Small Business Loans

When to Consider a Small Business Loan

The U.S. Small Business Administration (SBA) reports that 20% of small businesses fail in the first year, 50% close after five years, and about 33% make it beyond ten years. But why do businesses fail? Some common reasons businesses fail are lack of funding, ineffective business planning, inadequate management, and marketing mistakes.

Launching a business is risky in itself. But a small business owner’s most considerable risk is running out of working capital. Knowing how much money is coming in and going out helps keep the company going.

However, as a business owner, you may still find yourself needing to borrow capital even if your business is profitable. You might need additional cash to take advantage of a growth opportunity for your business. Here are a few reasons you might want to consider a small business loan:

• You’re borrowing to buy assets to help increase your revenue: Paying upfront for big-ticket items like equipment, machinery, or vehicles can tie up your capital. So, for these types of expenses, it would make sense to take out a loan instead.
• You’re borrowing to manage your cash flow: If your business sells on credit, and you have customers taking 30 days or longer to pay, loans in the form of invoice factoring or a line of credit can help. This way, you can pay your expenses in time while waiting for your customers to settle their accounts.
• You’re borrowing to grow your business: A business loan can help you expand your business faster. For instance, you may need to hire more people to ramp up production because of increased demand.
• You’re borrowing to build a credit history for your business: Applying for a line of credit or even a business credit card and using it responsibly can help establish a credit history for your company. And doing this can help you get bigger loans with better interest rates down the road.

As an entrepreneur, you need to be prepared for unforeseen circumstances, whether good or bad. So, even if you don’t need capital now but think you’ll need it soon, it’s always best to know what loan options are available to you.

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Unsecured Business Loans

An unsecured business loan is a loan that doesn’t require the borrower to put up collateral. So, you can take out a loan without the risk of offering up personal or business property. That said, lenders will approve unsecured loans based on your creditworthiness and other factors related to your business.

An unsecured business loan is an excellent option for business owners who need to cover emergency cash flow because they tend to have quick processing times. Loans can be processed, approved, and funded in as little as one day with Clarify Capital. Also, the requirements for unsecured loans are easier to meet for new businesses with no credit history.

However, suppose you’re looking to borrow significant capital. In that case, you may not get what you need from an unsecured business loan because most lenders don’t offer large amounts of money on unsecured loans. And since these loans also have shorter repayment periods, you’ll need to make sure you’re able to afford the monthly payments.

Examples of unsecured loans include:

• Short-term business loan: Short-term loans are a type of credit with short repayment periods, up to two years. The loans are repaid through fixed, regular monthly payments that include interest and fees. Short-term loans offer an alternative funding option for small businesses that may not be eligible for traditional long-term bank loans.
• A business line of credit: A business line of credit gives companies access to funds that work the same as a credit card. In this arrangement, you’ll get a set amount as a credit limit, and you’ll only get charged interest for the amount you borrow. As you pay back what you use, the account replenishes, and you can withdraw again.
• Working capital loan: Businesses apply for working capital loans when they need additional cash to cover day-to-day operations. These loans are also called operating business capital. Operating expenses include rent, salaries, transportation expenses, and inventory.
• Merchant cash advance: In a merchant cash advance agreement, a business receives cash in exchange for a percentage of its future revenue. This type of credit is only available to companies that accept credit card payments or other receivables through a business merchant account. Every day, the advance is paid through a holdback percentage withheld by the lender from the business’s daily merchant account balance.

Apply for an Unsecured Loan

Secured Business Loans

Secured business loans are types of credit that require borrowers to provide collateral for the amount they want to borrow. These loans spread the risk between the lender and the borrower because the lender can repossess the collateral if the debt is not paid.

With secured business loans, borrowers usually get lower interest rates compared to unsecured business loans because having collateral lowers the risk for the lender. And since the security of the assets backs the loan, borrowers also have access to larger amounts of capital. However, you might experience a longer approval process when applying for a secured loan because the required collateral must be verified.

Here are some examples of secured loans:

• SBA loans: The U.S. Small Business Administration (SBA) is a federal agency that provides capital through loans and business grants to small businesses. SBA loans are loans partially backed by the agency. This means that if a business defaults on an SBA loan, the government pays the lender the guaranteed amount. The SBA guarantees up to 85% of loans amounting up to $150,000 and 75% of larger loans. The SBA runs different loan programs, but popular ones include microloans, SBA disaster assistance, and the Paycheck Protection Program (PPP).
• Equipment financing: Equipment financing is a cost-effective and low-risk way for companies to buy assets because it helps them acquire machinery without paying out of pocket upfront. The asset serves as the collateral for the loan, which lowers the risk for the lender. But it also means that the business can lose the equipment through repossession if it defaults on the loan.
• Invoice financing: Invoice financing works for businesses that sell goods or services to a large number of customers on credit. This type of credit allows companies to turn accounts receivable into cash immediately. The invoices act as collateral for the loan. Invoice financing is different from factoring because it can be structured so that the customer doesn’t know their invoice has been financed. Then, when the customer pays, the lender takes the agreed-on percentage of the invoice amount as a borrowing cost. The rest is returned to the business.
• Invoice factoring: Invoice factoring is a type of invoice financing. It’s a type of credit where a company sells its outstanding invoices to a lender. The business will receive the agreed-on amount from the factoring company immediately, and the factoring company manages the accounts receivables from there, which means customers will pay them directly, and they’ll chase the payment if necessary. There are two types of invoice factoring: recourse and non-recourse. With a recourse contract, any unpaid invoice is your responsibility. You’re obligated to buy them back or replace them with a current receivable. But in a non-recourse factor, the risk is on the lender if a customer doesn’t pay.

Apply for a Secured Loan

How to Get the Best Business Loan

There's a lot of loan options to pick from when securing financing for your business.

Not to worry -- that's what makes us different. We learn about what your needs are and guide you in choosing the best small business loan that's right for you.

Let's go over the process to get the best loan for you.

Figuring Out What You Need

The goal is to figure out why you need funding, how you will use it, and the loan amount you should be seeking.

Step 1: Why do you need a business loan?

It's always a good idea to understand how you will use the financing from a business standpoint. Each type of loan serves specific business purposes.

Here are some reasons businesses choose get a small business loan:

• Coronavirus and pandemic assistance
• Growth opportunities
• Gap in accounts receivables vs. payables
• Short-term operational costs
• Emergency repairs
• Equipment purchases
• Material purchases
• Operating expenses
• Hiring new employees, training & education
• Payroll & taxes
• Opening a new location
• Advertising & marketing
• Refinance existing debt
• Store improvements / renovations
• Overcoming unanticipated business expenses

Step 2: Identify how much you need to borrow

Once you've figured out why you need to borrow money, the next step is identifying the loan amount.

We'd all love to get $50 trillion dollars. But the best way to go about it is understanding how much you need to achieve your business goals.

Here's one way to figure that out:

Take your list of reasons from step 1 above. Jot down how much each item would cost. Try to be as realistic with the expenses as possible.

Add them up, and see your loan options.

What’s Needed to Qualify for a Small Business Loan?

Qualifications and requirements for small business loans vary according to the type of loan. Also, different lenders have different criteria. For instance, SBA loans and traditional loans from banks tend to have stricter requirements. On the other hand, online lenders can be more flexible and even offer business loans to companies with bad credit. Meanwhile, crowdfunding is typically open to all businesses.

However, if you’re applying for any type of loan, there are three main requirements that lenders want to see. These include:

Amount of Time in Business

The first thing that lenders will want to know is how long your business has been in operation. Loan providers use your time in business to assess your creditworthiness and their risk in lending to you. The longer your company has been in operation, the lower their risk is typically considered. So, to qualify for business loans, most lenders require that you be in business for at least six months.

Business Revenue<

Another main requirement you must provide when applying for a business loan is your revenue. Most lenders want to see some sort of substantial and consistent annual business income before they give you a loan. In addition, they want to know if your company has the consistent cash flow to pay them back. Your revenue also helps lenders calculate the maximum amount you can borrow.

Credit Score

Lastly, lenders want to know your credit score. SBA loans and traditional bank loans require excellent to good personal credit scores to qualify for small business loans. But online lenders can be more lenient and will take into account your company’s cash flow and growth projections, as well.

However, to qualify for most business financing options, you must have a certain credit rating. FICO scores are commonly used in lending decisions. This ranges from 300 to 850. And when it comes to credit scores, the higher, the better. This is because a credit score represents your payment history, the amount of debt you have, and the length of your credit history. A higher score means you have been responsible for your debts in the past.

One other advantage of a higher credit rating is that it can help you get better interest rates and repayment terms. On AnnualCreditReport.com, you’re entitled to a free annual credit report from each of the three credit reporting agencies. These agencies include Equifax, Experian, and TransUnion.

If you have a more established company, you may have a business credit score. There are four main commercial scoring systems — Experian, Equifax, FICO, and Dun & Bradstreet — and their ranges vary significantly. If your score is low, taking out small business loans or starting a line of credit and using them responsibly can help you improve your business credit rating.

Other Lender-Specific Qualifications

On top of the criteria discussed above, banks and lenders also tend to ask for other documents when you apply for a loan. Some additional lender-specific requirements include:

• Legal documents: Some of the legal proofs you might be asked to show are a valid ID, such as a driver’s license or passport, your federal tax ID or employee identification number (EIN), and a copy of your business license.
• Financial documents: You may also be asked to provide information on your personal finances and any personal loans you have. So, get your personal and business income tax returns ready. You may also need copies of your personal and business bank statements and to disclose any leases you have under your name or your business.
• Business financial statements: Depending on the loan you’re applying for, you might be asked to present two to three years of balance sheets and income statements for your business.
• A written business plan: Some lenders will want to know that you have the means to repay them, so they may require that you write a business plan. The plan should detail how you plan to use the money and how you expect it to increase your profits. Increase your chances of getting a loan approval by including information that demonstrates you can cover operational business expenses and the new loan payments.
• Collateral for secured loans: If you’re applying for a secured loan, make sure you understand the terms of the loan and ready the necessary documents for the collateral. This reduces the back and forth and makes the verification and loan application process easier for you and the lender. Collateral could be business assets like equipment, vehicles, machinery, real estate, inventory, or accounts receivable.

Prequalify for a Business Loan

Clarify Capital Makes Getting a Small Business Loan Simple

At Clarify Capital, we understand that getting a loan is sometimes essential for a business’s growth and survival. We also know that you’re busy and don’t have the time to search across hundreds of lenders for the right funding option for your business needs. This is why we make the process quick and easy for you.

We offer fast and transparent applications that can be done in as little as two minutes! Apply online or call us directly at (877) 838-3919. There’s no fee or obligation to do this.

Our mission at Clarify is to help you pursue your business goals by getting the funding you need to meet your current financial obligations. This is why we work with more than 75 lenders to get you the best rate. You’ll also have a dedicated advisor who will work with you throughout the process.

Your advisor will help you choose the best financing option based on your needs and specific business goals. Your advisor is also there to help you understand the terms of your small business loan.

Once you’ve submitted your loan application and it’s approved, you’ll get access to the loan proceeds in as little as 24 hours. Your advisor will continue to help you achieve success every step of the way.

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Frequently Asked Questions about Small Business Loans