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 only 33% make it beyond 10 years. But why do businesses fail? Common factors contributing to business failures 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. No matter how well you manage your business expenses or your bottom line, you may still need to borrow capital. Here are a few reasons you might want to consider a small business loan:

• You’re borrowing to buy assets that will 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, business owners sometimes choose to take out a loan instead.
• You’re borrowing to manage your cash flow. If your business sells on credit and customers take 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 on 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. You can hire more people to ramp up production due to increased demand or expand services offered to serve a growing market.
• 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 an excellent credit history for your company. Doing this can help you get bigger loans with better interest rates.

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. 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, as 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, an unsecured business loan likely won’t work if you’re looking to borrow significant capital. Most lenders don’t offer large amounts of money on unsecured loans. Also, since these loans have shorter repayment periods, you’ll need to make sure you can 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 of up to two years. These lump sum loans or business term 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 of funds as a credit limit but only pay interest for the amount you borrow. The account replenishes as you pay back what you use, and you can withdraw funds 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. The advance is paid daily through a holdback percentage withheld by the lender from the business’s daily merchant account balance.

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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 than unsecured business loans because collateral lowers the lender’s risk. 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 lender must verify the required collateral.

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. 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. The asset serves as the collateral for the loan, lowering the lender’s risk. But it also means 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 differs from factoring because it can be structured to keep the invoice financing from being disclosed to the customer. When the customer pays, the lender takes the agreed-on percentage of the invoice amount to cover borrowing costs and returns the rest to the business.
• Invoice factoring. Invoice factoring is a type of invoice financing where a company sells its outstanding invoices to a lender. The business receives the agreed-on loan amount from the factoring company immediately, and the factoring company manages the accounts receivables. Customers pay the factoring company directly, and the factoring company chases payments if necessary. There are two types of invoice factoring: recourse and non-recourse. With a recourse contract, any unpaid invoices are your responsibility. You’re obligated to buy them back or replace them with a current receivable. With a non-recourse factor loan, the risk is on the lender if a customer doesn’t pay.

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How To Get the Best Business Loan

There are many loan options to pick from when securing financing for your business. It can be overwhelming, but that’s where Clarify Capital comes in. We learn about your needs and guide you in choosing the right small business loan.

Figuring Out What You Need

We aim to figure out why you need funding, how you will use it, and what loan amount you should seek.

Step 1: Why Do You Need a Business Loan?

The first step in securing a loan is identifying how you will use the financing from a business standpoint. Each type of loan serves specific business purposes.

Here are some reasons businesses acquire a small business loan:

• Coronavirus and pandemic assistance
• Growth opportunities
• Gap in accounts receivable vs. payable
• Short-term operational costs
• Emergency repairs
• Equipment purchases
• Material purchases
• Operating expenses
• Hiring new employees, training, and education
• Payroll and taxes
• Opening a new location
• Advertising and marketing
• Refinance existing debt
• Store improvements or 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. Every business would love an extra $50 million, but it’s best not to borrow significantly more than you need to achieve your business goals.

Here’s a simple way to estimate how much you’ll need:

1. Take your list of reasons from step one above and jot down how much money each item would require.
2. Try to be as realistic with the estimations as possible.
3. Add them up, and see your loan options.

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

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 the risk of lending to you. The longer your company has operated, the lower its risk is typically considered. Most lenders require that you be in business for at least six months to qualify for business loans.

Business Revenue

Another main requirement when applying for a business loan is a record of your business 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 annual 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 also consider your company’s cash flow and growth projections.

However, to qualify for most business financing options, you must have a certain credit rating. FICO scores are commonly used in lending decisions ranging from 300 to 850. When it comes to credit scores, the higher, the better. Credit scores are calculated by considering 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.

Another 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: Equifax, Experian, and TransUnion.

You may have a business credit score if you have a more established company. 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 above criteria, banks and lenders tend to ask for other documents when you apply for a loan. Some additional lender-specific requirements include:

• Legal documents. Some 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. It’s best to have 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 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 demonstrating 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 have the necessary documents for the collateral. This makes the verification and loan application process easier for you and the lender. Collateral could be business assets like equipment, vehicles, machinery, commercial real estate, inventory, or accounts receivable.

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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 you’re busy and don’t have the time to search across hundreds of lenders to find the right funding option for your business needs. That’s 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.

Our mission at Clarify is to help you pursue your business goals by getting the funding you need to meet your current financial obligations. We work with more than 75 lenders to get you the best rate and partner you with an experienced adviser to help you choose the best financing option based on your needs and specific business goals.

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

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