Small businesses have a variety of funding routes, one of which is getting a loan from a bank. Whether entrepreneurs are looking to buy equipment, invest in real estate or acquire working capital, the loan selection process should depend on its length (years) and specific terms like interest and amount to repay.
The more entrepreneurs are aware of small business lending options, the easier it will be for them to select the one that best fits their needs and qualifications. To assist you in making the right choice, we have detailed the different types of bank loans available for small businesses, what to expect from them, and the types of documents required to obtain them.
Commercial Real Estate Loan – With this loan, business owners can buy land or property for their business. You can repay the amount in monthly installments with interest around five percent, but the commercial property you finance becomes the collateral for the loan.
Business Term Loan – The term loan is best for business owners with a high credit score who want to borrow large amounts of money. You can use it for any business purpose. Avoid considering this loan if you need capital for emergencies or occasional situations, since many term loans carry early repayment charges. Poor credit ratings may require collateral for this loan.
The repayment period for this loan is somewhere between one to five years, and the interest rates start as low as six percent. Interest rates vary based on business owner credit score, but remain fixed during the term of the loan.
Equipment Financing – With amounts typically available up to $5,000,000, you can use this loan to purchase any physical asset your business needs, including vehicles, equipment and machinery. You can also take vehicle loans to pay for or finance any cars, trucks or vans you need for your business.
You can pay back the loan with monthly repayment terms over a long period; until then, the equipment acts as collateral for the loan. You can expect the interest rate around eight to 30 percent, depending on your credit score and the type of equipment that you’re financing.
Accounts Receivable or Invoice Financing – This is a convenient way to solve cash flow issues arising from unpaid invoices. It is a short-term loan with fast approval time and easy eligibility without minimum credit scores or a trading history.
In receivable financing, you leverage your unpaid invoices as collateral to get a cash advance from a bank. The amount may vary, but you can often get up to 80 percent of your receivables, and the loan term can last up to a year. While you wait for payment from customers, you have to pay a weekly fee to the bank. Similar to invoice financing, you can also secure a loan against the purchase order.
Working Capital Loans – This business loan lends an amount of $50,000 or less to pay for daily operations and employees, and deal with temporary drops in profit. This loan can be a good option for startups, entrepreneurs or other businesses that need small funds for expansion. It is usually easier to secure than a traditional loan, but also usually has a significantly higher interest rate.
Business Acquisition Loan – Business owners who want to buy an existing business or franchise may consider this loan. It can provide an amount anywhere from $5,000 to $5,000,000.
Startup Loan – This loan type is meant for new businesses to provide funds as low as $500 and up to $750,000. The interest rate varies from 0 to 17 percent based on the loan, with a period of repayment as long as 25 years.
Personal Loan For Business – To qualify for this loan type, you must typically have a credit score above 650 and experience in the industry related to your small business. Interest for this loan varies from five to 35 percent based on your financial history and often lasts between three and five years.
Short-Term Loan – You can aim for a short-term loan to bridge cash flow gaps, address emergencies, pay off higher-interest debt or take advantage of new business opportunities. The amounts for these loans only go up to about $500,000. You’ll need to pay that amount generally within one to three years on a weekly basis. Startups and entrepreneurs with a poor credit history may also be eligible for a variety of short-term loans.
Documents Required to Apply for a Bank Loan
When a small business owner applies for funds, banks almost always check their credit score and, if applicable, their business credit score. During the loan approval process, banks also evaluate borrower candidacy based on the following documents:
- Business Model – If your business is a startup, provide your business plan, financial projections and information about how you plan to use the loan amount.
- Financial Statements – Provide the bank with your financial statements and accounting records, including profit and loss statements, balance sheets, a debt schedule, income, and cash flow statements. Businesses with too much debt may have difficulty getting new loans, while a borrower with higher cash flow and income might have better chances of getting a loan.
- Identification Documents – Provide identity proof like a passport or business license for the loan application.
- Tax Documents – Provide at least two years of business tax returns and personal tax returns to the bank.
- Credit History – Banks will review your credit score, business age and revenue. Businesses with high credit scores can typically secure business loans more smoothly.
- Collateral – For a bank loan, you typically have to provide a personal or business asset as collateral.
A Word About Business Credit Cards – Business credit cards can be a great alternative to a short-term small business loan. These are often best for businesses that need on-demand financing for emergencies and everyday business expenses and want to boost their credit scores. These typically provide an amount up to $500,000, with interest rates from eight to 24 percent depending on your credit score and history. As long as you’ve got a credit score above 680 and have a decent business history, you can typically qualify for a business credit card. Many business credit cards enable users to earn perks such as points and cashback, which can be redeemed to help your business grow. Don’t consider this option if you need long-term financing or a large amount of capital.