Published December 29th, 2015
When considering a small business loan, you’ve probably hit the entrepreneurial fork in the road – you may be siting on a stellar idea that you’ve vetted through research, and you could even have a thorough business plan to boot. You’ve probably spent some time figuring out how you’ll market this idea and how the projected growth will impact your future. But there’s one issue that just can’t be overlooked – funding.
If you’ve heard from the grapevine that it is a bit difficult to get a small business loan nowadays, you would be correct. The Federal Deposit Insurance Corp reports that its data shows that lending to small businesses hasn’t bounced back from pre-recession levels yet. In fact, loans to small businesses have dropped 22% since 2007.
Since funding is often the core need to begin any business venture, learning more about how to secure financing and what is involved will be helpful as you find the options that are best for your needs.
Take a look at our overview below to learn more about the basics in small business loans.
What are some of the requirements for a small business loan?
You’ll find a bit of a variance in what lending institutions or banks require, but typically you’ll see a common theme including the following:
What information will I be required to show?
- Your business size and the nature of your business will be considered. Generally, businesses that are in the passive investment, gambling, or pyramid sales realms won’t usually be considered. Read on down below for an alternative to a small business loan – the merchant cash advance.
- You can show you have a good business model, good credit history, and have experience in the business model you’re presenting.
- You have the means to pay the loan back. Depending on the type of lending situation you go with, there will be different requirements as far as the loan being secured or unsecured.
For a small business loan, you can expect to show some or all of the following – depending on the lending situation:
How can I prepare to make the process as smooth as possible?
- Business and personal credit history
- Projections of cash flow for the next 12 months
- Detailed business plan
- Financial statements
- Guaranties from principle owners
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How large are most small business loans?
- Ensure that all of your statements and records are truthful and accurate as you are preparing the documents you need.
- Do your homework and compare lending institutions. You can expect that larger banks may be more difficult to secure funds with – this has to do with the ripple effect of the economic crisis several years back. While larger banks can and do make loans to small businesses, there are more hoops to jump through.
- Inquire about all of the documentation that will be required by the lending officer.
- Some of the biggest issues in processing small business loan applications are missing or incomplete information and applications. Make sure you have everything lined up that you will need to make the process run and smoothly as possible.
Just as small businesses come in all sizes, so do the amounts that are needed. While the typical amount can vary, the median small business loan ranges in the banking industry around the $135,000 range and tops off at a cool $250,000. However, you’ll see that number varying depending on the type of lending situation, business model, and other factors as well.
I’m a startup – how do I get funding for my idea?
Because of the lack of business history, a startup faces the biggest uphill battle in securing a small business loan. Because of this, many startups will rack up credit card debt, borrow from families, and attempt crowdfunding to fill in the gaps. However, many startups can still get approved for small business loans.
If you have good credit and a stable business model, focusing on smaller institutions rather than large banks might be your winning combination. You also have the option of a merchant cash advance as an alternative to a traditional small business loan.
The Merchant Cash Advance – An Alternative to Small Business Loans
If you’re a startup or you have less than stellar credit, you may have been met with rejection to secure a small business loan – but that doesn’t have to be the end of it.
It is very common for startups – and even established small businesses for that matter – to find the loan process tougher than expected. And if you need money sooner rather than later, a small business loan may not be the answer for you. A merchant cash advance
is the answer for many businesses who can’t get approval with a traditional loan, but it does have its own set of pros and cons.
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The merchant cash advance is structured differently and one of the benefits you’ll get is a faster turnaround time. For businesses who are in a time crunch – it is good to know that the process does not require the longer processing time and piles of forms like a traditional small business loan. In fact, you could see money within the week.
A key difference between a merchant cash advance and a small business loan is the repayment method.
With a small business loan, you will have a fixed monthly minimum payment, but with a merchant cash advance (MCA), the repayment amount each month will fluctuate because it is figured as a percentage of each sale – not a fixed monthly payment amount.
As you’re paying off the MCA, you only pay a part of each separate credit card transaction. So that means that if your sales dip for the month, you won’t have to worry about pulling together funds you don’t have.
So how long will I have to pay back the funds?
Terms can vary as far as how long you’re given to repay, but you can expect an average of about 8 months. However, terms could be half that or as long as 18 months. You’ll want to call around various companies to find the terms you can feel comfortable with financially.
Because of the ebb and flow of the repayment process, you won’t have to worry about hefty payments, but you also don’t benefit from paying funds off early. In fact, you’ll end up paying the entirety of the fees even if you opt to pay the funds earlier than originally agreed. It’s just one of the quirks of a merchant cash advance.
Another thing to consider about a merchant cash advance vs. a small business loan is the higher percentage rate. Because merchant cash advances don’t require collateral, there is simply more risk in lending and higher APRs are the result.
Regardless of the higher APRs, a merchant cash advance
still offers a more comfortable way for many businesses to borrow money when they need it.
Of course, you’ll also want to make sure you check out reviews and make sure that it is a reputable company. There are many predatory businesses that take advantage of startups or small businesses with less than great credit.
One of the things that the team at Top Credit Card Processors does is to evaluate these companies that offer both small business loans and merchant cash advances.
Finding the Best Company to Provide a Small Business Loan
Here are 5 ways we evaluate to determine what companies are the best each month. Here’s what we look at, and what you should look at when you’re choosing a company, too.
- Rates – We take the time to investigate the fees and rate structures associated with the loans being provided by the vendors we recommend. If you’re a merchant, it is important to take into account how the rates are being calculated and what the overall cost will be over the life of the loan.
- Calculation Methods – There are different methods used to calculate the interest rates as well as what amount the rates are applied to. We want to help small businesses find competitive rates that provide the best overall value of the whole life of the loan.
- Customer Support Ratings – Having flexibility and open communication during the life of the loan is important to small businesses – so that’s a huge factor that goes into the rating process. You want a dedicated team that will support you in the beginning process, through negotiating the terms of the contract, and beyond.
- Efficient Service – When we rate the efficiency of businesses, we look at the application process and how the funds are received. We look at things like clarity in the process, and how long the process takes. When small businesses need funds to take the next step, the process needs to be straight forward.
- Security – Your important financial and personal information needs to be kept secure through the application process, the loan delivery, and beyond. We look for businesses with a proven record of security.
Now that you’ve looked though some of the ways we evaluate, the next step is for you to evaluate some of the top performing businesses yourself. Take a look at the top 30 companies that deliver small business solutions
to companies like you. Many of our top-ranking companies provide options including small business loans, merchant cash advances, credit card processing, and other merchant services, so you are likely to find a solution that fits your needs.