Small Business Loans - The Definitive Guide - Excel Capital Management
108 Greenwich St., 5th Fl New York, NY 10006
For personal assistance, call
877-880-8086
Get Started

Small Business Loans – The Definitive Guide

EXCELCAPITAL - SMALL BUSINESS LOANS

Small Business Loans – Which is the right type for your business?

 

With so many different types of small business loans available today, it can be difficult to sift through the noise to find an option that works best for you.

 

Not to mention, find all the information you’ll need in one place regarding what a typical lender looks for in terms of qualification criteria.

 

 That’s why we’ve put together this comprehensive guide to help you be prepared when you are ready to apply:

 

1. Identify your exact funding need and how much you can afford

2. What kind of small business loans might be the best fit for you

3. How to maximize your chances of being approved

4. Which documents you’ll need to apply

5. And finally, we’ll walk you through how to review the details of your loan so you know what you’re getting yourself into

 

So, let’s get to it!

Step 1: Determining your business needs and wants

 

In this section, we’ll review:
  

– Identifying your small business loan needs   

– Calculating how much you can afford

– And reviewing your loan product options

 

Before applying for any type of small business loans, it’s important to identify your needs and wants so you don’t go jumping into something that isn’t best for you and your business.

 

How much funding do you need? How much can you afford? And of the loan products available to you, which best fits your funding needs and business model?

 

What do you need the small business loan for?

 

First, let’s talk about your funding needs.

 

This might be an obvious answer, however, it might be more difficult to discern.

 

If a critical piece of equipment just broke and you’re now looking for a small business loan to replace that piece of equipment fast so your business doesn’t miss a beat, you already know exactly what you need funds for.

 

However, if you’re having cash flow problems and you haven’t taken the time to figure out what is causing those problems, that could cause problems for you later when it comes time to decide how much funding you need and the best vehicle for receiving that funding.

 

So, take the time to review what your exact funding needs are, whether it’s:

 

  • Equipment replacement
  • Purchasing extra materials
  • A regular boost to cash flow
  • Capital for a big move
  • Starting your business
  • Or some other need altogether

 

Once you know that, you can move on to the next section…

 

What can you afford?

 

Now that you know exactly what you need the small business loan for, whether you knew already or had to take some time to pinpoint the cause, you can accurately calculate how much funding you need.

 

Going back to our equipment example, your answer is straightforward because you either know or can find out the price of that piece of equipment.

 

If you need capital for growth– new hires, training, a bigger place– take notes on how many new hires you need to make, how much that training is estimated to cost, and any additional growth expenses and jot that number down.

 

Once you have that number, you have an estimate of what amount of money you need from the small business loan. But before you go jumping the gun, you also should know how much you can afford as well.

 

We’ll run through some basic steps for calculating how much you can afford in a moment, but don’t let that stress you out.

 

Some small business loans offer a flexible source of funding that can be paid back with future business revenue, such as a merchant cash advance, which allow you to pay back your loan by using regular credit card sales.

 

This is great if you have a need for funding but no extra cash to pay for it. So, even if you don’t have extra cash on hand, you have options.

 

Having said that, most small business loans don’t work that way so you’ll need to know how much you can afford.

 

So, let’s run through a few quick steps to figure that out.

 

Calculate your DSCR (Debt-service coverage ratio)

 

The difficulty with calculating what you can afford for a small business loan in advance is you don’t have your loan offers in front of you.

 

However, you can take one effective step which will help guide your decisions later with regards to what you can afford.

 

And the great part is, this is something that lenders often ask for so it will help the process of acquiring a loan as well.

 

The easiest way to figure how much you can afford is by calculating your DSCR or debt-service coverage ratio.

 

Your DSCR is a measure of how much cash you have available to cover your debts.

 

The way lenders factor it into their criteria is as such (greatly simplified for ease of understanding):

 

Cash flow – Debt = What you have left

 

That “what you have left” is what lenders are looking for and it’s what you’ll be using, in most cases, to pay for your loan.

 

Lenders use a simple grading system to identify an applicant’s ability to pay for a loan. For example, a “1” means your business’ cash flow currently pays for 100% of your expenses. If your cash flow is more than your recurring debt, 20% more to be exact, then your number would be 1.2.

 

As a reference point, lenders typically look for a DSCR 1.25-1.35 or higher.

 

With that in mind, get a basic estimate of your own DSCR to see what kind of a recurring payment you can afford. Once you’ve done this you’ll be much better prepared when you receive your offers from lenders.

 

Finding the best small business loan product to fit your needs

 

Now that you have a better idea of what you can afford, let’s touch on a few of the most common small business loan types.

 

This is important to review because the information we’ve gathered thus far will be a good fit for certain loan products and not for others, so knowing where you stand beforehand and which loan products best fit your situation will help you sift through your offers later.

 

Here are a few of the most common small business loan products:

 

Unsecured business loans

 

The closest to a traditional bank loan, an unsecured business loan is a lump sum which is paid back gradually over time.

 

An unsecured business loan typically has a higher interest rate but it does so to balance out the risk lenders face with this type of loan due to its advantage to borrowers: no collateral.

 

Learn more about unsecured business loans.

 

Business line of credit

 

A business line of credit works like a credit card: you get a recurring pool of credit which you can tap into whenever you need it.

 

And, provided you pay back your balance, you can continue to use that line of credit for future needs. This makes a business line of credit the ideal form of funding for a seasonal business.

 

Learn more about business lines of credit.

 

SBA loans

 

Offered in conjunction with the Small Business Association (SBA) and your chosen lender, SBA loans are unique because they offer lenders a guarantee on the amount they’re lending.

 

This allows the lender to then pass off more favorable terms to you as the borrower. In addition to this, you get access to several useful SBA resources.

 

However, while an SBA loan has its benefits, one drawback is the fact that there is another party the loan paperwork must travel through. On average, even with lender aid it can take up to 30 days for an SBA loan to be approved. By comparison, most loans and loan alternatives on this list take 1-2 days for approval and funding.

 

Learn more about SBA loans.

 

Term loans

Term loans are single lumps of cash set on either a short-term or long-term repayment plan.

 

Term loans are great when you need a quick bulk of cash to pay for a one-time expense, such as a seasonal material purchase or new hires.

 

Learn more about term loans.

Small business loan alternatives

 

In addition to the above small business loan options, there are also several useful alternatives, each with their own unique benefits.

 

They are:

 

Merchant cash advance (or split funding)

 

A merchant cash advance, or split funding, is a purchase of receivable (by a lender) that’s defined by its repayment terms.

 

With a MCA, you pay back the loan with a portion of your daily credit card sales. That means if you don’t accept credit cards, you’re not eligible for a MCA.

 

But the great part about an MCA is that regular payment is a percentage, meaning when business is down your payment goes down with it, making it one of the most flexible types of small business loans.

 

Learn more about split funding.

 

Invoice factoring

 

If you’re in manufacturing or are a restaurateur who need to source ingredients for their restaurant, invoice factoring is a useful option to consider.

 

Invoice factoring is a loan alternative that allows you to obtain working capital based on vendor invoices. It’s a great way to take care of inventory expenses, especially in anticipation of a busy season, while being able to pay the advance back over time.

 

In addition to this, the invoice itself is used as collateral, so nothing else is required to put down against the capital borrowed.

 

Learn more about invoice factoring.

 

Step 2: How to increase your chances of approval for small business loans

 

In this section, we’ll review the various criteria which lenders look for when reviewing your application, including:
  

– Credit and the role it plays in small business loans   

– Business performance criteria

– Time in business

 

Now that you’ve assessed your needs and wants, it’s time to learn what lenders look for in an applicant so you can increase your own chances of being approved for a small business loan.

 

If all you know is how traditional bank lending works, you’ll be pleasantly surprised to hear that many modern lenders have a fairer and more comprehensive qualification process.

 

What does that mean? Well, for one, credit isn’t a make-or-break criteria that dashes your hopes of business success. Instead, a collection of criteria factors are taken into consideration when qualifying you for a loan.

 

First, let’s talk about the role credit plays in the approval process.

 

Credit: The role of credit in small business loans

 

First, the bad news: Traditional lenders still hold credit as their primary criteria for approval.

 

If you have great credit, you’re good to go. But if you don’t have a 660+ credit score (preferably 720+ for favorable options), you’ll have little chance of approval. That’s why you must know what the 4 C’s of Credit are.

 

However, the good news is that many new alternative lenders– such as Excel Capital– use a more comprehensive approval method that factors in your entire business’ health in addition to credit.

 

In fact, you can be approved for some small business loan products with bad credit (and many others with fair credit or better).

 

Did you know?

Lenders use personal credit to qualify you for funding, not business credit. You can go to annualcreditreport.com to get a free copy of your credit report annually.

 

With that in mind, there are still some things you’re going to want to watch out for that may hurt your chance of approval with lenders:

  • Foreclosures
  • Tax liens 
  • Judgements
  • Negative Cash Flow
  • And bankruptcy

These factors won’t reject your application, however, they will hurt your chance of approval.

 

To get a better idea of where you stand, get a copy of your credit report and review it for the items below:

 

  • Closed accounts that still show on your report
  • Erroneous accounts or details on accounts
  • Accounts or judgments which you weren’t aware of

 

By reviewing your full report, you’ll likely find several items you can either have fixed, removed, paid off so that when you apply, your credit is in tip-top shape.

 

A Key factor in small business loans: Business performance criteria

 

As mentioned earlier, newer alternative lenders take several factors into consideration when qualifying you for a small business loan.

 

In addition to credit, those factors include your:

 

  • Debt-to-income ratio
  • Profitability
  • Revenue
  • Sales
  • Cash-on-hand
  • Repayment and debt history

 

Each of these factors is considered differently depending on the lender. However, each is taken into consideration as a “complete picture” to gain a more accurate understanding of your business’ health.

 

Before applying, it’s important to run your own reports to see how your business looks. You might not be able to wait several months to fix any problems before applying for a loan but you will have a better idea of where you stand.

 

Time in business

 

Time in business is a final factor which is simple but vital.

 

Most lenders that give out small business loans require a business to be active for two or more years (but some as little as 6 months). If you can’t show that, you won’t even get past the application.

 

Why is this an important factor for lenders? They want to see that you have a proven source of revenue and they’re not investing in a business which may or may not be around in a year.

 

If you’ve been around for a minimum of two years, you’ve gotten past the “hump” so to speak and are a considered a business which has proven itself.

 

Step 3: How to apply

 

In this section, we’ll review how to organize yourself to get ready to apply for a small business loan, including:
  

– What documents you need to apply   

– And reviewing the details of your loan offers

 

Now that you know what the typical lender looks for, it’s time to apply for your small business loan.

 

Below, we’ll talk about what you need to apply and how you can streamline the approval process to get the funds you need in as little as 24-48 hours in most cases.

 

What documents will I need to apply?

 

Every small business loan program is a bit different. However, most of the documents necessary to apply and be approved are the same no matter what type of loan it is.

 

Keep in mind that there are two categories of documents when it comes to small business applications:

 

  1. What you need to apply
  2. What you need for approval

 

Most lenders only require a few pieces of critical paperwork to receive an approval. However, they may require additional documents to help qualify your approval amount and finalize the process.

 

Here are the documents most often required to apply for a small business loan:

 

  • Completed application
  • Last 4 months of business bank statements
  • Last 4 months of processing statements (if applicable to your business
  • Copy of photo identification
  • Voided business check

 

In addition to the above, these documents may be requested to help qualify your business and finalize your approval:

 

  • Proof of ownership
  • Business licenses
  • Profit & loss statement
  • Balance sheet
  • Debt schedule
  • Property lease agreement and landlord contact information
  • Personal and/or business tax returns

 

It’s important to gather these documents in advance so you’re prepared if and when your lender requests them. By having these documents on-hand you can streamline the approval process and get the funds you need as quickly as possible.

 

Reviewing the details of your small business loans

 

By now, you’re ready to apply for your first (or next) small business loan.

 

However, once you apply and start receiving offers, you’ll want to know what to look for when you’re reviewing those offers so you know what you’re getting yourself into.

 

Here are a few things you’ll want to look for when reviewing your small business loan offers:

 

  • Types of small business loans: Note the types of small business loan, or loans, you were approved for and compare it with what we talked about earlier about the different loan types.
  • Small business loan fees: Processing small business loans has a cost to each lender and lenders must make sure they’re recouping their cost. The most common fees typically have to do with some aspect of this. Those include:
    • Application fee: This covers the credit check and underwriting charges that lenders incur when processing an application.
    • Origination fee: Similar to an administrative fee, this is what a lender charges to process a loan.
    • Prepayment and late payment fees: Common to any type of credit, prepayment fees may exist on your loan, so be sure before making any early payments. In addition, late fees are to be expected but worth mentioning.
  • APR: APR, or annual percentage rate, is the combination of both your loan’s interest rates as well as all fees attached to that loan. This makes APR the single most important piece of information you should be looking for on your offers. Use an APR calculator such as calculatestuff.com/financial/apr-calculator to be sure of what you’re paying.

The future of your business is in your hands

 

It’s easier than ever to obtain the funding your business needs to not only keep its doors open during tough times but expand when you’re busting at the seams.

 

Take the time to review what we covered so you can put yourself in the best position possible before applying:

 

  • How much funding do I need and what do I need it for?
  • How much can I afford?
  • Which loan product is an ideal fit for my business’ financing needs?
  • Is my credit and other business performance criteria where it needs to be or can I make improvements that will increase my chance of approval (or increase my approval amount)?
  • Do I have all the documents I need on-hand in case my lender requests additional documentation?
  • And do I understand my small business loan well enough to be comfortable with moving forward?

 

No matter what you need funding for, you can obtain some type of small business loans or funding vehicle that gets your business the capital it needs in as little as 1-2 days.

 

And by making sure that you do your homework beforehand, you can ensure you’re making a smart decision for you and your business.

 

See what your business qualifies for

Some required fields are empty
Please enter a valid email address