The ultimate cheat sheet for your business loan search

Are you looking to expand your business or fill cash flow? Then you’ve probably read about small business loans and you probably realize that loan approval process can be more daunting than you think.

Worse still, a lack of knowledge can mean you’ll be rejected outright or sucked into a contract that’s not in your best interest. As small business loan approvals by banks appear to be on the rise, according to a 2016 study by Biz2Creditonly about 23% of small business banks loan applications were accepted in March.

That’s why it pays to be prepared. Business loans can be complicated, but they don’t have to be. Here’s everything you need to know about the small business loan application process.

What type of loan is best for you?

Before we even get into the loan application, let’s figure out which type of loan is right for you:

A business line of credit is flexible “revolving” capital that works almost like a credit card, except you have access to cash and, in some cases, lower APRs. What is practical with a business line of credit is that you can get approved in as little as a day. On top of that, there are no strict credit requirements, and it’s a great way to build your credit score (as long as you pay off your balance on time!). Even better, with a business line of credit, you only have to pay off the balance and interest on the funds you withdraw.

Business lines of credit have some drawbacks. You may need to provide updated documents each time you draw, and the lender may also ask for collateral. Also, if your credit rating is low, you may face higher interest rates. This can make using a commercial line of credit riskier and/or more expensive.

A commercial term loan is a lump sum that is repaid over a specific period of time with a predefined or variable interest rate. One of the most competitive loan products, you’ll need to be in business for at least two years, with a 620+ credit score and an annual income of at least $100,000.

Term loans have traditionally been a banking product, but many online lenders offer longer term loans at an affordable rate. Since term loans typically have lower monthly payments and longer payment terms than short-term loans, you have the flexibility and leeway to grow your business sustainably.

Short term loan work much like a traditional term loan, but must be repaid over a shorter period of time and usually with daily or weekly payments. As a result, loan amounts tend to be smaller and interest rates are higher.

The advantage is that you can get approved quickly (sometimes within a day) and can set up your own payment structure. For those with bad credit, a short-term loan is a financing option to consider, as even those with low scores can be approved.

The downside of short-term loans is that they can be very expensive. Due to the higher cost, payments can be difficult to meet if cash flow is slow for a week, month or quarter. So you definitely want to analyze your actual ability to repay the loan first.

SBA 7(a) loans are long-term, low-interest loans for small businesses partially guaranteed by the government, which means that the government will cover part of the loan if the borrower defaults. SBA loans are coveted by small business owners who might not qualify for traditional bank loans due to the low cost and excellent repayment terms.

Although SBA loans typically have the lowest down payments, longest payment terms, and reasonable interest rates, the process takes lengthy paperwork, resulting in longer approval times. SBA loans may also require collateral.

Cash Advances to Merchants provide you with a lump sum capital that you repay with a portion of your daily credit card sales.

The benefits of merchant cash advances are that the approval process is simple, you get quick access to funding, and bad credit is often okay. Getting money quickly and easily can be the springboard your business needs to start thriving.

Be warned, though: while a cash advance from a merchant can give you access to quick cash, daily payments can strain your cash flow and are absolutely the most expensive loan product on the market. You may want to consider another short-term loan before asking the merchant for a cash advance.

Invoice financing allows you to get paid immediately for your unpaid invoices, for a fee. The approval process is short and simple – you just need invoices (of course), at least 3 months of activity and at least $50,000 in annual income. Approval can take as little as a day, and credit score isn’t always a factor (but, in most cases, it is).

For businesses that already have a strong cash flow, invoice financing can be a smart choice.

It allows you to finance 50-90%+ of the invoice amount and then pay it back when the customer pays you (just watch out for fees).

There are, however, a few drawbacks. Fees are higher than traditional financing. Additionally, the longer the customer takes to pay, the more money you owe, which can make using invoice financing risky and expensive.

When you need to buy new professional equipment immediately, you can use the equipment itself as collateral. You can borrow up to 100% of the value of the equipment, and the term of the loan roughly matches the expected life of the equipment.

The main advantages of equipment financing include quick approval and very limited paperwork. In addition, the equipment serves as collateral. The only real risk is that the equipment becomes obsolete before you repay the loan.

Which lender should you look for?

Once you’ve decided which type of loan is right for you, you’ll want to review and compare different lenders. Banks are not the only solution. There is also the SBA and a number of alternative lenders that can meet your needs.

Broadly speaking, there are five types of lenders:

  1. Alternative online financing companies: Peer-to-peer lending platforms, short-term lenders, MCAs, crowdfunding sites, purchase order funders, etc. Many of these finance companies offer fast loan approval times, but interest rates are higher than traditional lenders.

  2. Big banks: The big banks are “the lender you know”. Although the interest rates and payment terms of a bank loan are generally more favorable, you may not be approved.

  3. Community banks and credit unions: These financial institutions are often very willing to work with small businesses and tend to have higher approval rates than larger banks.

  4. Non-profit microlenders: These lenders generally offer very advantageous conditions and interest rates for small loan amounts.

  5. Small Business Administration: See above. SBA loans are easier to obtain than traditional bank loans, but still have strict eligibility requirements and lengthy applications.

You can never be too prepared

Many people apply for business loans when they are desperate, giving them no time to prepare or research. But quick loans are expensive, and you may miss out on the best loan for your business if you don’t give yourself enough time to research and prepare.

Now that you have this small business loan cheat sheet, be sure to do your homework. Compare different loans from the same lender and between different lenders. Go out of your way to see what’s available for your exact financial situation and credit score.

Do yourself justice and find a business loan that’s right for you (not the other way around). After all, you get a loan to sustainably grow your business, not to worry even more about the future.

The opinions expressed here by columnists are their own, not those of

Aurora J. William