for you to make your payment on time.

Recommended: Trucking Small Business Loans

When to Consider Consolidating Debt

If you’re struggling to pay many debt payments each month, you might be tempted to apply for an emergency business loan as a quick fix. But creating a deliberate strategy to consolidate your business debt instead might leave you better off in the long run.

You can judge for yourself whether a debt consolidation loan would be useful in simplifying your monthly payments. Assessing whether a consolidation loan can save you money requires slightly more work. To do this, you’ll need to add up all your outstanding debt (the total balance you owe) and then add up the interest you pay each year on the loans. Divide the second number by the first and multiply the result by 100 to get a sense of the overall interest rate you’re paying on these loans. Now, add up your monthly payments for all of these different debts.

If you’re looking for a debt consolidation loan, you probably want to find a rate that’s lower than the average of those different interest rates and with a monthly payment that is less than the total you’ve been paying each month.

For example, let’s say you have one debt on which you still owe $20,000 and another on which you owe $30,000. If you’re paying $3,000 in interest per year on the first and $4,500 on the second, you would divide 7,500 by 50,000 and get 0.15. This translates to an interest rate of 15.00%. In this situation, it would make sense to look for a loan with an interest rate lower than 15.00%.

Recommended: Business Loans for Rental Property

Lenders Offering Business Debt Consolidation Loans

There are business debt consolidation companies that focus specifically on debt consolidation. But you may be able to use a small business loan for consolidating debt even if it isn’t designated solely for that purpose. If you qualify for a more traditional type of financing, such as a bank loan, you may get the best possible rates available. Just be sure to read the loan’s fine print to ensure that consolidating debt isn’t prohibited.

Here are some financing options to consolidate your debt.

Bank Business Loan

Traditional bank loans typically offer the most competitive rates and terms. However, they can be difficult to qualify for and often require several years in business, excellent credit, and a certain minimum annual revenue. If you’re interested in exploring a business debt consolidation loan from a bank, the bank you already have a relationship with might be a good place to start.

Alternative Business Loan

If you don’t qualify for financing your debt consolidation with a bank, consider alternative lenders, as they tend to have more flexible qualification requirements. Some online lenders will work with businesses that have as little as six months of business history and less-than-excellent credit, and may not have a specific minimum for annual revenue.

Personal Loan

In the event that your business doesn’t qualify for financing or your business debt is on personal credit cards, you might want to consider taking out a personal loan to consolidate your business debt. Just keep in mind that many lenders don’t allow you to use a personal loan for business purposes. You’ll want to check into any restrictions on how you can use the proceeds of the personal loan before applying.

How to Qualify for Business Debt Consolidation Loans

Before filling out an application for a business loan, you’ll want to make sure you qualify for that particular loan. Requirements vary, depending on the lender. You may need to have a certain number of years of business history, a minimum personal or business credit score, and a certain minimum amount of annual revenue. Lenders may also look at your debt-to-income ratio (DTI), which is how much of your small business’s monthly earnings go to repaying your existing debts.

Even if you don’t have high revenues or a great credit score, there are lending options that you may qualify for. But be aware that you’ll likely pay a premium in interest and/or fees to access these options. You’ll want to be sure that the rate you qualify for is lower than what you’re paying on your current debts.

Why Take Out a Debt Consolidation Business Loan?

Consolidating your business debt with a new business loan could help you reduce your monthly payments, lower your overall borrowing costs, and possibly pay your loan back more quickly. The higher the interest rate you’re paying on your existing business debts, the more money a debt consolidation loan can potentially help you save. Making one monthly payment for your debt, rather than many, can also simplify your business finances.

Get personalized small business financing quotes with SoFi's marketplace.

FAQ

Can you consolidate business debt?

Yes. There are loan options available that allow you to pay off current debts on business loans or credit cards and then make one monthly payment on the consolidation loan.

What are the disadvantages of business debt consolidation loans?

Consolidating your business debts could lead to a longer repayment term, in some instances. While this may result in lower payments, it also means you will be accruing interest over a long period. Even if the interest rate is lower, you could end up paying more in interest over the course of the loan. In addition, you may have to pay additional fees (such as prepayment and transaction fees), which could eat into the savings you’re looking to get by consolidating your loans.

What is small business debt consolidation?

Small business debt consolidation allows you to roll all of your existing business debts into one loan, ideally with a lower interest rate. You use the funds from a business debt consolidation loan to pay off your smaller loans and/or credit card balances and then only have to make one payment per month.

What is commercial debt consolidation?

Commercial debt consolidation is another name for business debt consolidation. It enables you to take out a new loan to pay off smaller loans and credit card balances so you only have one loan and one payment to make each month.

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.

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 .

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.

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May

2024

Merchant Cash Advance With Bad Credit

By Lauren Ward | SMB | Comments Off

A merchant cash advance gives businesses with bad credit an opportunity to access financing.

In exchange for receiving a lump sum of cash to use at your discretion, the lender receives a portion of your company’s credit card and debit sales until the balance is paid in full. Collateral isn’t always required and there are also typically less stringent credit requirements compared to a small business loan.

However, merchant cash advances are structured much differently than traditional financing options. Be sure to understand the details in full and seriously weigh the pros and cons before making a decision.

What Is a Merchant Cash Advance for “Bad Credit”?

Whether or not a business’s or an individual’s credit is considered “bad” is ultimately up to a lender and what they see as risky. However, according to FICO® rankings, a score of less than 580 is considered “poor,” while a score between 580 and 669 is considered “fair.”

A merchant cash advance is a type of small business financing that provides you with a lump sum of cash from a lender at the beginning of a borrowing term. Instead of making fixed payments like you would with a loan, however, you consistently repay the funds with a portion of your sales until the balance (including additional fees) is gone. In addition, instead of accruing interest as with a traditional loan, lenders apply factor rates to determine how much you’ll need to pay for the borrowed sum.

Factor rates will be explained in detail in the next section, but in general, the higher the factor rate, the more expensive the merchant cash advance will be.

With a merchant cash advance, borrowers with less than stellar credit may be more likely to qualify for funding than with a traditional small business loan. This is because merchant cash advances are repaid based on a businesses future sales, so credit scores aren’t as much of a deciding factor. Plus, the application process is generally fast and you typically get access to the funds quickly if you qualify.

Recommended: Bad Credit Business Loans

How Merchant Cash Advances Work

A merchant cash advance works differently than other kinds of small business loans, so it’s important to understand all of the components of the transaction.

Once you receive the lump sum, you’ll have a set period of time to repay the total owed amount — which includes the principal as well as fees. Depending on your borrowed amount and your sales volume, the repayment term could last anywhere between three months and three years.

Rather than being charged a fixed interest rate like with a loan, a merchant cash advance assesses a fee as a factor rate. A factor rate is a multiple of the amount you’re being funded. For example, if your factor rate is 1.2 and you borrow $50,000, you would multiply the two together to determine the total balance to be repaid.

1.2 * $50,000 = $60,000

As you can see in this hypothetical scenario, it would cost $10,000 to borrow $50,000 with a factor rate of 1.2. There may be other types of fees you need to pay, as well.

The next concept to understand when considering a merchant cash advance with bad credit is the holdback amount. This refers to the percentage of your credit card or debit card sales that will be diverted to repaying the cash advance. In general, you can typically expect a holdback amount to range between 10% and 20% of your sales (or sometimes up to 30%). It is important to seriously weigh this along with your factor rate to avoid any cash flow issues — and the possibility of defaulting — during the repayment period.

Recommended: Working Capital Line of Credit

Qualifications and Application Process

Qualifying for a merchant cash advance typically relies more on your company’s financial transactions than credit history, which is why businesses with bad credit may opt for this type of financing. Merchant cash advance companies may also have a minimum threshold for monthly credit card sales.

While the application process may not be as extensive as a traditional small business loan application, still expect to pull some of your company’s financials together. Here are some common documents that may be requested:

• Several months of bank statements

• Tax returns

• An accounts receivable summary report

• A profit and loss statement

While there will likely be a credit check during the application process, your company’s daily sales are generally weighed more heavily than its credit score. In many cases, you don’t need to provide a personal guarantee, which makes you personally responsible for the debt if your business is unable to repay it, and can instead keep the advance completely in the business’s name. If you are requesting a large sum, however, you may need to provide that personal guarantee or some other type of collateral.

Pros and Cons of a Merchant Cash Advance for Bad Credit

A merchant cash advance may be a financing solution to consider in some scenarios, but it’s worth fully weighing the pros and cons of this type of financing.

Pros

One of the biggest benefits of using a business cash advance is that you can get lump sum financing even if you or your company has bad credit. You can also typically expect to receive funding quickly if you qualify, often within a day or two of applying.

Cons

These conveniences come with a hefty price, however. Merchant cash advances usually involve extremely high fees and factor rates. Typically interest rate limits don’t apply since they’re technically not loans. Another drawback is that there aren’t any savings if you pay off your balance early, as there might be when you make prepayments on a traditional business loan. And you may experience a cash flow crunch because of the daily holdback amount.

Merchant cash advances are also only available to businesses with credit or debit sales, such as retailers or restaurants. And finally, your payments on a cash advance are not reported as positive payments on your credit report, so it doesn’t help to build your business credit.

Alternatives for Bad Credit Business Financing

Businesses with bad credit may consider other alternatives before deciding on a merchant cash advance. Some lenders specialize in bad credit business loans, including those designed specifically for startups and women business owners. It may be challenging for applicants with less-than-stellar credit scores to qualify for a business loan. And keep in mind that terms and rates may vary based on personal qualifications and lender policies.

Another option is a business line of credit. It may be difficult to qualify with traditional banks, but you may find some alternative online lenders who offer lines of credit for businesses with sub-optimal credit.

Finally, invoice factoring could be another viable choice if your business needs better cash flow while waiting for companies to pay their invoices. The factoring company fronts you the majority of the amount of your unpaid invoices, but first subtracts a percentage as its fee. Once the invoices are collected, you’ll receive the remaining balance. The price of invoice factoring can be very high, however. Plus you may have to rely on the factoring company to manage your client relationships when collecting invoices.

Compare Financing Options for Your Small Business

A merchant cash advance offers quick and easy financing for small businesses with bad credit, but there is substantial risk involved. Before accepting a merchant cash advance, review all of your options and evaluate your company’s cash flow to make sure it’s strong enough to support the ongoing holdback amount.

Trying to figure out your best option for securing a small business loan can feel overwhelming. We’re here to help you spend less time on the loan search and application process so you can spend more time taking care of your business.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can someone with bad credit get a merchant cash advance?

Creditworthiness matters less when applying for a merchant cash advance than it does for a traditional business loan. Instead, approval typically relies more heavily on the volume of retail transactions. If you have a high daily volume of credit card purchases, having a credit score on the lower end of the spectrum may not harm your chances of approval for a merchant cash advance.

Are merchant cash advances a good idea?

The benefits of a merchant cash advance include quick access to funds and an application process that places less emphasis on your company’s credit. In some cases, you may not have to provide a personal guarantee, meaning your own credit and assets aren’t on the hook for the borrowed amount.

However, the fees are extremely high compared to many other types of financing and are usually automatically deducted from your daily card transactions. Both of these factors can cause a major disruption to your cash flow.

Also note that even if you’re able to pay off the balance on a merchant cash advance ahead of schedule, this won’t likely lead to any savings, as it might with a traditional loan. This is because the fees due do not amortize as they would on a traditional loan, which could allow you to save money in interest by repaying early.

Does applying for a merchant cash advance involve credit checks?

There’s a good chance that your application for a merchant cash advance will involve a credit check. However, approval relies more heavily on your sales volume. If you’re worried about a hard check damaging you or your business’s credit score, ask the company ahead of time what type of check they run.

What happens if you default on a merchant cash advance?

Defaulting on a merchant cash advance comes with serious consequences. The lender may apply late fees that increase your balance and also report the delinquency to the credit bureaus. Your personal credit may also suffer depending on whether or not you signed a personal guarantee for the advance.

What is needed to apply for a merchant cash advance?

Requirements may vary from lender to lender, but generally, you’ll need to provide basic financials in order to apply for a cash advance, such as bank statements and a profit and loss statement. The cash advance lender may also run a credit check.

Photo credit: iStock/shapecharge

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