By Kelly Boyer Sagert |
SMB |
Comments Off on What Is a Good Debt-to-Income Ratio for a Small Business?
When small businesses apply for loans, lenders typically have guidelines to determine which loans to approve, including amounts and rates. One of the factors lenders look at is your debt-to-income ratio (DTI).
A debt-to-income ratio provides a snapshot of a business’s debt in relation to its income. Although each lender can have its own debt-to-income requirements, a lower percentage is generally considered more desirable than a higher one. Businesses with lower debt-to-income ratios may get approvals at better rates and terms.
Here’s more on how debt-to-income ratios are calculated and what’s considered a good ratio.
To calculate debt-to-income ratio, simply divide the sum of your business’s monthly debt payments by its monthly gross income. The resulting percentage is the debt-to-income ratio. To express it as a percentage, multiply by 100.
Put mathematically, the calculation for debt-to-income ratio is:
(Total monthly debt / Gross monthly income) X 100 = Debt-to-income ratio
Like any other ratio, this one is only as good as the quality of the data in the calculation. If you’re calculating it to see whether it falls within a lender’s guidelines, it’s important to be clear about whether the lender wants this figure to include only business debts and income or business and personal debts/income, since that can make quite a difference in the number.
When you’re totaling up monthly debt payments for this ratio, typically you’ll include mortgages, vehicle loan payments, minimum amounts due on credit cards, installment loans, and so forth. This figure would typically not include things like utility bills.
For the monthly income figure, be sure to use gross income (before taxes and other deductions are taken out).
• Borrower #1: With a monthly income of $7,000 and monthly debts of $1,500, the debt-to-income ratio would be 21.4% (that’s ($1,500 / $7,000) X 100). If the new loan payment added another $300 to the company’s monthly debt, then the ratio would become 25.7% (that’s ($1,800 / $7,000) X 100).
• Borrower #2: With a monthly income of $5,000 and monthly debts of $1,500, the debt-to-income ratio would be 30%. If the new loan payment added another $300 to the monthly debt, then the ratio would become 36%.
• Borrower #3: With a monthly income of $9,000 and monthly debts of $3,500, the debt-to-income ratio would be 38.8%. If the new loan payment added another $300 to the monthly debt, then the ratio would become 42.2%.
Now that you know how to calculate your debt-to-income ratio, the next question is what do these debt-to-income ratios mean? And what’s a good debt-to-income ratio for a company?
What Is a Good Debt-to-Income Ratio for a Small Business?
Each lender can set its own debt-to-income ratio guidelines for lending, but many would like to see a ratio of 36% or lower.
For a lender having this requirement, borrower #1 in the example would comfortably fit within this lender’s debt-to-income ratio parameters. The business in the second example is right on the nose. But the third business’s ratio is higher than the guideline.
Some lenders have a higher debt-to-income ceiling. Although this may be a central metric for many of them, it wouldn’t typically be the only guideline that a small business would need to meet to get loan approval.
The debt-to-income ratio is often thought of in connection with applying for a loan. But it has additional impact on small businesses, even if a company isn’t currently looking to borrow money.
When the ratio is high, this suggests that it might be harder for the company to meet debt obligations. If, for example, customers owe this business money but aren’t paying on time, this in turn could make it difficult for the business to meet its obligations, including payroll and payroll taxes.
2. Prone to Late Fees
When cash is tight, late fees can be triggered, which only adds to the business’s cash flow problem. In contrast, companies with low debt-to-income ratios and good cash flow may be taking advantage of early payment discounts and benefiting from a lower cost of goods. Plus, when a company pays its vendors promptly, this can strengthen its relationship with these suppliers.
3. Stagnant Business Growth
When a company has higher amounts of debt, the interest portion of its monthly payments can make it challenging to pay down the balances. That can then lead to even larger amounts of interest owed, making it difficult to manage or expand the business.
Plenty of benefits can come from a lower debt-to-income ratio. Even beyond helping to fix the three problems listed above, a lower ratio can simplify getting a loan if and when you need it. It can also help your business get better terms and interest rates.
To try to lower your ratio, first take a close look at your financial reports. Know how much your business is paying for rent, wages, raw materials, supplies, and more. Then consider the following:
• In what areas could money be saved? Talk to vendors to brainstorm ideas.
• Are there ways to buy in bulk to reduce costs?
• How can your business tweak its purchasing so that extra inventory and supplies don’t sit on the shelves?
• What are the interest rates on your business’s loans? Are they good rates?
• If your business sells multiple products, which ones are selling the best?
• Which ones have the best margins (make the most profit)?
• What is the standard margin for the industry?
• What combination of price raising and cost lowering can get your margin to the sweet spot? How does this position your business and its pricing against its competitors?
The goal behind contemplating these questions is to free up more cash, which can in turn be used to pay down debt and lower the debt-to-income ratio. Besides finding ways to reduce expenses, increase revenue, and negotiate with vendors, it sometimes makes sense to get a debt consolidation loan. When debt is consolidated at a lower interest rate, cash flow may be easier to manage.
If funding seems like something that might help your business, there are many options available. Here are a few to consider.
SBA loans. SBA loans are guaranteed by the Small Business Administration (SBA). They’re offered by approved lenders and typically come with competitive rates and longer loan terms. Small business loan requirements will vary depending upon the loan program and lender. In general, though, lenders will examine how a business earns its income, how the company is owned, where it operates, what other loans have been made to the business, and the creditworthiness of the applicant.
Inventory financing. With inventory financing loans, your business gets a loan to purchase inventory. For the lender, the inventory you’re purchasing with the loan serves as collateral. Typically, the amount of financing is calculated on a percentage of the inventory’s value.
Other types of small business loans include term loans, business lines of credit, equipment financing, merchant cash advances, microloans, commercial real estate loans, and more.
The Takeaway
Taking control of your debt-to-income ratio can help your business and its chances of getting funding at good rates. Ideally, you should aim to have a debt-to-income ratio no higher than 36%.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
With one simple search, see if you qualify and explore quotes for your business.
Photo credit: iStock/LumiNola
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.
By Susan Guillory |
SMB |
Comments Off on 7 Things to Know About Small Business Cost of Capital
Whether you plan to take out a loan or you’re looking for investors, one cash management concept to familiarize yourself with is cost of capital. By understanding why cost of capital matters to your business, you could make your business more appealing to investors or increase your chances of getting approved for a small business loan.
Keep reading to learn more about what cost of capital is and why it matters.
What Is Cost of Capital?
Cost of capital refers to the cost of running your business before you see profit. This includes how much it costs your business to access cash, whether that’s through financing or equity.
If you plan to take out a small business loan, your cost of capital (also called hurdle rate) includes the interest you will pay on that loan over time. Any trade credit you have with vendors that you pay in the short term also qualifies as your cost of capital.
If your company has investors, your cost of capital includes the cost of the equity they hold. For example, if you receive venture capital in exchange for 25% equity, that 25% is your cost of capital.
If your company is public and sells stock to raise capital, your cost of capital includes the cost of that debt as well as the cost of equity.
What to Know About Cost of Capital
Cost of capital matters when it comes to running your business or expanding it. If you want to take on a new project, for example, calculating the cost of capital will help to determine whether the project is worth it.
Here are seven things to know about small business cost of capital.
When investors are selecting a business to put their money in, they typically want a good return. The business’s cost of capital tells them the level of risk they would be taking on to attain that return. A high cost of capital signals more risk; a lower one indicates less risk.
An investor typically wants to see a rate of return that is, at a bare minimum, equal to his or her investment. But ideally, the rate of return exceeds that initial investment. Having details on your cost of capital can go a long way to helping a potential investor make the decision whether to invest.
2. There Are Actually Two Costs to Consider
When you look at costs, there are two you’ll want to consider, depending on how your business gets capital. Cost of equity and cost of debt both factor into your cost of capital.
Let’s look at the cost of equity first. When you work with investors, you’ll have a valuation of what your company is currently worth, and you’ll agree with your investors on what percentage of the company they’ll own. Down the road, if your company is doing well and is valued higher, those investors can cash out their equity and get a rate of return higher than their initial investments. The difference between what they invested originally and what they take out is your cost of equity.
Next is the cost of debt. When you take out a loan or line of credit, you pay interest and/or fees on that financing. The sum of the interest and fees is your cost of debt. Ideally, the cost of debt should prove worthwhile in the long run because the money you borrow can help you grow your business and thus make more money.
3. Weighted Average Cost of Capital May Be Relevant
In the event that your company has both debt and equity, you may need to consider what’s called your weighted average cost of capital, or WACC. This calculates an average of both your cost of debt and your cost of equity together, weighted proportionally.
The distribution of debt and equity makes up your company’s capital structure, and every type of debt and equity your business has must be considered to calculate your WACC, including both common and preferred stock, loans, bonds, and other financing. The formula can look intimidating, but basically it is a way to evaluate your cost of capital, taking into account exactly how much of it is equity-based and how much of it is debt-based.
Ultimately, the higher your weighted average cost of capital, the lower your business valuation and the greater the risk to potential investors.
4. WACC Relates to Your Discount Rate
When you look at your weighted average cost of capital in relation to a particular project, you’ll probably want to consider your discount rate. This refers to the current value of future cash flows (net present value). Simply put, it’s a tool to help figure out whether anticipated future returns justify the amount of money you’d need to put into a project.
Let’s say you’re thinking about spending $1 million to expand operations in Europe. How much might that investment net you five years from now? Ideally, it should be more than your initial $1 million investment.
Similarly, an investor thinking about investing in your business will likely consider the discount rate. It provides the potential investor with insight into the risk level, as well as the opportunity cost, of your business. It also accounts for the time value of money.
Here’s a simplified example. You have $100 and want to invest it in a savings account that offers 5% interest per year. At the end of the year, you would have $105. Because your ending balance is more than what you started with, you might consider that a worthwhile investment. Of course, when you’re investing in a business, your returns won’t necessarily be so clearcut.
Weighted average cost of capital is a type of discount rate, and it’s the one investors will likely be keen to examine when they consider investing in your business. An investor may have a specific discount rate in mind that must be reached to move forward with an investment.
5. Cost of Capital Can Help You Evaluate Financing Options
All this talk about cost of capital may be making your head spin, but stick with me. Having an understanding of your business cash flow and the cost of the investment opportunities your company offers is essential, both for you and for any investors.
From your perspective, understanding the cost of capital, particularly the cost of debt, can help you decide whether taking out financing is worthwhile. If what you pay in interest or fees outweighs what you could see in increased revenues, it’s not worth it. On the other hand, if paying, for example, 5% interest on a loan could help you realize a 15% growth in revenue, the cost of debt may be justified.
This information is also valuable to investors.The equity you receive from an investor should be used to deliver the expected rate of return. (That will also be beneficial to you, since you are also an equity owner in your company.) If you aren’t able to deliver the expected rate of return, any shareholders you have will likely sell their shares of your company’s stock, which will devalue your company.
That’s why it’s important to have a plan for how you’ll spend the investment capital you receive.
There are many small business financing tools to choose from, and each comes with a different cost of debt. If you take out a loan, you may pay 6% annually. If you use a business credit card, your interest might be 16.99% on what you’ve borrowed.
Carefully consider your financing options and your ability to repay the loan. The faster you repay it, the less you’ll pay in interest or fees. For example, with a business credit card, the annual percentage rate is divided by the days in your billing cycle that you carried a balance. If you pay your balance within a few days, you’ll pay significantly less interest than you would if you carried the balance from one month to the next.
The bottom line is that financing can be helpful, but be mindful of how much you pay for it over time. Keeping down the unnecessary cost of debt can help you keep your cost of capital lower.
7. It’s Not an Exact Science
As you’ve seen, determining weighted average cost of capital can look complex and technical. But in fact, there’s no guarantee that an investor will receive a given discount rate for his or her equity. Many factors contribute to the return your business may see, including market conditions, how many competitors are in your industry, how your business is run, and more.
Calculating cost of capital is a way to provide an educated guess on what sort of return an investment might bring. But it’s definitely not set in stone.
With a solid understanding of what cost of capital means, you can make smarter financial decisions. You can determine what type of loan or financing to take out or how to attract potential investors to help you grow your business.
The more appealing your company is, the more likely investors will be to give you capital in exchange for equity. Stay on top of your cost of capital so you can show your business in a positive light.
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.
Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.
Photo credit: iStock/pixdeluxe
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.
By Susan Guillory |
SMB |
Comments Off on Large Business Loans: Definition, How to Qualify & More
Many small businesses take out loans to cover day-to-day operating expenses, hire staff, or make a big purchase. And, while there are many loans available in the $5,000 to $100,000 range, what can you do if you’re dreaming bigger?
Many banks and other lenders offer million-dollar business loans (and even much higher amounts) to help small- and medium-size businesses see their growth skyrocket.
Here’s what you need to know about large business loans, where to find the best options for your business, and how to apply.
What Is a Large Business Loan?
A large business loan is one of $500,000 or more.
Maybe you want to acquire another business, buy real estate, or get high-dollar equipment for your company. That’s where large business loans come in.
Typically, small business loans, loans backed by the Small Business Administration (SBA), and business lines of credit all max out at about $5 million. Financing for purchasing or expanding commercial real estate can offer up to $10 million.
Repayment terms for large business loans can extend many years. These types of loans are available from traditional banks, credit unions, and online lenders.
How Do Large Business Loans Work & What Are Their Uses?
You can use a large business loan for many purposes, including:
• Purchasing commercial real estate to expand your space or open new locations
• Fulfilling large orders
• Expanding your product line
• Buying large assets or equipment
Large business loans can be harder to come by than smaller ones. For a business to get a large loan, it typically needs to have a good track record, show several years in business (or have experienced explosive growth in a short time), report a good business credit score, and be able to back the loan with collateral.
Unlike smaller loans, which often have simple online applications with an instant response on whether you’re approved, a large business loan may require a more in-depth application process that can take several weeks or months.
You may be asked for details on what you plan to use the loan for. In the case of purchasing equipment, for example, you may be asked to specify the model and age of what you’re buying, as well as what you’ll use it for.
You may also need to provide financial statements or tax returns to show that you’re fiscally responsible enough to pay back such a large loan. Some lenders, particularly traditional banks, may require you to visit a physical branch to complete the application.
Pros and Cons of Large Business Loans
Should you take out a large business loan?
Pros
Cons
The capital can help grow your business faster
The larger the loan, the more interest you’ll pay overall
If you qualify for a low rate, the financing may be affordable
The application process may take months
Pros of Large Business Loans
If you have big plans for your business, you might not have a way to fund those plans other than a large loan. Maybe you want to acquire another business that’s asking $1 million as the purchase price. You know it’s a great value, but you don’t have the capital.
The better your credit and financial history, the lower the rate you’ll pay. Also, the longer the loan term, the lower your payments will be, and most large business loans have long repayment periods.
If your business doesn’t see consistent revenue from one month to the next, having a large amount of cash can ensure you have steady access to working capital when you need it.
Like any financing, you’ll pay interest on a large business loan. And the larger the loan, the more interest you’ll pay in total. Keep in mind, too, that longer terms mean you’ll pay more in interest over the life of the loan.
If you’re in a hurry to get financing, a large business loan may not be right for you, because it typically takes weeks or months for your application to be processed.
While having a large lump sum of cash can be appealing, you have to be able to pay it back. A large loan payment each month could strain your budget.
Where Can You Find Large Business Loans?
As you start your research on how to get a large business loan, you can look to banks, credit unions, and online lenders. The SBA has several loan programs with high caps to consider, as well.
It can be a good idea to start your quest with the bank you already have a business relationship with. However, you don’t necessarily want to stop there. Comparison shopping your different business loan options could help you find a better rate and terms.
Qualifying for Large Business Loans
The qualification requirements for a large business loan will be more stringent than for a $5,000 loan because there is much more risk to a lender. You’ll need to have:
A proven track record: To approve a large loan, lenders often want to make sure that a business has been operating for at least a couple of years. Generally, the more experience you can show, the better.
Large revenue: Companies that qualify for large business loans tend to have very strong revenue to show potential lenders.
Strong credit scores: Good scores show lenders that you have a history of paying your personal and business debts on time. This gives a lender confidence that you’ll end up paying back a large business loan fully and on time.
Sufficient collateral: Having business collateral can make it easier to qualify for a large business loan. It lets the lender know that even if you should default on your loan, they could still get their money back by seizing the assets you put up as collateral.
Types of Large Business Loans
There are many different types of business loans to explore when you’re looking to borrow high dollar amounts.
SBA Loans
SBA loans are issued by traditional bank lenders but guaranteed by the Small Business Administration. With SBA-backed loans, such as the 7(a) and 504 loan programs, you can borrow up to $5 million.
SBA loans typically offer the best rates, along with term lengths of 10 to 25 years. These loans can be used for a wide variety of business purposes — from purchasing a new business to covering working capital needs.
Pros
Cons
The capital can help grow your business faster
The larger the loan, the more interest you’ll pay overall
If you qualify for a low rate, the financing may be affordable
Commercial real estate loans help businesses purchase commercial property, such as an office building, hotel, or retail space. They are available from private lenders, banks, and the SBA. Just like getting a mortgage to buy a home, commercial real estate loans typically come with long repayment terms and are secured by the property being purchased.
Pros
Cons
Can be used to purchase real estate, constructing or renovating facilities, landscaping, adding parking lots, and more
Limited to commercial real estate-related expenses
Secured Business Loans
Secured business loans are backed by collateral. This means that, should you be unable to pay off your loan, the lender has the right to seize that asset to cover your debt. Examples of collateral include real estate, equipment, and inventory. You may or may not also need to make a down payment on the loan.
Pros
Cons
Tend to have lower interest rates than unsecured loans
If you default on the loan, you could lose valuable assets
Accounts Receivable Financing
Another option for getting the cash you need is accounts receivable financing. This allows you to borrow against the value of your unpaid invoices.
Accounts receivable financing allows businesses to get early payment on outstanding invoices and purchase orders. If payments are delayed, the business still has the funding it needs to continue operations. When payments come through, customers pay the lender directly.
Since the loan is secured by your invoices — money your business has already made — the risk tends to be lower for both you and the lender. You can often find AR financing products from online lenders.
Pros
Cons
Typically does not require additional collateral beyond your unpaid invoices
You need good credit and qualified invoices to get this type of financing
Franchise Loans
If you plan to purchase a franchise or already operate one that could use an infusion of cash, franchise loans may be worth considering.
Pros
Cons
Can be used to purchase a franchise or make renovations to an existing one
Franchisor may require you to use one particular lender, which limits your options
Business Lines of Credit
If you don’t plan to use a large business loan all at once, a business line of credit may be a better option than a loan. Similar to a credit card, a business line of credit allows you to borrow up to a set limit and gives you access to funds as you need them. You pay interest only on the amount you borrow.
Pros
Cons
Can be used for any purpose
Generally available in smaller amounts than business loans
How to Get a Large Business Loan
Large business loans have more hoops to jump through in the application process. You may be required to provide tax statements, financial documents, and even a business plan. Many lenders will want particulars on how you will use the funds, and may also ask about assets you can use as collateral.
See below for a list of records you may need to submit:
Personal & Business Information
With many lenders, you can fill out an online application. To get started, you’ll likely need to provide:
• Your name, phone number, email, and social security number
• Business name, address, and EIN
• Business industry
Time in Business
Lenders will want to know how long you’ve been in business. Most lenders want to see at least six months of business history. For larger business loans, they may want to see a few years of history.
Credit Score
To qualify for a large business loan, lenders typically like to see a credit score of 680 or higher. The lender wants to make sure you’ll be able to pay back a large amount of money. The stronger your score, the better the rate you’ll receive.
Annual Revenue
Businesses seeking a large business loan need to be bringing in high annual revenues. Most lenders want to see at least $350,000 annually, with some preferring even more depending on the amount you want to borrow, your business history, and your credit score.
Intended Use of Loan
When you apply for a large business loan, lenders will want to see a detailed business plan. If you explain that you’re using the money to purchase a second location, for example, this gives the lender more security knowing that if you default, they can seize the property.
Desired Loan Amount
How much you want to borrow factors into your application. The more you hope to receive, the more stringent the lender’s requirements will be.
Collateral
Most large business lenders will want you to put up collateral before qualifying you for the loan. Collateral can include property, equipment, machinery, vehicles, accounts receivables, and investments.
Larger loans tend to take longer to process than small loans, so it may be weeks before you get a response from the lender, particularly for bank and SBA loans. Once you’re approved, you will need to review the loan agreement, which will tell you how much you have been approved for and the repayment terms.
Once you sign the agreement, the funds can often be deposited into your bank account in as little as one business day.
Alternatives to Large Business Loans
If you don’t qualify for any of the loans above, you have a few other options.
Peer-to-Peer Lending
Rather than going through a bank to be approved for a loan, you can also borrow money through peer-to-peer lending. This is a situation where private individuals, rather than banks or online lenders, loan money to businesses.
There are websites specializing in connecting private investors with companies seeking financing. Rates may be higher than with traditional loans, but you may find these loans easier to qualify for.
Venture Capital
If you run a startup and are willing to give up equity to investors in exchange for capital, venture capital is an option. Sometimes investors bring more than money to the table, as they may have useful industry contacts and advice to help your business grow.
Crowdfunding
Crowdfunding allows you to create a campaign online to raise funds for a particular purpose, such as launching a new product line. Anyone who finds your campaign interesting can donate. Typically, these funds do not have to be repaid.
Some crowdfunding sites require you to give a gift to contributors, such as your product, a T-shirt, or a personal experience with your brand.
When the time comes for your business to expand, buy new equipment, or fill an unusually large order, you might find yourself in need of a large business loan.
For a business to get a large loan, it often needs to have a good track record, have been in business for several years (or have experienced explosive growth in a short time), show a good credit score, and more than likely offer collateral to secure the loan.
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.
Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.
FAQ
How big can a business loan be?
A business loan can range in amount, but there are loans available for as much as $10 million.
What is considered a large business loan?
A large business loan is a commercial loan of $500,000 or more.
How hard is it to get a $1 million business loan?
While criteria to qualify vary from one lender to another, many lenders want to see high credit scores, at least three years in business, and a minimum of $350,000 of annual revenue.
Can you get a large business loan with no collateral?
There are large business loans that do not require collateral. However, these tend to charge higher interest than those that do require collateral. Peer-to-peer lending is an option if you do not have collateral to put up against a loan.
Where can large business loans be found?
There are many lenders who offer large business loans, including banks, credit unions, SBA-approved lenders, and online lenders.
Photo credit: iStock/Kerkez
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.
• Aspects of your business (age, credit score, revenue, etc.)
Repayment term refers to the amount of time you have to pay back the lender. Terms generally range from within a few months to 25 years. Some lenders call out the loan maturity date instead.
It’s helpful to understand how loan terms differ between lenders and loan types to make sure you’re choosing the right financing. You also want to have clarity on rates, fees, and guidelines set by the lender.
We’re breaking down business loan terms and conditions for different types of small business financing, from short-term business loans to boost cash flow to long-term business loans aimed at helping your business grow and alternatives to traditional bank loans.
A loan repayment term can be a short term measured in months, an intermediate term measured in years, or a long term spanning more than two decades.
Typical business loan terms vary depending on business needs, type of financing, lender, and other conditions, as do average business loan amounts. The following sections will highlight common repayment terms and lending vocabulary to help give you an understanding of what to expect when searching for small business loan funding that’s right for you.
Typical Small Business Loan Terms by Loan Type
We’ve broken down several different small business financing options including the following information:
• Repayment term: How long you have to pay back the loan.
• Loan amount: Total amount you can borrow from a lender.
• Interest rate: Amount the lender charges for the loan, usually stated as a percentage.
• Time to funding: Amount of time it will take to receive the actual funds.
• Requirements/eligibility: Conditions that determine whether you qualify for financing.
• Repayment term: Maximum of 10 years for inventory, working capital, or equipment; 25 years max for real estate loans.
• Loan amount: $5 million is the maximum business loan amount for all 7(a) loans except Express and Export Express, which typically have maximums of $350,000 and $500,000, respectively.
• Interest rate: Can be fixed or variable and is determined by the lender using guidelines on rate maximums from the SBA.
• Time to funding: Varies depending on program, but turnaround time can be as short as 36 hours or take up to two weeks.
• Eligibility: Lenders will have the final say on whether you’re approved for an SBA 7(a) loan, but at a minimum, your business must meet the following eligibility requirements set by the SBA:
◦ Is a for-profit enterprise
◦ Currently does or proposes to do business in the U.S. or its territories
◦ You have a reasonable amount of equity in the business
◦ You have exhausted all other business and personal financing options
Term Loans
A term loan is a type of financing in which the borrower receives a single lump sum of funding that they repay (plus interest) to their lender over an agreed-upon repayment schedule. The business loan term is based on a borrower’s qualifications, loan amount, and other conditions set by the lender. Examples of common term loans are commercial real estate loans and other installment lending options.
• Repayment term: Short term (3 to 24 months), intermediate term (up to 5 years), or long term (up to 10 years).
• Loan amount: Varies depending on type of lender and program, but generally starts around $50,000 and can go over $1 million.
• Interest rate: Depends on type of lender, amount of loan, and other qualifying factors.
• Time to funding: Varies depending on the program but can be a few days or a few weeks.
• Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.
Bank Loans for Small Businesses
Business loan terms and rates from banks are generally seen as some of the most favorable, but also the most challenging to get. Banks typically require collateral and a strong financial history in order to qualify.
• Repayment term: Typical business loan terms are 3 to 10 years.
• Loan amount: Average business loan amount is around $500,000.
• Interest rate: Will ultimately depend on the lender, loan type, and assessed risk of lending to the borrower.
• Time to funding: Banks often have longer approval processes due to their stricter qualifying factors. They can be anywhere from one week to two months.
• Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.
Business Line of Credit
A business line of credit gives you access to funding up to an approved maximum amount, with interest typically charged on unpaid balances. These can be good short-term options for small business owners who want cash flow and flexibility to access funding on a revolving basis.
Business loan terms for a line of credit function differently than a traditional term loan because borrowers do not pay back in set installments, but according to how much they borrow against the line of credit.
• Repayment term: Typically 6 months to 5 years.
• Loan amount: Credit limit is determined by the lender but generally can be between $1,000 to $250,000.
• Interest rate: Depends on lender and creditworthiness.
• Time to funding: Online lenders typically approve within a few days, while traditional banks may take up to 2 weeks.
• Eligibility: Banks may require a credit score over 680 and a minimum two years in business. Some lenders may have less stringent standards.
Microloans
Microloans can be great for small business startups or businesses that have struggled to get financing elsewhere. The SBA has numerous intermediary lenders participating in its microloan program.
• Repayment term: Up to 6 years for SBA microloans. Private and peer-to-peer lenders will set their own business loan terms.
• Loan amount: Business loan amounts vary depending on lender, but are generally up to $50,000.
• Interest rate: Depends on type of lender, loan amount, and your business’ eligibility, but rates are generally higher than other loan types.
• Time to funding: Online lenders may approve within 24 hours, while lenders with stricter application requirements may take days or weeks.
• Eligibility: Traditional lenders will base funding on creditworthiness, collateral, and business history. Alternative lenders may have fewer or different qualifications, and take your business’ cause into consideration.
Invoice Factoring or Financing
With invoice factoring, you sell your invoices to a factoring company that is then responsible for collecting payment from your customers. With invoice financing, you use unpaid invoices as collateral to receive cash from a lender. Both can be nice short-term financing options for small, B2B businesses that regularly use invoices or have irregular billing cycles.
• Repayment term: Typically 30 to 90 days to reflect the terms set for customers paying the invoice.
• Loan amount: Typically a percentage — up to 100%, depending on the lender — of the amount of each invoice.
• Interest rate: On top of a processing fee of typically 3%, the factoring fee is generally 1% to 2% of the total amount of each invoice and charged each week until the customer pays their invoice.
• Time to funding: As little as 24 hours*
• Eligibility: Must be a business that invoices customers, which are usually B2B organizations. Lenders may also consider your creditworthiness and your customers’ ability to pay the invoices.
Equipment Financing
A type of small business loan for the specific purchase of necessary business equipment, these are typically intermediate-term loans that are paid off within a few years. With business equipment financing, you can secure loans for necessary equipment and machinery without tapping into valuable cash reserves.
• Repayment term: Generally, business loan terms are the same as the life of the equipment; could be a few months or many years.
• Loan amount: Can be up to 100% of equipment cost
• Interest rate: Typically ranges between 5% and 30%
• Time to funding: Online lenders may approve within 24 hours, while banks may take up to a few weeks.
• Eligibility: Lenders will typically look at creditworthiness, business history, and monthly or yearly revenue. Banks may want to see at least two years of business history to qualify. Because the equipment acts as collateral, these types of loans may be easier to qualify for than other financing.
Inventory Financing
This is an asset-based term loan or line of credit that a business receives in order to purchase more inventory and maintain cash flow. The inventory itself acts as collateral for the loan or line of credit.
• Repayment term: Typically up to one year, depending on the inventory, or possibly longer for revolving inventory lines of credit.
• Loan amount: A percentage of your inventory, generally 20% to 65%
• Interest rate: Depending on the lender type, could be anywhere from 0% to 80%
• Time to funding: Between one business day and several weeks depending on the lender
• Eligibility: Be in business for at least six months to one year, meet inventory minimum set by the lender, and be willing to have inventory audited if the lender requires it
Merchant Cash Advance
A merchant cash advance allows small businesses (“merchants”) to get a cash advance in return for a portion of their future credit/debit card sales or receivables, plus a factor rate or fee.
• Repayment term: Typically, three to 18 months but depends on the lending company.
• Loan amount: Business advance amounts usually up to $500,000.
• Interest rate: Factor rate typically between 1.1 to 1.5, multiplied by the cash advance amount (E.g.: $5,000 cash advance × 1.3 factor rate = $6,500 owed to the merchant lending company).
• Time to funding: Can be as little as 24 hours.
• Eligibility: Lenders typically look at financing documents like monthly sales and bank statements to determine if the business will be able to make the amount advanced back.
The loan maturity date is generally the due date for making the final required payment on your small business loan. The loan maturity date typically aligns with the term length.
A $50,000 SBA microloan with a six-year term, for example, would typically feature 72 scheduled monthly payments. The date when the 72nd and final required loan payment is due is the loan maturity date.
Here are some of the maximum maturity term lengths on SBA loan products:
• SBA 7(a) loans can have a maturity term of up to 25 years for financing real estate
• SBA 504 loans can have a 10-year maturity term for equipment financing
• SBA microloans can have a maturity term of no more than six years
What Is a Prepayment Penalty?
A prepayment penalty is a fee that some lenders may charge if you pay off a loan prior to the loan maturity date. The terms and conditions of your small business loan may disclose the financing costs, including any fees and penalties. Paying off a small business loan early can minimize your interest costs and may be right for you if there’s no prepayment penalty.
Which Business Loan Terms Are Right for You?
When deciding which business loan terms are right for your business, it may help to assess what your immediate needs are and how much debt you can safely take on. To get started, it may help to answer the following questions:
• What is the total cost of the funding you need, including interest rates and fees?
• What are your revenue projections for the business loan terms you’re considering?
• What items are the most essential to purchase for your business? Are there items that can wait?
• What are your regular business expenses and how do you plan to cover them?
• How much working capital do you currently have to work with?
• Do you have collateral you can offer to lenders?
• Has cash flow been healthy or restricted? Would financing help or hurt it?
The Takeaway
Business loan terms can be short, intermediate, or long in duration. A short term may suffice if you need fast funding for working capital. You might prefer a longer term if you need commercial real estate financing.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
With one simple search, see if you qualify and explore quotes for your business.
FAQ
What are common terms for a business loan?
A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. Microloans, for example, generally have terms of up to six years. SBA 7(a) loan terms can go up to 25 years for financing real estate and up to 10 years for working capital purposes.
What is a typical SBA loan term?
Here are some typical term lengths for SBA loan products:
• Up to 25 years for SBA 7(a) loans used for real estate financing
• Up to 10 years for SBA 7(a) loans used for working capital purposes
• 25 years for SBA 504 loans used for real estate financing
• 10 years for SBA 504 loans used for equipment financing
• No more than six years for SBA microloans
How long can a business loan term be?
SBA 7(a) and 504 loan terms can go up to 25 years for financing real estate. These are generally the longest terms you can get for an SBA loan product.
What are the three types of term loans?
A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. An SBA 7(a) loan for real estate financing typically comes with a long term of up to 25 years. Microloans typically have short terms of up to 36 months, but SBA microloan lenders can offer intermediate terms of up to six 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.
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.
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.
By Nancy Bilyeau |
SMB |
Comments Off on Guide to Business Loans for Bad Credit in 2024
If you’re looking for a small business loan with bad credit or no credit, you could face some extra hurdles. Banks tend to prefer borrowers with a good credit score — typically a personal credit score of 670 or higher — leaving business owners wondering how to apply for a business loan if they have bad credit or if their business has no credit history.
Fortunately, there are options for business loans for bad credit. Even if you have a personal credit score below the mid-600s, you may find lenders who offer options to help you start, grow, or expand your small business.
Below, you’ll find a guide to resources that might help you with the process of applying for a small business loan when you have bad credit, as well as different loan options.
What Are Business Loans?
A business loan is a sum of money received by a business owner exclusively for use in their business that is repaid — with interest — over an agreed term.
Personal loans are usually of shorter duration. Business loans offer more capital with, ideally, a lower interest rate. Personal loans usually mean a smaller amount of money with a higher rate of interest.
What Is Considered Bad Credit?
Your personal credit score, a rating derived from your credit history, is an important indicator of your creditworthiness to lenders. Similarly, when your business builds up a credit history, it may receive a credit score that potential lenders can use to assess whether to lend it money.
If your credit rating isn’t high enough or your business hasn’t been in existence long enough to build up a credit history, potential lenders may evaluate you as having bad credit or no credit, and it may be harder for you to get good terms on financing or even any financing at all.
Understanding what lenders may be looking for can help you figure out your best options for getting business loans for bad credit.
Personal Credit vs. Business Credit
A common question when you’re trying to figure out how to apply for a business loan with bad credit is whether a lender will look at your personal credit score or your business’s credit score.
Personal credit is based on your individual credit history, including factors such as your record of borrowing and repayment on items like credit cards and loans. It’s connected to your social security number (SSN) and includes specific details regarding any credit-related inquiry. Your credit score is used to sum up how creditworthy you are considered so that potential lenders can assess how risky loaning money to you might be.
Most personal credit scores range from 300 to 850 (although there are a few different scoring models with slightly different scales). Less than 580 is typically considered a poor score.
Business credit is based on the financial history of a business. Instead of being connected to an individual’s SSN (even the SSN of the owner), it’s generally connected to the business’s Employer Identification Number (EIN).
Business credit scores may be issued by several different companies with different systems. Some (though not all) range from 1 to 100, and higher scores are typically viewed more favorably by lenders than lower ones. The scores are generally determined by factors that can include payment history, business history, credit utilization ratio (how much the business currently owes divided by its credit limit), and type of industry.
Every lender may have its own rules, but in general, on a scale of 1 to 100, a business credit score of 80 or above means that the business is likely to be seen as low risk, while a score of 49 or below may suggest high risk to potential lenders.
While your personal credit score and your business’s credit rating are different, they can both matter when you’re looking for a business loan, particularly if you’re a sole proprietor — the only owner of your business. When banks are evaluating an application for a business loan, they commonly review both personal and business credit scores, if available.
Why Your Personal Credit Score May Matter for a Business Loan
Many businesses start out with a sole proprietor — just one person who owns the business. When the business is new and hasn’t had the chance to build up a credit history yet, potential lenders may look at the owner’s personal credit when they’re assessing the business’s creditworthiness. A majority of lenders will consider your FICO® score (the credit score issued by the Fair Isaac Corporation) when evaluating an application for a small business loan.
While FICO has different versions of its credit scores for different purposes, personal FICO credit scores are generally determined using the following factors:
• New credit – 10%
• Credit mix – 10%
• Length of credit history – 15%
• Accounts owed – 30%
• Payment history – 35%
Every personal credit score uses these five categories, but the importance of each can vary depending on the individual. For example, a person with a long credit history will be evaluated differently than someone who is just beginning to establish credit.
Lenders use multiple factors to determine what small business financing options they want to offer you. But even though your credit score is just one factor, lenders may have minimum personal credit score requirements to qualify for loan products. That’s why it can be useful to know what your personal credit score is and whether it’s considered good or bad when you’re applying for a business loan.
Banks and SBA-approved lenders generally require credit scores over 680 to qualify for a small business loan, in addition to credit history. Alternative lenders, like those who offer options like merchant cash advances or factoring services, may accept lower credit scores (below 600), but you may face higher total borrowing costs due to increased interest and factor rates.
Getting a business loan with a lower credit score may require a bit more legwork. There are five steps to applying for a business loan with less than stellar credit.
Checking Your Credit Scores
To find your personal credit score and history, you can request a credit report from any of the major bureaus: Equifax®, Transunion®, or Experian®. The Fair Credit Reporting Act (FCRA) entitles individuals to one free copy of their credit report per year from each of the three bureaus.
When you’re looking into a bad credit business loan and you want to know your business credit rating, however, digging that up may be more challenging than finding your personal credit rating. The following sources may offer comprehensive business credit ratings, but keep in mind that some are paid services: Dun and Bradstreet, Experian, and Equifax.
After you’ve gathered your credit reports and scores, you’ll probably be better prepared to determine how eligible you are for financing by comparing your ratings against potential lenders’ minimum requirements.
6 Steps That Can Improve Your Chances of Getting a Business Loan
Working toward a higher credit score can take time, but a strong credit score may better your chances of securing a more competitive interest rate on a small business loan. The following steps can help you improve your chances of getting a small business loan.
1. Check your credit reports and dispute any errors
It’s important to monitor your personal and business credit scores to ensure there aren’t any incorrect entries. An error on your credit report could lower your score, making it more difficult for you to secure the financing your business needs.
Check your personal credit reports with the three major credit bureaus (TransUnion, Experian, and Equifax) and report any potential errors directly to that bureau. You can access a copy of each of these credit reports for free once annually.
You may also want to check your business credit history with Dun and Bradstreet, Experian, and/or Equifax. The sooner you can catch and correct any discrepancies, the sooner you can improve your chances of getting approved for funding.
2. Establish credit with a business credit card or line of credit
One way you can work toward building your business credit score is by using a business credit card to make small daily purchases. To help build credit, it’s important to pay your business credit card bill on time each month and avoid carrying a balance.
If you qualify for it, another option that may help you build business credit is taking out a business line of credit. Like a credit card, a credit line lets you take out available credit to make purchases and then pay in full each month. Some lines of credit are revolving, while some close after they’re paid in full, but both give you access to cash flow to support your business while you’re also laying a positive credit foundation.
And finally, consider keeping your business credit card or line of credit accounts open, even if you aren’t using them. Canceling a business credit card could impact your business credit score.
3. Keep your business expenses separate from personal expenses
There are a number of reasons to keep your business and personal expenses separate. These include building credit, keeping your records accurate, and streamlining your taxes, as well as for the legal implications. Whether you’re just starting your business or trying to build good credit, these steps can help you establish and maintain a separation between your business and personal expenses:
• Open and maintain separate business and personal bank accounts
• Avoid using your business credit card for personal expenses and vice versa
• Register your business with an EIN number
• Hire a bookkeeper to manage accurate accounting for your business
4. Maintain your personal credit score
Can you get a loan with a 500 personal credit score? It may be difficult, which is why it’s important to maintain strong personal credit if it’s at all possible.
Even though your business and personal credit are separate ratings, having a good personal credit score may improve your chances of getting approved for a business loan. When lenders see strong personal credit, it highlights for them that you’re a trustworthy borrower. One way to help build and maintain a good personal credit score is to pay your credit cards and other outstanding debts on time.
5. Take the time to build credit
Trying to figure out how to apply for a small business loan with bad credit and no collateral can be frustrating. Building credit may take a while, but it’s usually worth the effort. That’s because a strong credit history can help you get favorable rates and terms on future loan products.
For starters, you can aim to work with vendors and suppliers who will report your business dealings to the major credit bureaus. Paying your outstanding balances and invoices on time can also potentially help you establish and build better business credit. But keep in mind that not all companies will report on your behalf, and try to choose judiciously.
If you’re able to wait to apply for a loan, delaying your application could be an opportunity to continue paying down other debts and credit cards, or make any other regular payments that show a stable financial history. By taking the time to build a good track record, you can prove your dependability as a borrower and potentially improve your chances of being approved for more favorable loan products in the future.
6. Diversify your credit
Creating a good credit mix is an important step in building good business credit. A mix of credit means that you have varied lines of credit, credit cards, loans, and other products. Once you’ve established good business credit, having a well-rounded credit mix can help you maintain or potentially build your credit score, so long as you’re responsibly making payments on each account.
Another factor to keep in mind is your credit utilization ratio. This is how much available credit you’re using. Maxing out every line of credit may present a negative picture of your business, while using around 25% of your credit typically suggests that you’re a responsible borrower.
When you’re planning to apply for bad credit business loans, it may help to gather the following documents:
• Personal and business credit reports
• Business bank and financial statements
• Legal documents related to your business
• Business and personal tax returns
• Personal identifying documents
• Business plan
Some lenders may not require all of these documents, but having them all ready in case they’re needed can be helpful. In fact, some lenders may even require additional documentation. And while you’re gathering this paperwork, it can also be a good opportunity to assess your business’s financial status, too.
Applying for Bad Credit Business Loans
Now that you’ve taken steps to prepare, you’re also equipped with knowledge that can help you make a decision on which loan products and lenders suit your business needs. Consider the following factors when comparing your business loan options:
• When you need funding by
• The documents needed to apply
• Interest rates and terms and fees
• The length of application and approval time
• Required personal and/or business credit ratings
• Whether you have collateral to offer
When you’re applying for a business loan with bad credit, banks and other traditional lenders may be more likely to lend to you if you’re able to back the loan with collateral. If you don’t have any collateral to offer, it may be worth reviewing alternative lenders, who may be more likely to have funding options for companies with less-than-stellar credit.
Besides the traditional term loans, there are other financing options available to you, even if you have low credit or no credit.
Secured Business or Personal Credit Cards
When you get a secured credit card, you have to provide a security deposit to open the card. That deposit acts as collateral in the event you default on your payments. This lessens the risk for the credit card company, and therefore improves your chances of getting approved.
If you are looking for a startup business loan with bad credit and no collateral, opening a secured personal or business credit card may be an option to consider. If you make payments on time for a certain period, your creditor may even offer you an unsecured card to help build up your credit rating further.
Peer-to-peer lending lets borrowers and investors connect directly, eliminating the need for a financial institution to facilitate the loan process. Borrowers who are trying to get unsecured business loans with bad credit or whose business is new may find more financial options to choose from in this category than from other kinds of lenders.
Borrowers and lenders use P2P networks to find each other based on business needs, purpose, and qualifications. Fund transfers and payments go directly through the P2P platform for a simple, manageable process. Because you work with an investor directly, there may be more emphasis placed on your business’s purpose and long-term goals.
Equipment Financing
Equipment financing can help you purchase necessary equipment, machinery, and other items for your business. Equipment financing may be a viable loan option for a business with a low credit score or limited collateral because the equipment itself acts as collateral. In other words, if you default on your payments, the lender can claim the equipment to recoup its losses.
Equipment financing can help you purchase big-ticket items without the financial strain of paying a lot of money all at once. The terms on loans like these may range from a few months to 10 years, and generally vary based on the lifespan of the equipment.
Invoice Factoring
A short-term financing option known as invoice factoring lets you sell your invoices to a factoring company, which assumes responsibility for collecting payments from your customers. Typically, B2B companies or operations with irregular billing cycles rely on this type of financing.
Businesses may use invoice factoring as a quick way to supplement cash flow or when they need a bad credit business loan. Since the factoring company is responsible for collecting payment from your customers, it’s important to partner with a company that’s reputable and uses fair collection practices.
Inventory Financing
Inventory financing helps a business maintain cash flow while it’s purchasing additional inventory, typically in preparation for a seasonal spike. That new inventory serves as collateral, and lenders offer financing based on a percentage of its value. This can be a good option if you don’t have collateral and need funds to stock up on inventory.
Microloan
Microloans are loans offered by nonprofit and peer-to-peer organizations for smaller loan amounts, typically less than $50,000. If you require just a small amount of financing and don’t qualify for a larger loan, a microloan may help you get the funding you need to cover basic startup costs and other business expenses.
Since newer, smaller businesses often seek microloans and haven’t yet established business credit, it’s helpful to have an established personal credit history to help the lender make its financing decisions.
SBA microloans are also available and may have advantages like longer terms and better interest rates, but they require a strong credit rating.
Merchant Cash Advance
A merchant cash advance is not actually a loan, but a way for a small business (“merchant”) to get a cash advance for business expenses in return for a portion of its future credit/debit card sales. Merchant cash advance companies purchase a business’s future sales at a discount and, in return, offer quick financing.
A business owner trying to get an unsecured business loan with bad credit may find that merchant cash advances are an option for quick cash, but they do often come with high interest rates and fees.
Additionally, since merchant cash advances are not technically loans, companies don’t receive the same governmental oversight and regulation as traditional lenders. If you decide to go with this option, research the different merchant cash advance companies carefully to ensure that the one you choose operates in a fair and trustworthy manner.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
With one simple search, see if you qualify and explore quotes for your business.
FAQ
Can I get a business loan with no collateral?
Yes, there are some business loan options that don’t require collateral, particularly from online lenders. However, that’s not the case for all small business loans. Some will require collateral to qualify, especially if you don’t have strong credit. There are also other lending options that essentially have collateral built into their structure, including equipment financing and secured credit cards, which you may want to consider if you have no other form of collateral to offer.
Can I get a business loan with bad personal credit?
Yes, there are options for securing business funding, even if you have bad credit. While many lenders look at your personal credit to help determine your eligibility and loan terms, some alternative lenders and online business loans may be available to people who are still building their personal credit. Lenders offering certain other products, like merchant cash advances and invoice factoring, will also consider individuals with bad credit.
Are any banks easier to get a business loan at than others?
Banks differ in their evaluation criteria. However, since interest rates began to rise, U.S. banks have been tightening their criteria. They have typically expected higher credit ratings, longer time in business, and more income generated every month before giving a term loan.
Are all business loans based on credit scores?
Credit score is one thing banks look for. Banks also examine business revenue, cash flow, outstanding debt, unused credit lines, and the length of time in business.
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.
