Business Loans USA

What is a Business Loan?

A business loan is when you borrow a fixed amount for business needs (as opposed to for personal needs) from a lender. Your business application with a lender will be reviewed and an offer is made. Once you agree to a specific term, the loan is funded and you begin paying it back based on your agreement. Most of the common reasons for business loans include upgrading or buying new equipment, launching a new location, buying inventory, or fulfilling purchase orders. A business loan can give you an instant infusion of capital to help you grow your business. It’s important to fully understand the cost of borrowing, and any additional fees that might be associated with your loan. Regulations and rules around borrowing vary from state to state.

How Does a Business Loan Work in the US?

Business loans work similar to personal loans. The amount that you borrowed will be repaid to the lender with interest and fees over time. There are a number of options to choose from when you need a business loan. You can apply with a bank, credit unions, alternative lenders, online lenders, or crowdfunding platforms.

There are a number of key things to consider when applying for a business loan. They include loan amount, interest rates, term, repayment structure and fees. Make sure you review and understand the loan agreement in detail prior to signing off.

What Are the Different Types of Business Loans?

In the US, companies are all different and therefore the loan products that they seek for their business will largely depend on their needs. The loan products may even vary from state to state. Below are some of the most popular types of business loans.

Business Line of Credit or Credit Card

Business line of credit allows a business to access money that can be used to cover business expenses. Unlike a term loan, there is no lump-sum amount being borrowed. The funder does not require a monthly repayment. Business line of credit is revolving, like a credit card. Interest will accumulate as funds are being used and once an amount is paid back it is available again to be borrowed. The funders will determine the amount to be borrowed and review the loan on a term or annual basis.

Term Business Loans

A term loan is a fixed amount of money funded to a business and paid back over an agreed upon amount of time. The terms can be anywhere from 6 months to 5 years. Term loans are best for healthy businesses that have good credit with steady sales volumes and are looking to grow even more. Term loans are often used for additional or new inventory, equipment, renos, or expansions. Term loans can be obtained from most types of business lenders, including banks, credit unions, online funders and private investors.

Merchant Cash Advance

A merchant cash advance allows a funder to offer an advance of capital by purchasing a portion of the daily credit card or debit card sales of a company. The company pays back the advance with a percentage of their daily credit card sales. This loan type is a popular option for businesses that have high transaction volumes, like restaurants, retail stores, spas. Paying back a merchant cash advance is driven by the income your business is making. When times are slow, you’ll payback less of your advance, when sales pick up the payback amount will increase. The MCA is considered to be one of the more expensive business loan types on the market. Make sure your cashflow can handle the repayment.

Working Capital Loans

Working capital loans are good for financing the day-to-day operations of a business. These loans are typically used for short-term operational expenses such as payroll and rent. These loans are ta popular option for companies that experience periods of high seasonality and cyclical sales. The working capital is used to bridge the gap through periods of slower sales, and are paid off once the busy season hits and more revenue starts to come in.

Invoice Factoring

Invoice Factoring helps businesses get immediate cash flow by selling a portion of their future invoices. This type of financing solution works for businesses that need to invest money in the short term but don’t get paid for several months. This type of loan is popular with staffing companies, that only get paid once someone is hired and stays employed for at least a month. In this case the staffing company knows that payment is coming, however they get the cash for it now.

Asset Based Loans

Businesses that have assets, like equipment, machinery or real-estate can use their assets as collateral on a loan. These loan types are larger in loan amounts and can be in the millions of dollars. The amount will depend on the asset that you will be securing the loan against. These type of loans offer lower interest rates than the loans mentioned above.

Startup Funding

New businesses have a difficult time qualifying for traditional loans as there are no guarantees of success or established credit scores for the company in question. They likely have very little or no sales.  Startup business loans are specifically for startup businesses and are granted on the basis of the credit of the entrepreneur starting the company, their business plan and other factors. These types of loans are not a good option for established businesses because they offer small amounts.

Startups have a number of funding options like, venture capital firms, angel investors, government grants, or crowdfunding platforms. VC’s will typically offer capital in return for shares or part ownership of the Startup. They can also add guidance and experience to the startup which can be very valuable. It is important to evaluate the share of the business that you are willing to give up in order to get this funding.

What Are Good Reasons to Get a Business Loan in the US?

Business funding should be used to expand and scale your business. Even if your cashflow is good, a business loan can be used as an impactful investment that will generate new or additional revenue for your business. Taking out a business loan to capitalize on sales or efficiency opportunities can really help your business. The amount that you borrow will be paid back over time, so you need to make sure that the investment your making with the loan will be worth it. If you can become more profitable in the process, this is a good reason to consider a business loan.

The most popular reasons for taking out a business loan include: expansion, buying inventory, purchasing or upgrading equipment, marketing and sales campaigns, increasing cashflow, opening up new locations, hiring new people.

How to Qualify for a Business Loan in the US?

Qualification criteria will vary from state to state and funder to funder. There are a number of factors that are pretty standard across the board. Before applying you should try and find out what the qualification criteria is for a specific funder. Typically, a business loan is provided to businesses that have existed for at least 1 year, and generate at least $5,000 – 10,000 in monthly revenue. Things that funders will look at include your business financials, your past and current sales performance, number of daily/monthly credit card transactions, business credit score, capital business assets, other available collateral, and potentially your business plan.

What Are Pros and Cons of Business Financing?

Business needs are different for everyone. Deciding whether a business loan is a good idea for your businesses is a personal decision that only you can make for yourself. We want to help just a bit by sharing some of the common benefits and issues with business financing.

Key Benefits

By taking out a business loan, it can help build your company’s financial credit. By making payments on your financing, you may qualify for future business loans with more favourable terms, higher credit limits and added credit from your suppliers. It will be a lot easier to get financing in the future when your business has a record of repaying debt.

Getting approved for a business loan will provide immediate capital. You can use that financing to get a boost for your business and grow your revenue. Upgrading equipment, expansion, getting additional inventory are just some of the things you can use the financing for in order to grow.

Things to Watch Out for

Business loans typically take longer to approve than personal loans. Depending on the size of your business loan, you could end waiting a few days or a few weeks for your business loan application to be approved. Make sure to ask the funder how long it will take to get approved and funded.

Applying with multiple funders may impact your business or personal credit score.

It can be fairly difficult for startups with little revenue or financial history to get approved for a business loan.

Business Financing USA FAQs

1. What type of credit score is needed for a business loan?

While you can probably get a business loan in the US with most FICO scores, in general you’ll need a score of at least 500 to qualify for a business loan from an online funder. The better your FICO score the more options for lower rates and funding solutions you’ll have.  For example, someone with a FICO score of 600 would be eligible for approval with more funders, and receive better offers. The time in business is an important factor for funders as well.  If you are able to show 3 years of financial statements you’ll have a good chance to get approved for a business loan. Ultimately, the minimum credit score that you need will be determined by the type of funder you apply with. Banks will require higher scores, while online or alternative funders might be more open to lower credit scores.

2. How long are business loans in the US?

Business loans in the US can be as short as 6 months – 10 years. The borrow amount will often be an important factor in determining the length of the loan. A large loan for purchase of land, or real-estate might be for 5+ years, while a smaller loan of up to $200,000 can be paid back over 2-3 years. Most business loans have a term of 6 – 60 months.

3. How do business loans help the economy grow?

Business loans often help businesses grow and expand. This can lead to hiring new employees, which would now benefit from having a job. This will help reduce unemployment, and also give the employed person buying ability. By being employed, they are able to contribute back to the economy by purchasing homes, cars,  groceries, etc and helping other businesses that sell those goods and services.

Smarter Loans is a leading loan directory in North America. We provide important loan information on some of the top business financing providers in the US. Compare your options and apply online to get the business financing that you need to grow your business!