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Types of Small Business Loans

Updated: October 26, 2020

Starting a small business can be empowering and exhilarating. Keeping a small business alive? Those adjectives still fit, but so do stressful, frightening and exhausting.

And while those who manage to make it work are lauded for traits like ingenuity, persistence, creativity and sound leadership, access to capital (usually in the form of a small business loan) is usually just as important (if not moreso).

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Small Business Loan Key Facts

  • 20% of small businesses fail by their second year, with roughly 50% failing by year six1.
  • Financial hurdles are the most common reason small businesses fail2.
  • The percentage of U.S. workers employed by small businesses has been shrinking for decades. In Q1 of 2019, businesses with more than 250 employees employed 54.8% of U.S. workers, compared to 49.3% in 19933
  • Average Small Business Loan Amount: $633,0004
  • Average interest rate on a small business loan: 4-6%5
  • In 2019, the SBA awarded $28.2 billion in loans and more than 63,500 loans to small businesses6

How To Get A Small Business Loan (by Type)

1. Business Line of Credit 

A business line of credit is essentially a fund that you can repeatedly borrow from — as long as you pay it off and don’t go over the limit (usually between $1,000 and $250,000). The requirements on a business line of credit vary, but most lenders require businesses to show:

  • 6 months in business
  • $25,000 in annual revenue
  • personal and business tax returns
  • Bank account information
  • Business financial statements (profit-and-loss, balance sheet)
  • A business plan
  • Credit score above 500 (although some lenders do not have a minimum score)7

2. Short Term Loan 

Like the name implies, a short term loan gives businesses access to cash that they pay off in a short time frame (3 months to 3 years). Typical asks from lenders include:

  • A business tax ID number
  • Personal and Business credit scores
  • A business bank account
  • 3 months of bank statements
  • Annual revenues 
  • The amount of time the business has been in operation8

3. Business Term Loan 

The term loan9 is a lump sum of money given to a business all at once, that the business repays over time with interest. When considering businesses for term loans, lenders usually require businesses to provide: 

  • Personal/Business income tax returns
  • A balance sheet or income statement
  • Personal/Business bank statements
  • A photo of your driver’s license
  • Relevant commercial leases and/or business licenses
  • Articles of incorporation (if applicable)
  • A resume/proof of business experience
  • Financial projections (if the company hasn’t been around very long)
  • A business plan
  • Collateral 

4. Equipment Financing

For businesses with poor credit or who just need some extra capital to replace or purchase new equipment, there’s equipment financing10. Lendio, a lender that does these kinds of loans, requires their applicants to prove:

  • $50,000 a year in revenue
  • At least 12 months in business
  • A credit score of 650 or higher

Because these loans are used to purchase equipment (which can double as collateral) they often have fewer requirements than other types of small business loans. These requirements are fluid and vary by lender. 

5. Accounts Receivable Loans

Accounts receivable loans allow businesses to borrow against their unpaid invoices to get emergency cash flow11. The lender then takes the money from the vendors directly to pay off the loan. Because the money is coming from the vendors and not the business, a business doesn’t need to have sterling credit ratings to get approved for an accounts receivable loan – just vendors with good payment history, and to meet the following requirements:

  • Be a B2B or B2G business that invoices customers
  • Be in business at least 6 months
  • Creditworthy customers
  • Outstanding receivables
  • Submit outstanding invoices
  • Provide a driver’s license
  • Bank statements
  • A voided business check

6. SBA Loan

As mentioned earlier, the U.S. Small Business Administration hands out tens of billions of dollars to tens of thousands of small businesses each year. But don’t let that fool you into thinking that they’ll accept just anybody! The requirements for an SBA loan12 are actually rather strict. To get one, a business must: 

  • Be a for-profit business
  • Do business in the United States
  • Be physically located in the United States
  • The owner of the business has invested equity in the business
  • Go through all other potential funding options BEFORE requesting an SBA loan
  • Have a sound business purpose
  • Prove that they can repay the loan

Of course, all these loan types are for businesses attempting to get capital from institutions or big lenders. Small businesses can also go outside these established routes and attempt to secure loans from venture capitalists, private lenders, family members or friends. For that, all that, a simple loan agreement is a great way to make sure both sides are (literally) on the same page.

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Sources

  1. https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm
  2. https://www.investopedia.com/articles/personal-finance/120815/4-most-common-reasons-small-business-fails.asp
  3. https://www.bls.gov/web/cewbd/table_f.txt
  4. https://www.fundera.com/business-loans/guides/average-small-business-loan-amount
  5. https://www.valuepenguin.com/average-small-business-loan-interest-rates#:~:text=Average%20Small%2DBusiness%20Loan%20Interest,than%20alternative%20or%20online%20lenders.
  6. https://www.sba.gov/sites/default/files/2019-12/SBA_FY_2019_AFR-508.pdf
  7. https://www.nerdwallet.com/best/small-business/small-business-loans/business-line-of-credit#:~:text=At%20a%20minimum%2C%20you’ll,500%20or%20higher%20to%20qualify.
  8. https://www.nav.com/blog/short-term-business-loans-130083/
  9. https://www.nerdwallet.com/article/small-business/how-to-qualify-for-small-business-loans#:~:text=To%20qualify%20for%20a%20small%2Dbusiness%20loan%2C%20you%20may%20have,collateral%20to%20back%20the%20loan.&text=SBA%20loans%20require%20%E2%80%9Cadequate%E2%80%9D%20collateral,personal%20assets%20on%20the%20hook.
  10. https://www.lendio.com/business-loans/equipment-financing/#:~:text=To%20get%20equipment%20financing%2C%20you,months%2C%20you%20can%20still%20qualify.
  11. https://www.fundera.com/business-loans/guides/accounts-receivable-financing#:~:text=To%20be%20eligible%20to%20receive,more%20in%20annual%20business%20revenue
  12. https://www.sba.gov/funding-programs/loans

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