At WelendLoans, term loans are ideal for established businesses looking for predictable payments and long-term financing. Many term loans can also be paid off early without penalties, giving you flexibility as your business grows.
There are different types of term loans:
Short-term loans, which usually last 18 months or less
Intermediate-term loans, which typically last one to three years
Long-term loans, which last three years or more
Most loans are paid in full at the end of the term, but some may include a balloon payment, meaning the remaining balance is due at the end. Balloon payments help keep monthly payments lower. Many borrowers refinance at the end of the term to pay off the balloon balance.
The required documentation varies depending on the lender. A credit union may have stringent requirements, while a peer-to-peer lending platform may require limited documentation.
Some lenders may also have additional requirements not typically associated with traditional loans, such as minority or female ownership, physical location, or customer base. These criteria are common among mission-focused lenders who aim to make a positive impact.
While your credit score may be reviewed, it is generally not a strict requirement for microloan funding. Lenders understand that credit may not be perfect and are typically flexible. You may be asked to provide a letter explaining any negative marks on your credit report.
Microloans were originally designed to be under $500, but some nonprofits now offer loans of up to $50,000.
Microloans have unique funding timelines. Peer-to-peer lending platforms may take up to 60 days for a loan to fully fund, while a microloan through a chamber of commerce may need to wait until the next quarterly meeting for approval.
Repayment terms vary depending on the loan amount, but they are typically very flexible. Lenders want your business to succeed, not struggle with high monthly payments or short loan terms.
This type of loan isn’t based on creditworthiness; instead, it focuses on credit card sales. Lenders usually only require access to those sales records.
Your credit score is rarely checked when applying for a merchant cash advance.
Lenders can advance up to 250% of your credit card sales, often with a maximum of $250,000.
The funding timeline for merchant cash advances is very short. Once the paperwork is signed, your loan can be funded in just a few days. In some cases, it may take one to two weeks to receive your funds.
The lender maintains access to your merchant account and collects payments on a monthly, weekly, or even daily basis directly from those funds. The repayment rate can range from 8% to 30% of your sales.
Equity financing involves raising money by selling shares of your company. Even if your business isn’t a large corporation yet, you can still use equity financing to fund growth.
You can also borrow from friends and family. For example, borrowing $1,000 from a loved one can benefit both parties when they receive a stake in your company in exchange for the funds.
Equity financing can also come from angel investors or venture capitalists. They may require multiple shares to ensure that the investment is worthwhile for them.
Whether you’re working with a family member or a venture capitalist, you should provide a viable business plan, a profit and loss statement, and details of any existing business debt.
While equity financing is not based on your credit score, a venture capitalist may request a copy of your credit report to assess your financial responsibility. Be prepared to explain any negative marks if they appear.
Equity financing is based on the value of your business. Small business owners typically value their company at two to four times their net profit.
For example, a business with $200,000 in gross revenue and $40,000 in net profit could value the business at $80,000 to $160,000 (2–4 times the net income).
If we use a 2x multiple and value the business at $80,000, each share might be worth $800. Using this calculation: $800 × 100 shares = $80,000. If you need $4,000 for new equipment, you would sell five shares.
As your business grows, the value of each share can increase significantly. For instance, if your company grows to a $10 million valuation, those same five shares could now be worth $250,000.
There is no set timeline for equity financing. A loved one could provide the funds immediately. However, it’s important to draft legal documents to protect both parties, which may extend the funding timeline.
There are no repayment terms. You are selling a share of your company, not borrowing funds. The investor receives an ownership stake in your business.
Debt financing is a broad term for any loan—whether a term loan, microloan, SBA loan, or even from a family member. Anytime you borrow money and agree to repay it with interest, it is considered debt financing.
Small businesses can also use debt financing to issue bonds to investors.
You will need to provide a profit and loss statement and a business plan to demonstrate the health of your business and your future plans.
Debt financing with bonds is not based on your credit profile, but an investor may request your personal credit report before purchasing a bond to assess your overall creditworthiness.
Using debt financing to sell bonds results in different repayment terms. While you and the investor can agree on the terms, it’s typical for a bond to require one lump sum payment at the end of the term with no monthly payments. Some bonds may require interest-only payments each year, with the principal repaid at the end of the term.
You may have seen ads for factoring on late-night television. While these commercials are often dramatic, factoring is a legitimate option for small business owners.
Small businesses often wait 30, 60, or even 120 days for payment from large clients, which can strain cash flow. Factoring allows you to receive payment for outstanding invoices immediately.
Factoring companies typically pay 70% to 90% of the invoice value. For example, if you have a $10,000 invoice that would take three months to be paid, you could sell it to a factoring agency for $7,000 to $9,000 and get your funds sooner.
Factoring companies require copies of outstanding invoices along with any related contract documents. They may also request proof that your business is legitimate, such as Articles of Incorporation, a profit and loss statement, or a business card.
| Funding Type | Purpose | Amount | Disbursement | Payment Schedule |
|---|---|---|---|---|
| Traditional bank loan | General business | $150,000+ | Two to four months after approval | Monthly |
| SBA loan | General business use | Up to $5 million | Three to six months after approval | Monthly |
| Merchant cash advance | Payroll and other essential | Up to $500,000 | One week or less | A fixed percentage from daily sales; typically 3 to 12 months |
| Factoring | Operating expenses | 70% to 90% of invoices | One to two weeks | 2% to 3% of invoice totals; typically 30 days |
Some small business owners explore alternative funding options for their ventures. This is often done while building or improving their credit history. When you have confidence in yourself and your business, bypassing traditional financing routes may be necessary to reach your goals.
If your small business hasn’t established credit yet, it may be difficult to secure a loan. You can take a personal loan in your own name and then lend that money to your business. Be sure to keep detailed records of the transaction and repayments for tax purposes. Consult your accountant or tax advisor to ensure an accurate paper trail.
Sometimes borrowing from family can be as risky, or even more risky, than using credit cards to bootstrap a business. Consider this decision carefully, as issues may arise.
If you decide that family is your only funding option, request the funds professionally. Have a lawyer draft legal documents stating the loan amount and terms, and ensure a reasonable interest rate. Treating it as a formal business transaction can help prevent tensions later.
There are many crowdfunding platforms online that focus on different types of funding. Donation-based sites, like FundRazr, provide money that does not need to be repaid. Platforms like Kickstarter help entrepreneurs raise funds to launch new products. Crowdfunders typically aren’t repaid in cash, but often receive the first products the company or individual produces.
Peer lending, or peer-to-peer lending, is a subset of crowdfunding and a relatively new concept. It focuses on raising cash for small business owners, which can be used to purchase new equipment or expand into new markets. Traditionally, the funds are not intended for monthly expenses like payroll or rent.
While most small business loans are used for tangible needs like buying equipment, adding software, or expanding operations, they usually don’t cover day-to-day expenses. A working capital loan can help when your company’s cash flow is tight.
Working capital loans are often used by seasonal businesses that need support during slow periods but can repay quickly when business picks up. Examples include a window cleaner who earns most of their income in spring and summer but has little work in winter, or a retailer whose revenue peaks during the holiday season.
You can obtain a working capital loan from various types of lenders. Some, like payday lenders, require very little documentation, while others, such as banks or credit unions, require extensive paperwork. This may include your business plan, Articles of Incorporation, two years of profit and loss statements, and current accounts receivable information.
Funding is generally quick, as working capital lenders understand the urgency small business owners face during slow periods.
SBA loans, guaranteed by the Small Business Administration, are a good option for some small business owners. These low-cost loans are provided through lenders, not directly by the SBA. The government typically guarantees 75% to 85% of the loan, meaning if you are unable to make payments, your lender can recover funds from the SBA.
The application process for SBA loans can be lengthy and requires documentation. Remember, an SBA loan is not the only small business loan option available.
To apply for a business loan, you must first demonstrate your needs and explain how you plan to use the funds, as lenders will ask this before approving your application. You also need to choose a lender—options include credit unions, banks, online lenders, or the Small Business Administration (SBA). Keep in mind that the SBA only backs loans and typically offers direct loans only for emergencies.
As with any loan, it’s wise to compare options and rates from multiple lenders before deciding. Review your finances and credit score, and ensure you meet any qualification requirements. If your credit score needs improvement, take time to repay outstanding debts or reduce credit card balances before applying for a small business loan.
It’s easy to make mistakes when applying for a small business loan, but careful planning can help you avoid them. Here are some common mistakes to avoid:
Applying for the wrong loan type: Make sure you choose the right small business loan for your needs. This could be a startup loan, an SBA loan, or a loan for veterans. WelendLoans can help you decide which option best suits your business goals.
Not meeting loan qualifications but still applying: Always check the minimum requirements before applying. You don’t want your credit pulled only to find out you don’t qualify, resulting in an immediate denial.
Lacking a plan: Have a clear business plan and explain how you will use the loan funds. Lenders prefer business owners who understand how to manage their company rather than making it up as they go.
Ignoring the need for supporting documentation: Small business loan applications require detailed documentation. Don’t skip important sections or leave parts blank, as this can lead to denial.
Not knowing your financial standing: Know your finances and credit score before applying. Poor credit can lead to loan denial or less favorable rates. Understanding your financial situation helps you make smarter decisions.
Being dishonest about income or expenses: Inflating numbers will hurt your application. Always report accurate income and expenses. Lenders can revoke your loan even after disbursement if they find false information.
When you accept funds for your business, the lender provides a contract detailing the loan terms. Small business loans often include payment schedules, interest rates, and penalties. Review the terms carefully before agreeing to any loan to avoid problems later.
For example, your agreement might state you received a $50,000 loan to be repaid in five years, with monthly payments of approximately $834, plus a 10% interest rate, which adds $83.40 per month. Your contract may also include a $39 late payment fee or a temporary APR increase for six to twelve months.
Not every loan term is clearly defined, so review these helpful tips before signing:
Compare multiple rates before selecting a lender to ensure you get the best value. At WelendLoans, our team reviews the APR, interest, and terms for small business loans before offering recommendations. We understand that every business has different needs and expectations, so we compare a variety of funding options for each applicant.
Take time to ask potential lenders about their products and services. Here are some questions you can ask:
Do you work with small businesses often?
Have you ever worked with someone in my industry?
How long have you been in the lending business?
How much communication, and via what methods, should I expect from you?
Do you offer any other products that might benefit my business?
Can I make payments online?
What payment methods are available?
What are the benefits of working with your company to meet my goals?
After learning more about the lender, ask product-specific questions. For example, you may want to know the credit requirements for a startup loan or how quickly funds are disbursed for SBA small business loans. If you don’t qualify for a lender’s products, WelendLoans can help you choose a company that better fits your needs.
The good news is that you don’t need a perfect credit score for a small business loan. Ideally, a high FICO score makes the lending process smoother and helps you secure better rates and terms. Aim for a score in the mid-600s or higher, though it’s still possible to get approved with scores in the mid-500s to low 600s.
If your credit score is low, don’t be discouraged. There are still bad-credit small business loans available from reputable lenders. Interest rates may be higher, and you might need collateral or a cosigner, but successfully paying off the loan can improve your credit score. Demonstrating responsible repayment may eventually help you qualify for loans designed for those with good credit.
The good news is that you don’t need a perfect credit score for a small business loan. Ideally, a high FICO score makes the lending process smoother and helps you secure better rates and terms. Aim for a score in the mid-600s or higher, though it’s still possible to get approved with scores in the mid-500s to low 600s.
If your credit score is low, don’t be discouraged. There are still bad-credit small business loans available from reputable lenders. Interest rates may be higher, and you might need collateral or a cosigner, but successfully paying off the loan can improve your credit score. Demonstrating responsible repayment may eventually help you qualify for loans designed for those with good credit.
To decide whether a small business loan is right for you, first consider your needs and goals for the funds. Review each loan type and compare the options. Before making a choice, ask yourself the following questions:
How much money do you need, and why do you need it?
What is the interest rate, and can you afford it?
How long is the loan term?
Does it make sense to take out a short-term or long-term loan?
What are the repayment terms?
How will this loan impact your business?
Answering these questions can help you compare different small business loans and choose the one that fits your situation. Sometimes, it may be better to wait until your credit score improves or your revenue increases before requesting funding.
Decide how much money you’ll need and what you plan to do with the funds. Carefully consider why you’re applying for this loan and which bills or expenses will be covered. Make a list of every expense your business has, including:
Payroll
Equipment
Office supplies
Company vehicles
Utilities
Rent or mortgage
Maintenance and repairs
Marketing
Cleaning supplies
Taxes
Licensing fees
Include all expenses, even those with a minor impact on your business. Having an accurate view of your monthly expenses will help you request a business loan that covers the necessary costs.
Know where your credit stands and what your score is before applying for a small business loan. Your credit score plays a key role in how lenders decide whether to lend to you and the type of interest rate they will offer. You can use free online tools to get an estimate of your credit score before applying.
If your credit score is lower than expected, don’t panic. You can improve it by practicing good financial habits, such as paying debts on time and repaying past obligations that have gone to collection agencies. A helpful approach is the snowball method: start by paying off your lowest debt first, then work your way up to the largest.
You also need to know your debt service coverage ratio (DSCR) before applying for a small business loan. This ratio helps lenders understand how much cash you have available to pay off debts. Lenders want assurance that your business has enough incoming funds even while you’re requesting additional financing.
You also need to know your debt service coverage ratio (DSCR) before applying for a small business loan. This ratio helps lenders understand how much cash you have available to pay off debts. Lenders want assurance that your business has enough incoming funds even while you’re requesting additional financing.
Each lender has specific requirements, but most applicants need a driver’s license and Social Security card for identity verification. You’ll also need tax returns, expense sheets, and/or bank statements to verify income.
A business plan is another crucial document for your small business loan application. Make sure it provides a detailed description of how you plan to use the funds, including what you’re purchasing and how it benefits your company and its customers.
Contact our team at WelendLoans, and we’ll help you review your documents. You can also find helpful information about business plans on SBA.gov.
