After the financial crisis of 2008, it’s been quite difficult for business owners to get the capital they need to fund their business. Banks halted lending to small businesses nearly across the board, especially for those new businesses without years of consistent revenue to show in their bank statements.
However, new products have been developed by private, direct lenders to fill the gap left open by the banks. In today’s market, there are almost too many options when it comes to small business loans. Many lenders are getting creative with lending programs, funding amounts, and payback terms.
Unsecured business loans vs equipment financing
Put simply, business loans can first be broken down into two basic categories of lending. The more traditional route is the financing of equipment, such as a new truck, an excavator or machinery. Since the loan is secured with an asset, equipment loans typically come with a lower interest rate and longer terms. For borrowers looking to use the funds to purchase equipment, this is the ideal loan structure.
On the other hand, unsecured working capital is an attractive offer to small businesses. Once approved, a lender will wire cash directly into the owners’ bank account and set up automatic ACH payments on a daily, weekly or monthly basis. Unsecured small business loans range from $5k to $500k with 3 to 36-month terms. The funds can be used for anything involved with the business: payroll, materials, inventory, etc.
How Much Can I Get Approved For?
Most business loan programs top out below $500k, many not even exceeding $250k. However, that does not mean you’ll be approved for the max funding amount. A general rule of thumb is that lenders tend to approve about 10{9aec2f3753136e72632b4743edb3bd445b461a73e7aee1730978bb7c413976bd} of gross annual sales. This means if your business does $1,000,000 in gross revenue, if approved it will likely be for an amount around $100,000.
Lenders will also take into account the number of deposits into the account each month. Consistency is the name of the game because it appears a lot less risky when a business is generating revenue on a regular basis. A business that’s not overextended and has numerous deposits each month will tend to get a bigger approval amount than a business with only a few deposits.
Business Loans and Bad Credit
I know you’re probably thinking it’s impossible to get a business loan with bad credit. The truth is there are a number of options for businesses, even when the owner has terrible credit. A lot of the unsecured business loan programs place a much heavier emphasis on revenue volume and consistency. If a business can show more than $10,000 per month in deposits every single month without any negative balances, chances are your business will be approved.
Although revenue is the most important factor, underwriters will also be looking at your personal credit. The loan must be personally guaranteed, typically by majority ownership. A score above 500 is the bare minimum you’ll need for approval, but other factors such as judgments, liens and bankruptcies will be taken into account.
Getting Started with a Small Business Loan
Once you have done your research and considered your business needs, the business loan application process tends to be quite simple. Most lenders offer a one-page application and require 3 to 6 months of bank statements. For amounts, more than $50,000 will likely require a copy of the most recent tax return.
It typically takes about 24-48 hours to get loan approval. Once approved funds can often be wired into the business bank account the same day. The entire process from beginning to end averages around 2 to 5 business days.