Loan Options for Small Businesses

10 Best Loan Options for Small Businesses & Growing Companies

Publish Date: 27 Dec 2020

If you have a small business, sometimes growing it might seem impossible due to financial limitations. This is where most small businesses and companies that are currently growing will look for the best loan options. So, what are the best options for business loans especially for small businesses?

Some of the best loan options for small businesses and growing companies include secured and unsecured loans, short term business loans, and peer-to-peer lending. The key to obtaining one of these loans is to have a good credit record and a thorough business plan.

In this article, we are not just going to list the 10 best loan options for small businesses, we are also going to talk a little bit about each of them. We will then take a look at the requirements that you need to meet in order to obtain one of these loans. So, let's get into it!

 

10 Best Loan Options For Your Small Business

#1. Secured Loan

The secured loan made it onto this list first because not only is it one of the easiest ways to receive finance but it is also one of the best. This type of loan is pretty much straight forward.

A secured loan is basically A loan that is taken against one or some of your personal assets. These assets are generally things such as property and/or vehicles.

Because you are taking a loan against one of your assets, a financial institution might see it as being lower risk than an unsecured loan and so you will end up paying less interest.

Requirements to be Accepted for a Secured Loan

In order to qualify for a secured loan from a financial institution such as a bank or credit union, you need to obviously have assets in your name. These assets need to be paid off so you cannot use a car as collateral if you are still paying that off.

Also if you are paying off your house, you could technically take a loan on the amount that has been paid off however, that can become very tricky.

Finally, you need to have a good credit record and a business plan.

 

#2. Unsecured Loan

Second on this list is the unsecured loan. This is one of the most popular ways of gaining finance however, it is not one of the most efficient or even cheaper ways. Let's take a look at what an unsecured loan is.

An unsecured loan is A loan that is not taken against an asset. There are some financial institutions that prefer giving out unsecured loans because it means they can charge a higher interest rate knowing that you had a higher chance of already being rejected by a bank.

Banks also do give out unsecured loans however, they are less likely to do so than they would a secured loan.

Requirements to be Accepted for an Unsecured Loan

In order to qualify for an unsecured loan, it can be a lot more difficult. Not only will you need to have a stable income and a good credit profile but you will also need to make sure that you are very specific when highlighting what the money will be used for.

Another good thing to have when applying for an unsecured loan for your business is to have a detailed business plan. Also, if you have a growing business, show the institution all of your financial statements.

 

#3. Short/Long Term Business Loan

There are a lot of things that you need to consider when taking a short or long-term business loan. These are not just handed out to anyone and so, you want to make sure that you know exactly what the loan is for. First, let's talk about what a short or long-term business loan is.

A short or long term business loan is a loan that is obtained by businesses that are currently running. These loans are generally used to grow businesses and not keep them afloat.

Short term business loans are easier to obtain than long term ones. They also cost less in the long run. Long-term business loans mean less immediate liability however, they do mean that you will be paying more interest in the long run.

Requirements to be Accepted for a Short/Long Term Business Loan

To qualify for a business loan you need to have all of your ducks in a row. This is not an easy loan to obtain and you need to watch everything you do, say, or write on paper when dealing with the financial institution. You will be scrutinised quite heavily.

While there are cases that some companies can obtain business loans to keep themselves afloat, as a small to medium business, a bank will most likely not finance your current liabilities such as running costs, salaries, and commitments. Here is a list of requirements that you need to meet.

  • To qualify for one of these loans your business must be at least one and a half years old.
  • You need to be able to provide statements from your business banking account.
  • You will often need to provide your tax information.
  • A bank will not give you a business loan without an updated and detailed business plan.
  • You will need to show that you have sufficient money coming in.
  • You will need to display a good credit profile for your business.
  • You can use any financial information regarding your business.

 

#4. Peer-to-Peer Lending

If you are able to receive peer-to-peer lending then I want you to congratulate yourself because it is one of the most difficult things to do. Why? Let's first talk about what peer-to-peer lending is and this will help us better understand.

Peer-to-peer lending is basically the process of removing financial institutions from the equation. Peer-to-peer lending is also called “Crowdfunding”. This crowdfunding is done online most of the time and the funding can come from individuals, small businesses, and even large companies.

The most successful crowdfunding campaigns are done by gaming companies. Let's take a look at a game called Star Citizen. The developer of this game did not want any meddling from big game publishers and for this reason, he probably found it hard to get funding.

He turned to crowdfunding and has raised over $300,000,000  from gamers who just trust the guy and want to play his game. With this money, he has been able to build a gaming development company and although there is a lot of controversy surrounding star citizen, he has been able to fund the making of the game.

Most of time you won't approach your customers for funding. You will go to a broker such as Iwoca or Capitalise.

Requirements to be Accepted for Peer-to-Peer Lending

In order to qualify for peer-to-peer lending, it's more about building trust with the people who you want to borrow from.

You need to be able to display that you have what it takes to deliver on the promise that you need to give to potential funders.

You also need to offer something in return. Let's take a look at Star Citizen again. The developer said, “this is the minimum amount you need to donate in order to receive access to the game while it is in development”.

“You will get access and you will get this ship as a starter”. Star Citizen took it one step further and created their own website once they had established a base and there they sell access to new ships at hefty prices. Players buy these ships because they trust the developer.

All of this stems from their initial crowdfunding campaign almost a decade ago.

If you are going the brokerage way, Iwoca requirements are similar to what you would need if you were going to lend from a bank.

 

#5. Invoice Financing

Instead of receiving a loan against your assets, invoice financing means that you are taking a loan against invoices that have not been paid by your clients or customers. 

For instance, if you have £60,000 worth of bad debt from customers you can borrow against that value, then when you are paid for the invoices, you pay this to the lending company.

It does get very tricky sometimes. Different institutions have different terms for invoice financing and normally, your best option is to first go to a bank to see if they offer such a loan. Usually, invoice financing companies will look at your outstanding sales invoices and value them based on what you are likely to collect. This is usually between 60% and 80% of the sales total.

Requirements to be Accepted for Invoice Financing

Banks and other financial institutions are the ones taking on the risk of your clients defaulting on their payment. So, the only requirement is that you have outstanding invoices that meet the institution's requirements.

 

#6. Cash Advance Loan

This is pretty straightforward. You are basically taking a loan from your credit card. This type of loan can work out expensive, different financial institutions have different interest rates when it comes to cash advance loans.

Most banks will in fact increase their interest rate on cash advance loans. It is important to remember that this is a short term loan.

Requirements to be Accepted for a Cash Advance Loan 

Qualifying for this loan is a little bit easier because you would already have a credit card. So, all you need to do is make sure that your credit card is in good standing. You also need to have a sufficient line of credit available on the card. You then need to, in most cases, apply with your bank.

 

#7. Government-Backed Start-up Loan

Whether or not this loan type applies to you, depends on where you live. You need to check whether or not your country offers this type of loan. If they do, you need to check what the interest rates are. Most of the time, this is a good loan to get because it generally offers a low-interest rate with no fees and good loan terms.

The government-backed business loan is Pretty much a loan that is backed by the government. It is very popular in the UK and India. Obviously, governments benefit when you repay the loan, and the country benefits if your business is a success.

The interest rate is generally up to 6% and the repayment terms can be anywhere from 1 to 10 years. While there is an interest rate, there generally are no hidden fees with these types of loans.

Requirements to be Accepted for a Government-Backed Start-up Loan 

To qualify for a government-backed start-up loan, your company may not be more than 24 months old. Also, you need to be able to demonstrate a thorough business plan.

Finally, the directors/owners of the company need to have good personal credit profiles. Even though this loan is backed by the government, they are taking a risk on you and they will like to know that they are placing their money in good hands.

 

#8. Asset Financing

Now we are starting to move on to very specialised types of loans. This type of loan only applies if you have over a certain value of assets inside the company. So major construction companies, manufacturing companies, and machinery companies are best to take advantage of this.

Asset financing is very similar to secured loans except, generally, when speaking about asset financing you are referring to the assets of your business. These assets can range from vehicles, balance sheets, property, and even outstanding invoices. If you default on the loan payments, your business assets can be taken by the lender.

You can think of it as a secured loan but more specialised. Your interest rate and repayment terms will depend on the financial health of your business.

Requirements to be Accepted for Asset Financing

In order to qualify for asset financing, it is similar to a secured loan. The requirements also differ depending on the financial institution. However, there are some universal requirements.

Your business must have assets, or plan to buy assets with the loaned money. The business must have good financial health and a good credit profile. The funds gained from the finance must either be used to improve the current assets for higher production, or to purchase new assets to improve the business.

You also need a business plan. I know we are starting to repeat this a lot but if it's a necessary requirement, we have to add it in. Remember, you are not asking for money to keep your company afloat, these loans are only given out to companies looking to grow.

 

#9. Working Capital Loan

This is probably the only loan which can be used if your business is struggling to survive. By staking your working capital on the line, you can basically get paid in advanced for your work.

This loan is taken out to cover a business’s everyday running costs. You can either take out a working capital loan against your assets or as an unsecured loan. The way you go with this will determine the interest rates and repayment plan. If you have more work in the pipeline, the more you will be able to apply for, this type of loan is for companies who are taking on jobs outside of their capacity, but plan to grow to that level.

These loans come with higher interest rates in general. If you need to cover your running costs with a loan, a bank could see that as being high risk.

Requirements to be Accepted for a Working Capital Loan 

You need to have a stellar credit record for a working capital loan. You sometimes need to demonstrate that you and your business have this credit profile.

You need to demonstrate your future work capacity. This might sound a bit difficult, because why wouldn't you just say you plan to make a million-dollars? The banks will be looking for realistic figures, but also a level of growth that makes the loan affordable. The working capital loan is used to push your business into a higher level of capacity, so your business can make more money. If the level you want to pushed to isn't high enough, the bank will class your loan as unaffordable, because they don't expect you to make enough money.

In some cases, banks will not give out unsecured working capital loans so in those cases, you would need to have some assets to back the loan against.

 

#10. Equity Finance Loan

Last on this list is the equity financing loan. The reason why it is last on this list is because you are basically giving away part of your company in exchange for cash flow.

The value of your company will be determined and the amount an investor puts in will equal the number of shares he holds within your business. Generally, with small to medium businesses, these loans are taken from family, friends, or if you can gain the trust of investors, then they will invest as well.

You then have to pay a percentage of your profit to the investor. At a later stage, they can request to be bought out and this can be done if you have the money available or by financing the buyout. Remember, the amount you buy them out for will depend on what the value of their percentage of the business currently is and not the amount they paid you.

Requirements To Be Accepted As a Borrower 

For friends and family there should be some trust but having a good business plan will go a long way in helping you achieve your goal.

The same can be said for investors. They might check things like your credit profile but they would always want a business plan and they would want to know as much about you and your employees as possible. They will need to determine whether or not you are worth the risk.

 

Summary

Type Of Loan

Requirements To Be Accepted

Secured Loan

Assets in your name, stable income, and a good credit profile, a business plan helps

Unsecured Loan

Stable income, good credit record, a detailed business plan helps. Finally, financial statements if necessary.

Short/long term Business loan 

A registered running business, a b/plan, good credit profile, detailed information about your finances.

Peer-to-Peer Lending

Demonstrable produce. A relationship of trust between funders.

Invoice Financing

Good credit profile, outstanding Invoices owed to you. 

Cash Advance Loan

A credit card that is in good standing and has a good line of credit available.

Government Backed Start-up Loan

A thorough business plan, good credit profile, the business must not be older than24 months.

Asset Financing

Your business must be financially healthy with a good credit record. The business also needs to have assets. Finally, a thorough business plan will help.

Working Capital Loan

A relatively healthy financial state. A steller credit profile. In some cases, you will need assets to back the loan.

Equity Finance Loan

Whether you are selling shares to friends, family, or investors, you need to have their trust. You also always need a thorough business plan.

 

Conclusion

The goal of this article was to help you choose which loan is best for you. Choosing the right one can be tricky. Well, hopefully, you now have enough knowledge just start planning how you will be financing the growth of your business or at least, the next project.