Financing is the lifeblood of any company. Although there are many types of corporate financing options available, personal loans can also be used to provide businesses with cash. Personal loans are actually undergoing a boom period, with ample options available from both traditional and online lenders. Personal loans are usually funded rapidly and don’t have the same type of detailed documentation requirements as other types of loans, no doubt helping contribute to their popularity.
Rates and terms for personal loans can vary considerably from lender to lender, but the biggest variable is the credit history and financial profile of the individual borrower. These important factors can help determine whether a personal loan for business makes sense or whether other corporate financing options are more appropriate.
Since personal loans are typically unsecured, cash flow and debt-to-income ratio are important factors for lenders reviewing applications. The more likely your financials indicate you can pay back a personal loan for business, the more likely your application is to be approved.
Whether or not a personal loan is the best option for your business can depend on a number of factors, including the type of business you’re operating and your own personal credit history. Here’s a look at seven types of businesses and owners along with an exploration of how personal loans -- and other financing options -- can help serve your business.
In one sense, a personal business loan is the perfect option for a startup company seeking financing. Why? Because startups are a special breed when it comes to corporate financing -- meaning, it can be hard for a startup to get a traditional business loan, particularly with a large, bricks-and-mortar bank. Banks aren’t in the business of losing money, and the truth is that no matter how great your startup company is, statistically it’s a high risk for a lender. However, it’s not an impossible feat. Alternative personal loans are available from funding sources like Seek Business Capital that actually specialize in working with startup companies.
A personal loan for business relies on the credit history and qualifications of the individual applying, rather than the business as a whole. Depending on the situation, this can either be a plus or a minus. For startup companies, a personal loan can often be the only way to get a good small business loan, as a business with no credit or operating history can be hard to finance. A company like Seek Business Capital has loan specialists that specifically work with startup companies, so they can be a good option to help you determine your best financing options. If a startup loan is not available at good terms, a personal loan might get you qualified for good financing.
Generally, personal loan rates are higher than the best available corporate rates. However, as a startup, the best small business loans are likely to be either expensive or difficult to obtain. In this case, the rates on your personal loan may be quite a bit lower. This is particularly true if you have good credit of your own.
An advantage of working with a lender that specializes in startup companies is that you may be able to work out a flexible payment structure tailored to your specialized needs as a startup. For example, Seek Business Capital offers an instant qualification check for various loans, including SBA loans, and offers a 0% introductory APR for certain loans, with a variable rate thereafter. However, for a personal loan you should expect a rate somewhere between 5.99% and 29.99%, depending on your creditworthiness.
Anyone can apply for a personal loan, so in that sense, anyone can be eligible. A sketchy individual credit history could prevent you from qualifying. Your personal credit history will determine both your eligibility for a personal loan and the rate you’ll get on it.
Qualifying for a personal loan can be important for a business looking to cover startup costs because other types of financing may be limited. Even though your business doesn’t have an operating history, a solid credit record in your personal life can be enough to get you the financing you need.
Important factors in your personal credit history will be the amount of debt you have and your history of credit repayment. Lenders will also look at your overall ability to repay the loan. This can include your income-to-debt ratio, your assets or net worth and an estimate of your future cash flow.
Bear in mind that if you are pouring all of your available income and assets into funding your startup business, your personal loan approval odds may go down. Lenders look at your complete financial picture when assessing your ability to repay a loan, and if you don’t have any assets and your startup won’t likely generate income for years to come, it may impair your personal loan approval odds.
This is why using a company like Seek Business Capital can make sense if you’re looking for a personal loan to finance your startup business. As a specialized lender, a company like Seek Business Capital has experience incorporating both personal and startup business finances to help borrowers qualify for an appropriate loan.
The size of the personal loan you can get will depend directly on your ability to repay the loan. Lenders factor in a number of different variables, including your existing outstanding debt payments and your income, to determine how much you can afford to pay back on a loan. This is why your personal credit and income are so important when applying for a personal loan.
If you currently have a high income, substantial assets, no outstanding loans and a history of paying your debts on time, you’re likely to qualify for a high dollar-value loan with a low APR. For example, if you earn $200,000 per year, have no debt and have a large bank account, you may be able to qualify for a personal loan in the six-digit range. If you’re pouring all of your available working capital into your new business and aren’t earning anything, you might be looking at a loan value of $10,000 or less, if you can get approved at all.
On the high end, lenders like Seek Business Capital offer loans up to as much as $500,000. However, you shouldn’t let your eyes dream bigger than your finances can handle. If you take out a loan for more than you need -- or can afford -- you might end up defaulting. This would not only bury your startup dreams but also make you ineligible for any type of reasonably priced loan in the future. Working with a good lender can help you avoid this scenario, as respectable lenders will not offer you an amount more than you can afford to pay back.
In many cases, you can quickly apply for personal loans online and get your rate and funding information in a matter of minutes. This makes personal loans much more convenient than many other forms of business loans, which can require additional paperwork and in-branch consultation before approval.
Still, you’ll need to provide relevant personal and financial information to get approved for a personal loan. Commonly requested documents include the following:
Specific requirements for personal loans can vary considerably from lender to lender. In some cases, you might just be asked a generic question about your intended use for the loan proceeds, while other lenders might ask for detailed specifics about your intentions, up to and including asking for a copy of your startup business plan. In certain situations, this may actually help you both get approved and get a better rate.
One of the advantages of a personal loan is that terms are often quite flexible. Most personal loans come with no prepayment penalty, meaning you can effectively turn a long-term loan into a short-term loan if you so desire and have the financial capability. In fact, assuming your loan does have no prepayment penalty, it can be a good strategy to set up a long-term loan with a lower monthly payment and then pay back that loan prematurely to save on interest charges.
Generally, the lower you score on a lender’s risk assessment profile, the shorter the loan term you’ll be offered. If you’re a high-risk borrower, lenders may shy away from offering you a long-term loan to minimize the chances that you will default. If you have a demonstrated history of paying back loans and can demonstrate the likelihood that you’ll have consistent, long-term cash flow, you may be eligible for a long-term loan. While most personal loans come in the one-to-five-year range, with outstanding credit and solid financials you may be eligible for a seven- or even 10-year loan.
Bad credit can be a problem for both companies and individuals. Financing can be difficult at worst or expensive at best. Lenders take a risk by lending to bad-credit individuals and businesses and have to curtail that risk or get compensated for taking it. For this reason, a personal loan might not always be the best option for those with bad credit. Even if you get approved, you might face sky-high interest rates. An option for obtaining financing for your company if you have bad or fair credit might be a merchant cash advance.
Rather than relying on your own individual credit to get a personal loan, a merchant cash advance uses the incoming debit and credit card sales of your business to generate financing. Lenders will essentially buy the rights to your incoming receipts and front you the money; when your revenue comes in, its paid directly to your lenders. With most merchant cash advances, you’ll receive a large sum upfront and pay back a percentage of your monthly sales until the merchant cash advance is paid back in full. At that point, you can renew the MCA if you so desire. Your own personal credit won’t really be an issue with a merchant cash advance, as the quality of your incoming revenue stream is the determining factor.
Merchant cash advances typically have high rates, certainly higher than with traditional loans. However, if you have bad credit, the rate you can get on a merchant cash advance could be significantly less than with a personal loan.
Merchant cash advances are priced a bit differently than traditional loans. The rate you’ll pay on a merchant cash advance is expressed as a factoring fee. Average factoring fees run from about 1.14 to 1.18, equating to an annual interest rate of about 14%. Merchant cash advances are typically short-term loans, however, so what that means is you’ll generally be paying a bit more than 1% per month on your merchant cash advance.
While an annualized loan rate of 14%-plus is high, it’s about half that of the most expensive personal loan rates you’ll find, which can reach 29.99% or more. As with a personal loan, the riskier you are for a lender, the higher the rate you’ll pay. With a merchant cash advance, this means that the less reliable your monthly receipts, or the less predictable your business revenue stream, the higher the factor fee you’ll pay.
Some lenders adjust the factoring rate based on the size of your sales or the frequency with which you repay your cash advance. Others may offer exorbitant factoring rates of 1.3 or even higher. Be sure to deal with a reputable lender and get all of your terms in writing before you agree to any type of merchant cash advance.
Part of what makes a merchant cash advance a reasonable option for a borrower with bad or even average credit is that your own personal credit won’t typically play a role in your eligibility. If your company operates with regular and predictable incoming cash flow, you’re likely to get approved for a merchant cash advance. Lenders aren’t relying on your own personal ability to pay back your loan so much as the ability of your customers to make their own timely payments. That being said, it can only help if your personal credit is top-notch and you have extensive cash reserves on hand.
The maximum amount of your merchant cash advance, just like any loan, is based on your ability to repay. If you have sizable and predictable revenues, you’ll likely qualify for a large merchant cash advance.
The good news is that a merchant cash advance is structured so that you won’t ever owe a monthly payment higher than your cash flow. With a standard personal loan, for example, you might have a set monthly payment of $2,000, and if you don’t generate that much in income, you’ll default on your monthly payment. With a merchant cash advance, you pay back a specific percentage of your sales, so you’ll never be in the position of not being able to make your monthly payment.
This doesn’t mean that you should take out an enormous cash advance, knowing that you can “eventually” pay back the entire amount. Your merchant cash advance should only be as much as you need to finance your operations. If you take out a $100,000 merchant cash advance but you only generate $5,000 per month in sales, you’ll be paying interest seemingly forever on that cash advance while the funds likely sit idle in your corporate bank account. Add in the high interest rates that come with merchant cash advances and it’s a formula for financial disaster.
The bottom line is that while you may be able to get tens of thousands of dollars as a cash advance, you should work with your accountant and/or financial advisors to determine the optimal amount of a merchant cash advance.
A merchant cash advance is a popular financing option in part because it’s so rapid. You can often apply for a merchant cash advance and receive your funding within a day, or even a matter of hours in some cases. This type of financing doesn’t require the extensive type of documentation that a traditional loan might, just a demonstration that your business has enough cash flow to support payments. If that’s the case, you’re likely to qualify.
Typical documentation requested for a merchant cash advance includes the following, although particulars will vary from lender to lender:
Additional requirements may include personal or business bank statements or credit reports, but the primary factor in your application will still be the quality and quantity of your business cash flow.
With a merchant cash advance, you’ll pay back a certain percentage of your incoming sales on a monthly basis. Thus, a merchant cash advance doesn’t have a maturity date like a traditional loan. If your incoming receipts are high, you may end up paying back your MCA rapidly. If sales slow, you may be paying for a longer period of time.
The terms that are decided when you set up a merchant cash advance are the factoring rate and the percentage of each sale you’ll dedicate to paying back the cash advance. You may also have to pay establishment or maintenance fees, depending on your individual agreement.
If your company has significant assets, you may be in a position to get better financing than you could with just a straight personal loan. If your company has significant assets and is generating a lot of income for you, you probably have good credit and good qualify for a decent personal loan for your business. However, you may want to lean on the strengths of your business and use those assets to get even better rates with an equipment financing loan.
An equipment loan uses your corporate assets as collateral. Traditionally, you’ll use an equipment loan to finance the purchase of new equipment. However, you can also use equipment loans, or asset-backed personal loans, to borrow money against the value of existing equipment. In that case, you’ll borrow a certain percentage of the value of your equipment and pay it back out of your company’s general cash flow. Equipment loans have stated terms and rates, like traditional loans, although you may be able to pay them back early without penalty.
Rates on equipment financing loans can be low, which is why they’re often a better choice than a straight personal loan. Since your loan is backed by actual collateral that the bank could seize to pay off the loan, the risk to the lender is minimized. However, equipment depreciates and isn’t the most liquid asset, so equipment financing rates still won’t be as low as some other types of available corporate financing, such as a business line of credit for a highly qualified company.
Equipment finance rates can vary greatly from lender to lender. With solid business financials and personal credit, you might find rates in the 3% to 7% range and up.
Equipment loans can be relatively easy to qualify for because you’re using physical collateral that has a defined value. Unlike a straight personal loan, in which the lender is simply relying upon your word as a borrower that you will pay the money back, an equipment loan is collateralized, giving the lender the right to take the underlying assets in the event of default.
Everything is variable, of course, and some equipment loans are easier to come by than others. If you’ve borrowed from a particular lender in the past and successfully paid back your loan, for example, you’ll likely find an easy path to your next equipment loan. Similarly, if your assets are worth significantly more than the amount you’d like to borrow, you’re also more likely to be eligible. The less risk you can assign to a lender, the more likely you are to qualify for any type of loan, including an equipment loan.
With an equipment finance loan, the size of your loan will be directly related to the value of the collateral behind it. Usually, lenders will offer to finance a certain percentage of your equipment, such as 80%. In some cases, 100% financing may be available, but that’s not always the case. For example, if you’re buying a new piece of equipment -- or borrowing against an existing one -- with a value of $100,000, you might be able to get $80,000 to $100,000 if the equipment is brand-new. Older equipment may be harder to finance at those levels, but you’ll have to work that out with your individual lender.
When you apply for an equipment loan, you’ll need to provide specific documentation about the equipment you’re offering as collateral. In most cases, this will be the new piece of equipment you’re going to finance, but you may also want to take out a loan against older, existing assets. In either case, the bulk of your documentation will be tied to the asset you’re borrowing against.
Typical documentation requests for an equipment loan include the following:
Some lenders may also ask for information on your personal finances, particularly if you are going to personally guarantee the loan. Proof of insurance on your equipment is also likely to be required, as is a business permit or license.
Most equipment purchase arrangements are structured like a traditional loan. You’ll receive your money upfront in exchange for an agreement to make regular payments until your loan maturity date. The maturity of your loan will usually approximate the useful life of the equipment you’re using as collateral. Of course, if you can get a shorter term, you’ll end up paying less interest over the life of your lease. Equipment finance rates can vary greatly, but 6% to 15% is a good approximate range of what to expect.
With good-to-excellent credit, a personal loan may be a great option to obtain financing for your business. At this level of credit, rates begin to tumble as lenders view these borrowers as much less risky. You’re likely to get approved for a personal loan with good-to-excellent credit, and you may even be able to get rapid approval via an online approval. If your business is struggling finding other sources of funding, this may be a viable choice.
The online personal loan market has simply exploded over the past decade, with countless online banks now offering personal loans. With some simple personal and financial information, you can easily apply online for a personal loan and get a decision instantly. Your loan can be funded as rapidly as 24 hours or less in many cases. Once your loan is established, you can set up automatic payments via online account access.
Rates on personal loans are directly related to your credit history and score. Your income and debt-to-income ratio can also play a role. With good-to-excellent credit, you’re likely to get some of the better available rates. Overall, personal loan rates carry a broad span, often from 5.99% to 29.99% or more. As an upper-tier credit customer, you’re likely to get rates in the single digits. Considering the rapid nature of the funding and the convenience of an online application, personal loans for those with good-or-better credit can be a good combination.
Eligibility for personal loans is primarily based on your personal credit score. If you’ve got good-to-excellent credit, it means your score is likely in the high 600s or low 700s. At this level, you’ll most likely be eligible for a personal loan, unless your credit history carries a bankruptcy or other serious negative mark. For some lenders, this type of delinquency will automatically disqualify you from a personal loan. However, other lenders will base your approval strictly on your score, even if you have a prior black mark.
For any loan, the amount you can get is tied to your ability to repay your loan. With good credit and a high income, you’re more likely to qualify for the highest amount available. Lenders tend to cap personal loan amounts at about $35,000, although some may offer higher amounts to certain borrowers.
Even if you qualify for a higher loan amount, you’re not committed to taking the full amount a lender offers. You can choose how much you want to borrow, and that amount should be tailored to the amount you need and the amount you can afford. Even if a lender think you can manage payments on a $35,000 loan, if you only need $10,000, you should only accept $10,000. Remember that although personal loan rates can be lower than other types of loans, such as business credit cards, there’s no need to pay interest on money that you aren’t going to put to work. Consult with your tax or financial advisor to help you determine the appropriate amount you should borrow.
One of the benefits of an online personal loan is that the process is rapid and not too involved. Unlike a traditional bank loan from a major bank, you won’t need to visit a banker in person and you won’t need to provide reams of documentation to qualify for your loan. However, you’ll still need to show a lender that you have the financial wherewithal to pay back whatever you borrow. Expect to provide these types of documents when you apply for a personal loan online:
You may also be asked what your intended use is for the personal loan proceeds.
Online personal loan terms can be relatively flexible. Often, you’ll start the process by choosing how much you’d like to borrow and what your repayment terms will be. For most online personal loans, your term will likely be limited to one-to-five years. In some cases, seven- or even 10-year personal loans may be available. As with any traditional loan, you’ll pay back your online personal loan monthly, generally through direct transfer from your bank account. Generally, online personal loans don’t carry setup or maintenance fees, although this may vary from institution to institution. A credit union or community bank may be able to offer regional perks or rates as well.
Since the online personal loan market has grown so competitive, it definitely pays to shop around. Rates can vary greatly from lender to lender, and some lenders will offer longer (or shorter) loan terms than others. Use the ease and flexibility of the online personal loan process to help you find the best rates and the best terms.
Individuals with outstanding credit are the gold standard when it comes to the world of personal loans. With outstanding credit, everything becomes easier. You’ll find that you’ll likely be eligible for a personal loan with any lender, and you’ll likely qualify for the best rates, the highest amounts and the best terms. In this situation, you’ll often find that your best financing option is with large, traditional banks, as you can leverage your strong financial position to get loans tailored personally to your situation at rates lower than with a generic online personal loan.
Getting a traditional personal loan through a large bank is a much more involved process than simply applying online. However, the effort usually pays off for borrowers with outstanding credit, as great rates can be had to go with personalized terms. For some banks, you can still start the loan process online, but eventually you’ll have to visit a bank officer in person to get the loan funded.
The general process is what most people think of when they envision applying for a loan. You’ll need to provide your personal and financial information, including your credit history and bank account information, and you’ll need to demonstrate the ability to pay back what you borrow.
Regardless of how you apply -- online or in-person -- the rate you’ll get on your personal loan will be a result of your credit score, payment history and current financial situation. Factors like your income and debt-to-income ratio will no doubt come into play, particularly for an in-bank application with a large institution.
On the low end, rates with a big bank are similar to those offered by online institutions, in the neighborhood of 5.99%. Some banks may be able to offer certain lenders a slightly better rate. The two areas where large bank loans can shine compared to online lenders is in the size of loans and in the high end of the rate structure.
Large banks typically have higher standards when it comes to personal loans, which means they won’t even offer loans to lower-credit borrowers. Thus, the high end of the personal loan range at large banks like Chase are often capped at around 20%. Similarly, since higher-credit borrowers are the ones getting approved for personal loans at these types of banks, larger loan amounts are generally available. Chase, for example, offers personal loans up to $100,000 or even more to extremely well-qualified borrowers.
If you’re a top-tier credit borrower, yes, you are likely eligible for any type of loan that you’d want. Banks seek out customers with excellent credit, as it’s highly unlikely that these types of borrowers will default. In addition to the near-certainty that you will qualify, it’s also highly likely that you’ll be eligible for the best types of loans with the best terms that a bank can offer. Some banks offer special programs or relationship deals to customers with a spotless credit history, so be sure to shop around and enquire as to what additional perks you might qualify for if you take out a personal loan.
By virtue of being a top-tier borrower, you likely have access to higher loan limits than other borrowers. As mentioned above, large banks like Chase can offer $100,000 or more to extremely well-qualified personal loan borrowers. Although those large sums can be tempting, it’s important to keep your borrowing in check if you want to keep your top-tier credit score.
Taking on too much debt can drop your score and make obtaining future financing more difficult. In some cases, borrowing too much can be a recipe for financial disaster, as your monthly loan and interest payments can overwhelm your cash flow. It’s a good idea to decide how much you and your business really need before you apply for a large loan amount; that way, even if you’re approved for more than you ask for, you can keep the amount you borrow down at the proper level.
Documentation for a personal loan with a large bank is likely to be extensive. Since you’re claiming top-tier credit and looking for low interest rates, bank will be thorough in vetting your credit history and personal financial situation before committing to offer you their lowest rates.
Still, the documentation requirements aren’t as rigorous as many types of business loans, making a personal loan for business a decent option for those with top-tier credit.
Here are some of the types of documents you should expect to provide to your loan officer:
You may also be asked to disclose your intended use of the funds as well.
Once you clear the hurdles of qualification for a personal loan with a big bank, your terms may be flexible or even generous. Large banks can often extend personal loans to seven years or more, particularly if you’ve got the type of credit that shows you can handle a long-term repayment agreement. Payments are usually handled on a monthly basis via direct debit from your bank account. There may be some setup, maintenance or prepayment fees with personal loans obtained from large banks, so be sure to read the fine print.
Companies with three-to-four years of experience are in a unique position when it comes to business financing. Often, these types of companies can’t yet qualify for large loans with major institutions, yet at the same time they’re past the state of taking on startup investors. To fill this gap, the Small Business Administration created the SBA 7(a) loan program. Regardless of your personal credit rating, the SBA 7(a) loan program is often your best choice if your company falls into this category.
The SBA 7(a) loan program is specifically targeted to small businesses. Most businesses that aren’t making national news and have been operating for three-to-four years qualify as small businesses under the 7(a) program.
What may come as a surprise to some potential borrowers is that SBA 7(a) loans aren’t actually funded by the Small Business Administration. Rather, the SBA guarantees a portion of loans that qualified banks and financial institutions offer to small businesses. This guarantee, which typically amounts to 85% of a loan’s value, is the glue that keeps the program together, as it incentivizes banks to issue loans to borrowers that might not otherwise qualify on their own.
Due to this guarantee, the SBA doesn’t allow all businesses to access the 7(a) program. Typically, businesses have to be operating for at least three years before they become eligible for a 7(a) loan.
Rates are one of the most clearly defined aspects of the SBA 7(a) loan program. Maximum loans rates and terms are published in black-and-white on the SBA website so that both borrowers and lenders understand the parameters of the program. These are the current SBA 7(a) loan terms:
Loans Less Than 7 Years
Loans 7 Years or Longer
For many businesses with three-to-four years of history, these are the best rates that are available, particularly when compared with unsecured lines of credit.
The guarantee of the SBA 7(a) loan program helps protect lenders from borrowers that may not otherwise qualify for a traditional loan. While a necessary requirement in order to ensure the survivability of the program, it comes at a cost: Not all small businesses that are in dire need of funding can access the program.
When you apply for an SBA 7(a) loan, the process is similar to applying for a loan directly with a banking institution. You’ll need to qualify for your loan based on your credit history, operating income, cash flow and other metrics, including profitability. The SBA can’t help you qualify for a loan in the 7(a) program, although it may make lenders more willing to extend you a loan, thanks to the 85% guarantee.
Beyond traditional qualification requirements, such as a minimum credit score in the 640-680 range, your company will need to meet additional SBA minimum standards. The three most important are the ability to repay the loan, having a sound business purpose and qualifying as a “small” business. You must also have a personal investment in your business and show that you were unable to obtain financing elsewhere.
Although for some people the definition of “small business” can vary greatly, from the perspective of the SBA, the phrase is specifically defined. Most businesses with 100 or fewer employees and revenue of $1 million or less meet the SBA definition of being a “small business.” The specifics of this requirement are outlined on the SBA website and can vary based on industry. For example, in certain large industries, you can have revenue of up to $41.5 million and still qualify as a “small” business. Similarly, in some industries, you can still be considered a small business even if your employee count reaches as many as 1,500 employees.
The maximum loan amounts in the SBA 7(a) loan program are as well-defined as the rates and terms. Small businesses can borrow as much a $5.5 million under the SBA program, an amount likely more than enough for many companies. However, don’t expect to qualify for this maximum amount if you’re deemed eligible for an SBA loan. As with any type of traditional loan, the top loan amount available is reserved for businesses with extensive cash reserves, cash flow, profitability and overall financial capacity.
Rather than being distracted by this large, headline figure, it’s best to figure out exactly the amount your business needs before applying for the program. Overextending the financial capability of your company -- which by definition is in need of funding -- is financially imprudent.
With all the requirements in the SBA 7(a) loan program, documentation requirements can be extensive. For borrowers used to taking out simple personal loans, this can be a drawback of the program. However, considering the benefits of the 7(a) program -- including the fact that your business is unlikely to get a better loan package elsewhere -- the documentation requirements are understandable.
In a general sense, you’ll need to demonstrate that you have good credit and the ability to repay your loan to gain access to the 7(a) program. The SBA also requires that you are a person of good character and that you are operating your business with the intention to generate a profit. Additional specific documentations include the following:
If you’re using your SBA 7(a) loan to buy out an existing business, you’ll likely be asked for additional documentation.
The best way to approach an SBA 7(a) loan application is with the same thoroughness as if you were applying for a traditional loan outside of the program. The greater the amount of documentation you can provide showing your ability to repay your loans, the more likely you are to be approved.
As with other aspects of the program, the SBA 7(a) loan program defines its loan terms in print. According to the SBA, maximum loan terms are 25 years, but that term is reserved for real estate loans only. Typical SBA loans run from five to 10 years. As a borrower, you might want to shy away from a loan term exceeding seven years, as these longer loans face a 0.50% interest rate surcharge.
How to Get a Personal Loan for Established Companies You can think of a business line of credit like a great version of a credit card. Like a credit card, a business line of credit stands at the ready to provide you with needed funding at a moment’s notice. Until you actually draw it, the line of credit doesn’t incur any interest charges.
What Are the Rates? Unlike a credit card, interest rates on a business line of credit can be quite low. This is because a business line of credit is only available to top-tier companies with a demonstrated ability to pay back an unsecured loan. For these types of companies, an APY of the prime rate + 1.75% or even lower can be available.
Am I Eligible? If your business has been operating for at least five years and has consistently demonstrated profitability, you’re no doubt eligible for a business line of credit. This type of financing is reserved for companies with significant free cash flow, cash reserves and impeccable credit; if your company meets these requirements, you’re no doubt eligible.
How Much Can I Get? Business lines of credit can often be high because the businesses that qualify for them typically have top-tier credit to begin with. Business lines in the millions of dollars are not that unusual. However, the amount that you can get will be a direct result of the financial performance of your company. For example, a mid-level company with $1 million in annual revenue won’t qualify for the same size of business credit line as a major conglomerate posting $500 million in annual revenue.
In one sense, you might think that you should apply for the largest line of credit possible so that you’ll have ultimate flexibility when it comes to financing your business. After all, you won’t get charged interest on your line of credit until you actually use it, so in that sense, there’s no harm in setting up a $10 million line of credit. However, you’ll need financial discipline if you accept a large business line of credit. With all that money available, you might start dreaming of business expansion plans or other expenditures that may not be part of your original business plan. If you end up drawing down more of your line than you should, you could end up crippling your business cash flow. Prudence is the watchword to use when choosing the size of your business line of credit.
What Documents Do I Need? A business line of credit is essentially a giant unsecured loan that could be financed at a moment’s notice. Thus, you’ll need to demonstrate to your potential lenders that you’re financially capable of handling such a large blank check. With five years or more years of successful business operation, you’re likely to qualify for your business line of credit, but you’ll have to demonstrate your financial capability in writing. Expect to have these documents, at the very least, available for your application:
Business P&L statements Three or more years of business tax returns Business balance sheet, cash flow and net worth statements Business bank account statements Specific documentation requirements vary from lender to lender.
Since documentation requirements for a business line of credit can be extensive, you shouldn’t expect to be able to complete your application online. You’ll need to meet a bank officer face-to-face to process your application. On the plus side, as an established business you can often negotiate with a bank officer to get the absolute best terms and rates possible. If you’re not satisfied, there are plenty of other lenders that will be eager for your business.
What Are the Terms? A business line of credit is usually extremely flexible. Like a credit card, your credit line doesn’t have any repayment requirements until you actually draw on it. Once you actually borrow from the line, then your repayment schedule will kick in. Bear in mind that your lender may charge you maintenance or setup fees before you ever draw down your line, and some of those charges may recur even if you never use your line.
Once you’ve begun drawing down your line, payments can work in one of two ways. With some lines, your borrowing becomes something like a traditional loan, wherein you’re required to make monthly payments until a set maturity date. With other lines of credit, your borrowings act more like a credit card. You’ll still be required to make monthly payments, but the repayment date may be open-ended.
Personal loans can serve a wide variety of purposes, including being a funding source for various types of business. The ease of application and the reasonable rates that are available to top-tier credit borrowers make personal loans a viable option in many circumstances. However, personal loans are not always the optimal choice for business financing. Always compare all available funding options to ensure that you’re getting the best rates and terms for your business financing needs.
Personal loans seem straightforward, but there are still many questions about how they operate, particularly when used to finance business operations. Here’s a look at some common questions about using personal loans for business.
A line of credit is a type of on-demand financing. After approval from a bank, a line of credit stands available to be used by a borrower at any time, up to the credit line limit. Interest is only charged on amounts used, although there may be fees to set up or keep a line open, even if no money is ever drawn.
A personal business loan is a loan offered to individuals based on their own credit histories, rather than that of a business. The proceeds of the personal loan are then used to fund business needs. The individual taking out the loan remains personally liable for the payback of the loan, even though the business is benefitting from the proceeds.
In most cases, you can use a personal loan for anything you want. You’ll usually have to disclose your intentions to your lender, however. So, if you plan on using a personal loan for business, it’s not usually a problem.
A business loan appears on company financial statements and is the responsibility of the business to repay. A personal loan, even one used for business, is not attributable to a business but is rather the responsibility of an individual to repay. If a company goes bankrupt, it may be able to avoid repaying its outstanding business loans, but personal loans remain the responsibility of the individual who took out the loan.
Personal loans are often more affordable than other forms of unsecured credit, such as credit cards. However, they’re not the cheapest type of money available, and for those with poor credit, they can actually get quite expensive. You can expect a personal loan for business to cost between 5.99% and 29.99% in annual interest charges, plus any setup or maintenance fees charged by lenders.
Your personal credit report and score will be of paramount importance in terms of qualifying for a personal business loan. Your intended use of the proceeds, your annual income and your debt-to-income ratio are also important factors.
A personal loan makes sense for business owners when no other cheaper financing options are available. A personal loan for business can also make sense if a company wants to keep a loan off its books for accounting purposes, relegating the liability to an individual instead. This is particularly true in the case of a sole proprietorship or partnership.
You should avoid a personal loan for your business when cheaper financing options are available. You may also want to avoid a personal loan for business to protect yourself from personal liability in case your business fails.
Personal loans have proliferated over the past decade, with numerous online banks now in the game. Large, traditional banks continue to offer personal loans and may be able to offer better rates, higher limits and more customized loan packages for top-tier borrowers than online options.
Alternative financing options, such as Seek Business Capital, can offer tailored loans for startup businesses or those who may have trouble finding loans elsewhere. Community development financial institutions, or CDFIs, may offer personal loans in areas that are traditionally underserved.
Individuals with good credit are the most likely candidates for personal loans for business. Although those with lower credit scores may qualify for a personal loan, rates are likely to be sky-high, and alternative funding sources are likely to be more attractive.