How We Chose The Best Small Business Loans Of 2021
Here are all the most important factors we considered as we compiled this list of the best business loans and lenders for 2021.
- Easy Application Process – We gave the highest marks to business lenders that provide a quick and easy online process, especially those that offer loan decisions the same business day.
- Transparency – We gave precedence to lenders who are transparent about the cost of their loans.
- Fast Loan Funding – The top lenders on this list make it possible to receive your loan funds anywhere between 24 hours and three days after getting approved.
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What Are Secured & Unsecured Business Loans
The difference between secured and unsecured business loans is simple. Secured business loans require collateral, such as real estate, heavy machinery or other assets, while unsecured business loans dont require any collateral as a guarantee for being able to pay the loan.
With secured business loans, the borrower agrees to give the lender an asset or piece of property if theyre unable to repay their debt. Collateral can make the financing process less risky for lenders.
Banks and other lenders have more certainty that they will get their money back, in the event you default. This can translate to lower interest rates, higher funding amounts, and better terms for borrowers.
Typically, traditional banking institutions will require your loans to be secured with collateral, like real estate or heavy machinery.
Unfortunately, borrowers face additional risks with secured business loans. In case you are unable to meet your debt obligations, you could risk losing the asset youve put up as collateral.
In the modern business financing world, however, you can find small business loans without collateral.
If you have collateral to back your small business loan, then you can choose to put it up. If not, then you can still find financing options. We can help you find either option within our marketplace.
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Typical Documents Required To Initiate Your Loan Application Include:
- Several months of bank statements
- Outstanding credit account statements
- Corporate tax returns for multiple years
- Balance sheet and/or statement of profit/loss
- Individual tax returns
Lenders vary in the amount and history length of the documents they need to process your loan application. Be prepared to provide up to 2 years of history. Not all lenders will require two years on all documents, but many will not require more than that. In any case, be prepared to furnish all requested documentation.
Online And Alternative Small Business Loans
Online and alternative lenders can offer a variety of loans without collateral requirements to help you meet your business working-capital needs. The types of financing you may be able to get without having to provide collateral up front include:
With these types of small-business financing, there may be some type of security required, but it isnt cash or another physical asset you have to offer. For example, with invoice financing, youre leveraging your outstanding invoices to borrow money. With a merchant cash advance, youre borrowing against the value of your future credit card receipts. And in the case of equipment financing, the equipment youre buying or leasing serves as collateral for the loan.
Peer-to-peer lending is another option for small-business financing that doesnt require collateral. Peer-to-peer lending platforms connect investors with small-business owners who need loans. Investors pool money together to fund the loan, and owners pay it back the same as any other loan, with interest. These loans are unsecured, meaning theres no collateral needed.
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Find The Right Lender
A lender that has experience in lending to businesses in your industry will better understand what your business needs. Some larger lenders have specific lending teams that deal with specific types of loans, such as commercial real estate, equipment financing, or lines of credit. An experienced lender can help determine the right type of loan to apply for and may structure a loan package based on your specific needs.
Some questions you should ask potential lenders before you apply for a small business loan are:
- What fees are involved with originating and closing on a small business loan?
- What does the application process entail?
- How long does it take to get a decision?
- What documentation do I need to provide with the application?
- Will I need to submit a business plan with the application?
- Do you require a personal guarantee?
If youre applying for a line of credit, some additional questions to ask include:
- Whats the annual fee?
- Can I draw on the line of credit online or on a mobile app?
If youre applying for a term loan, some additional questions to ask include:
- Is there a prepayment penalty?
- Whats the required repayment schedule?
How Do Sba Loans Work What’s The Process
Before you apply for a loan from the SBA, its worth getting familiar with the loan application process so you know what to expect moving forward.
First things first: The SBA itself doesnt actually lend you the money. What they do is guarantee a business loan from a lender, like a bank. This gives additional assurance and encourages banks to finance businesses they otherwise might not approve for a loan.
To begin the loan application process, you need to establish a dialogue with an SBA-approved lender either directly or through a broker. The right lender will be able to walk you through a number of different loan options and recommend the financial vehicle that makes the most sense for your unique situation. Youll have to submit a pile of documentation and financial informationyour credit score, personal and business financial statements, several years worth of tax returns, resumes, business plans, authorization for credit and background checks, your completed loan application paperwork, and moreto determine your eligibility.
Over the next few weeks, the lender will assess your qualifications across five categories: your ability to repay the loan, your business experience, the equity youve invested in your company, how much debt you have and how likely you are to repay it, and whether or not you need to put up collateral to secure financing.
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Annual Business Revenue And Profit
Your businesss annual revenue and profits will also be one of the most common small business loan requirements you see across different lenders.
Typically, lenders will want to see both a year-to-date profit and loss statement, updated within the past 60 days, and statements from the previous two years.
This being said, overall, banks will want to see that your business is profitable in order to approve you for financing. Alternative lenders, on the other hand, will not often require profitability, but will usually have annual revenue minimums.
Ultimately, regardless of the specific lenders requirement, the stronger your business financials the more likely you will be to qualify for financing, and business financing with the most affordable rates.
What Are Short Term Loans
Short term loans work just like term loans, but have shorter payback periods. Typically, short term loans have payment terms of 1 year or less.
While you have a shorter period of time to pay the full payback amount, there is also less time for interest to accrue. For this reason, short term loans can actually be the best option for some small business owners.
Short term loans are the ideal option for expenses that directly drive revenue, such as marketing, the costs of taking on a new project, and expansion.
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Choosing A Small Business Loan Product And Submitting An Application
Many business owners report feeling stressed when applying for a small business loan. It seems that lenders are asking for more and more documentation with each passing day. In reality, most lenders have a standard discovery list of documents that are required to apply for and process a loan. Knowing which documents will be required and getting that documentation in order before you apply for your business loan can reduce your stress and speed-up approval of your loan.
How To Get A Business Loan With No Money
Getting funding can seem like a catch-22. You wouldnt need the loan if you had money, but the bank needs to see that you have good revenue to consider you a wise risk. How can you possibly qualify when cash is tight? This is where the bank will be impressed by collateral and an excellent credit history. These two factors are perhaps the most important when cash is tight.
Start with a business credit card and trade credit with your vendors. Spend time improving your business credit profile and demonstrating a track record of reliably making periodic payments. If you can demonstrate that you have the ability to service debt, you will be more likely to get approved.
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What Lenders Look For In A Small Business Loan Application
If you, as a small business owner, know the appropriate steps to get the loan, your chances greatly increase. If you know that you are in need of a loan, then it is imperative for you to know the eligibility requirements of most lenders. Here is what you need to know that is required by lenders:
Collateral is frequently highly valued by more traditional lending organizations. A secured business loan can provide you with the funds you require it is often easier to obtain a loan that is backed by some form of collateral. Because start-ups and small businesses dont often have a lot of assets, you may need to utilize personal collateral, such as your home or car, to obtain the loan you need.
This is the amount of money youre investing in your company. The more you inject, the more favorable the loan request will be viewed by possible lenders. Before offering any extra finance, prospective lenders will look to see if you have made a considerable investment.
History of Credit
Your business should have its own credit score and credit history, which will advise potential lenders about your ability to manage your companys finances. If your business is still new and you havent had time to build a credit history for it, potential lenders may look at your personal credit history and score.
The Business Age
Flow of Cash
What Credit Score Is Required For A Small Business Loan
You typically need at least a fair/average credit score to qualify for a small business loan, but it will vary depending on the lenders.
If your personal credit score is good/very good or excellent , youll have even better odds. As with most financial products, the higher your credit score, the better interest rates and fees youll receive.
Lenders focus on your personal credit score when setting minimum credit score requirements, however they may also check your business credit score. But lenders don’t state any requirements for business credit scores.
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Key Benefits Of Small Business Loans
Fueling Growth: Many small business owners want to grow their company, but that can require significant cash investment. A small business loan allows you to invest in your business without tying up your cash. It can allow you to finance expansion to a new location, invest in marketing campaigns, hire additional staff, and more.
Buying Equipment: When equipment necessary to the operation of your business fails, a short-term small business loan can help get operations moving again without a four-year or longer loan obligation.
Investing in renovations and other projects: There are times when ramping up a new project requires upfront costs that might exceed a business ability to cover with cash flow, but will be recouped in 60 or 90 days as their customer pay their invoices. In that case, the ability to get in and out of the financing quickly at a lower total dollar cost could make more sense than making payments on a longer-term loan for several years.
Bridging seasonal cash flow gaps: Many seasonal businesses sometimes borrow to meet short-lived cash flow demands during lulls that exist between their busy seasons. Doing so requires the business to ensure that it has sufficient cash flow during that slow period to make the larger periodic payments often associated with a short-term loan.
Anticipate How Lenders Will View Your Credit And Risk Profile
Lenders ultimately make a judgment call on whether or not to make a small business loan based on the borrowers credit and risk profile. Lenders will look at the following factors, so review them carefully and consider taking any appropriate remedial action:
- Lenders will review your credit report, credit score, and history of making timely payments under credit cards, loans, and vendor contracts. So review your credit report and clean up any blemishes.
- Outstanding loans and cash flow. Lenders will review your outstanding loans and debts to determine that your cash flow will be sufficient to pay existing loans and obligations as well as the new loan contemplated.
- Assets in the business. Lenders will review the assets in the business to see if there is a good base of assets to go after in the event of a loan default.
- Time in business. Lenders will tend to look more favorably on businesses that have been operating for several years or more.
- Investors in the company. Lenders will view the company more favorably if it has professional venture capital investors, strategic investors, or prominent angel investors.
- Financial statements. Lenders will scrutinize your financials, as set forth in the next section below.
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Determine Your Capacity To Repay
To obtain financing, youll need to be able to show that your business is either profitable or on a path to profitability, as well as show that you can afford your loan payments. Banks will determine profitability and repayment ability by calculating your debt service coverage ratio . Your DSCR is the amount of debt relative to income, calculated by dividing net operating income by the total of your debt and interest payments. Lenders prefer a DSCR of 1.25 or higher.
Use our calculator if applying for SBA 7 financing: If you feel that an SBA loan for equipment or working capital is your best option, use our calculator to estimate your monthly payment.
For Example You Can Use A Loan To Finance:
- commercial vehicles
- computer or telecommunications equipment and software
- production equipment
Interest rates are determined by your financial institution and may be variable or fixed.
- Variable: The maximum chargeable is the lender’s prime lending rate plus 3%.
- Fixed: The maximum chargeable is the lender’s single family residential mortgage rate for the term of the loan plus 3%.
A registration fee of 2% of the total amount loaned under the program must also be paid by the borrower to the lender. It can be financed as part of the loan.
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Personal And Business Tax Returns
Just like your personal and business credit scores, lenders will use your tax returns to evaluate the health of your personal and business finances, and therefore, your ability to afford and pay back a business loan.
Generally, youll need to provide at least the past two years of your personal tax returns. These documents will be especially important if you have a pass-through entity , where you report your businesss profits and losses on your personal tax return.
This being said, your business tax returns will be particularly influential if you have a corporation or an LLC thatâs taxed as a corporation. In these cases, the lender will use your last two years of business tax returns to verify your revenue, profit, and expenses.
How To Get A Credit Approval For Your Small Business Loan
Getting a credit approval for a small business loan is no longer the tedious process it once was. New fintech platforms have expedited this process to make it faster and easier for you.
At National, our streamlined digital application entirely eliminates the need for any paperwork. In order to qualify for funding, youll only need to show a minimum of:
- 6 months of business history
- $120,000 in annual revenue
- No minimum credit score requirement
We work with a wide variety of lenders that maintain options for all different types of credit scores. The application process is also fast and secure. Once you complete the online application, simply connect your bank accounts through our bank-grade security portal – and your information will be verified automatically.
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What Is An Sba Loan
Small Business Administration loan programs are drafted in agreement between lenders and SBA agencies. Borrowers use these programs when looking for lenders for their small businesses. Lenders appreciate SBA loan programs because the SBA shoulders some of the risk for the lender by guaranteeing a portion of the loan amount. Because of that guarantee, lenders are able to offer more flexible payment terms and lower interest rates than most small businesses would otherwise be able to get.
SBA loans and SBA Express loans are a useful option for many SMBs, but they do have several drawbacks that you should consider before applying. Here are some to think about before you make a decision.