Lending Library

More than 30% of American small businesses are not approved for at least some of the funding they apply for.

Reasons for this can range from operating in a risky industry to a low credit score. But what really shouldn’t be a concern is flubbing the preapproval process by not having the required documentation.

If you’re concerned that you might fall into that category, read on—these are the documents you’ll need to apply for a small business loan or other financing.

Which documents will you need to apply for business financing?

The first thing you will do when you apply for financing at Lendio is give us enough information to help our lender network assess your risk. When you click “Apply now,” you’ll start our 15-minute online application.

You’ll need the following documents:

• 3 months of business bank statements (you’ll be given the choice to connect your account or manually upload images)
• A copy of your driver’s license or state ID
• Voided check from your business account
• Proof of business ownership
• Month-to-date transactions

You’ll also be asked to provide:

• The amount of money you want to borrow
• When your business started and some general information about your business
• Your birthday and your social security number

What documents will you need for the next stage?

After we receive your application, our financing network will review your application and we’ll let you know what you’re eligible for. Depending on the types of loans or other financing you’re being offered, you may need to provide some of the following documents before your financing funds. And you won’t be asked to guess at anything: your Lendio funding manager will walk you through all of this.

You may be asked to provide:

Tax returns 

These will objectively show lenders how much money your company makes, how much you draw from the business, and how much money you personally have in the bank.

Some lenders will want to see profit on your business tax return—and if not profit, then a clear path to profitability. They’ll want to know that you pay your taxes in full and on time. 

Business bank statements

You will have already uploaded 3 months’ worth, but some types of financing can require additional bank info. These documents are used to show lenders your cash flow patterns. BTW, these will need to be business bank accounts, not a personal account.

A business plan

Some lenders will request a copy of your business plan, which they may review from two angles. 

First, they’ll be looking at the legitimacy of both the problem your business solves and your solution to it, as well as how you plan to bring your solution to market and how you plan to make money from it. 

And don’t make the mistake of thinking that only apps and tech platforms solve problems. A hair salon could solve the simple problem of there not being another hair salon closer than 6 blocks away, and it’s a perfectly sound solution to a perfectly reasonable problem.

Second, they’re looking for a good fit, both from your business and from you, and this could mean different things. You may not be a good fit if:

• They have a different idea of how you should be growing
• They don’t share enthusiasm for the category you’re in
• Any of a number of other reasons

Also, don’t worry about not being a good fit, however. Lendio works with 75+ lenders, which opens up a lot of options.

Profit and loss statement and balance sheet

A P&L statement, also known as an income statement, shows a business's revenues, expenses, and profits or losses over a specific period. It helps lenders understand how much money the company is making and where it is being spent.

A balance sheet provides a snapshot of a company's financial position at a given point in time. It lists all of the assets, liabilities, and equity of the business. This document gives lenders an overview of what the business owns and owes.

Business license and related documents

If you didn’t previously upload your business license, you may be asked to by some lenders to provide it now. You could also be asked for a copy of your LLC or articles of incorporation, if relevant.

Debt schedule

A debt schedule is a document that outlines all the outstanding debts of a business, including loans, interest payments, and other financial obligations. It is an important piece of information for lenders when considering a business loan application.

A debt schedule typically includes the following information:

• Outstanding balance: This is the total amount owed on a particular loan or debt.
• Interest rate: The annual percentage rate charged by the lender on the outstanding balance.
• Payment frequency: This refers to how often payments are due (monthly, quarterly, annually).
• Maturity date: The final date by which the loan or debt must be repaid in full.
• Collateral: Any assets that have been pledged as security for the loan.
• Guarantors: Individuals or entities who have guaranteed to repay the loan in case the business is unable to do so.

Documentation requirements for SBA loans.

If you have your heart set on a Small Business Association (SBA) loan, you’ll be asked for the following information in addition to the documentation listed above.

• Why are you applying for this loan?
• How will the loan proceeds be used?
• What assets need to be purchased, and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your management team?
• Anyone who owns more than 20% of the business will need to complete SBA Form 413.

If any of these seem confusing, don’t worry. If you apply for financing through Lendio’s marketplace, your funding manager will explain any additional documentation required. You’ll also upload everything in your online document center, so you’ll have a record of what you’ve submitted and what’s still missing.

It’s common for companies growing faster than their current income to seek outside capital to keep up their momentum. An under-capitalized business will find it difficult to make the leap required to scale and expand.

A clear first step to lining up outside capital is to determine whether equity investment or debt financing (or a combination of the two) might be the best route for your business.

What is equity financing?

When you own a business concept or company, there’s a subjective value attached to it called equity. The equity of any type of asset—whether intellectual or physical—is the value someone is willing to pay for it, minus its liabilities. That could mean the value of an entity today (measured in time and money invested) versus its value in the future (measured by comparable growth).

Once the owner and investor determine the “valuation” of the asset, the owner can then sell parts of the equity to raise capital. 

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

What is debt financing?

Debt financing is a source of business funding where a lender provides to the business an agreed-upon amount of money that is to be repaid over a period of time, in addition to any associated fees or interest.

Types of equity financing.

There are a variety of methods to raise equity capital, including seed capital, angel capital, and managed venture capital. Here’s a closer look at each of these popular equity financing solutions. 

Seed capital

Seed capital typically comes from private investors (often personal sources like friends and family members) during the startup phase of a company’s development. It only qualifies as equity financing if the investor receives a piece of the company in return for its investment.

Angel capital

Angel capital comes from angel investors—typically high-wealth individuals who invest in businesses (startups included). In exchange for angel capital, an investor will require a piece of the companies in which they invest.

Managed venture capital.

Venture capital funds come from managed, pooled investments. This type of funding is usually only available to startups with the potential for rapid growth and high returns. Again, you’ll have to give up a share of your business in exchange for the investment dollars you receive. 

Key differences between debt financing and equity financing

Understanding the key differences between debt financing and equity financing can help you make an informed decision tailored to your business needs.

1. Ownership and Control

• Debt Financing: You retain full ownership and control of your business. Lenders have no say in business decisions.
• Equity Financing: You give up a portion of ownership in your business. Investors may have input on business decisions and strategic direction.

2. Repayment Obligation

• Debt Financing: Requires repayment of the borrowed amount, plus interest and fees, according to the lender’s terms.
• Equity Financing: No obligation to repay the investment. Investors expect returns in the form of dividends or an increase in the company’s value.

3. Profit Sharing

• Debt Financing: Profits remain with the business owner. There is no requirement to share profits with lenders.
• Equity Financing: Profits need to be shared with investors based on their equity stake. This can reduce the total profit that goes back to the business.

4. Credit Impact

• Debt Financing: Can help build business credit if the lender reports to credit agencies. Poor credit might make it difficult to qualify.
• Equity Financing: Doesn’t impact business credit directly. Credit history is generally not a barrier to obtaining funds.

5. Business Risk

• Debt Financing: Poses a risk if the business is unable to meet repayment obligations, potentially leading to loss of collateral or personal assets if a personal guarantee is involved.
• Equity Financing: Reduces financial risk since there’s no debt to repay, but you risk losing a measure of control and having to share future profits.

Considering these differences can clarify which financing option aligns best with your business goals and current financial situation.

When to choose equity vs. debt financing.

Every business has to choose for itself whether equity financing or debt financing makes the most sense, and many companies opt for a mixture of both types of funding. There are risks with either option you choose. 

If your business closes and it still owes outstanding debts, you may still have to repay those loans plus interest. The same isn’t true with equity financing. On the other hand, if you sell your business for a sizable profit, paying off shareholders could be much more expensive than the cost of paying off a business loan. 

It’s up to you to weigh the pros and cons of each type of financing and figure out which solutions make the most sense for your business. 

Lendio’s mission is to empower your small business by making small business loans simple by providing options, speed, and trust. Whether you are looking for an acquisition loan or a startup loan, Lendio offers hundreds of different loan products from a variety of lenders. Find out which business loan is best for you.

Understanding how credit scores are calculated can sometimes feel like unraveling a complex puzzle. However, breaking down the key components gives a clearer picture of how these scores are derived and what they signify. A credit score is essentially a numerical representation of your creditworthiness, influenced by various financial behaviors and patterns. This guide will delve into the factors that impact your credit score and explain how each element contributes to your overall rating.

What is a credit score?

A credit score is a numerical representation of your creditworthiness. It is calculated based on your borrowing and payment history and indicates to lenders how likely you are to repay your debts on time.

It’s also important to understand that you don’t have just one credit score—different lenders and credit reporting agencies use multiple credit scores. While most scoring models assess similar factors such as payment history, amounts owed, length of credit history, new credit, and types of credit, they may weigh these factors slightly differently, resulting in variations in your score.

How is a credit score calculated?

The most common credit score you’ll hear of is FICO or the Fair Isaac Corporation. FICO determines the creditworthiness of an individual with a number, typically between 300 and 850. This FICO credit score is the lending industry standard for making credit-related decisions.

FICO scores are calculated from information pulled from the three major credit bureaus in the United States: Experian, TransUnion, and Equifax. These bureaus, in turn, gather information from lenders like credit card companies, student loan lenders, and banks.

FICO credit scores are divided into several ranges that help lenders assess an individual's credit risk. Here's a breakdown of the different ranges:

• Very Poor (300-579)
• Fair (580-669)
• Good (670-739)
• Very Good (740-799)
• Exceptional (800-850)

Your personal credit score has a large impact on your ability to get a business loan. Most lenders will have a minimum credit score requirement in addition to other eligibility criteria.

FICO determines your credit score based on five factors, but each is weighted differently. Your repayment history and overall credit utilization are the main components of your score.

5 components of your FICO credit score.

1. Payment history

FICO says that payment history determines 35% of your credit score, making this factor the most important aspect of your credit reports. The guiding wisdom here is that past repayment behavior is the best way to determine your ability to pay off new debts.

“Both revolving credit (i.e., credit cards) and installment loans (i.e., mortgage) are included in payment history calculations, although installment loans take a bit more precedence over revolving credit,” financial expert Rob Kaufman of FICO writes. “That’s why one of the best ways to improve or maintain a good score is to make consistent, on-time payments.”

You can boost this portion of your score, and, therefore, greatly boost your FICO credit score overall, by paying down existing debts. One of the fastest ways to push your score skyward is to pay off a debt like a credit card completely. Even ensuring your payments are timely can have an impact, although paying above the minimum will compound your efforts to improve your score.

2. Amounts owed

The next biggest factor FICO uses in determining your credit score is your “credit utilization.” As the term suggests, this metric compares the amount of credit you are using to the credit available to you. This factor accounts for 30% of your FICO score.

Basically, your credit utilization is the percentage of debt you carry. If your credit burden is high, it will lead lenders to believe that much of your monthly income is going toward debt repayments.

“Credit score formulas ‘see’ borrowers who constantly reach or exceed their credit limit as a potential risk,” Kaufman explained.Generally, a “good” credit utilization ratio is 30% or less. Improving this aspect of your credit score can require some strategic thinking. If you pay off a credit card, you might want to keep that account open so the open credit line pushes the ratio in your favor. Similarly, asking for credit limit increases can better your burden percentage.

3. Length of credit history

The number of years you have been using credit has an impact on your score. FICO says it makes up 15% of your score, although this can be a bigger factor if your credit history is very short.

“Newer credit users could have a more difficult time achieving a high score than those who have a credit history,” Kaufman said, “since those with a longer credit history have more data on which to base their payment history.”

It’s smart to always have some lines of credit open, even if you aren’t using them. This approach is especially true if you, or your children, are young adults, although you want to ensure you can responsibly handle credit cards.

4. Credit mix

Credit mix accounts for 10% of your FICO score, so it is a relatively minor factor unless your credit history is limited. Generally, lenders like to see several different kinds of lines of credit on your report, like credit cards, student loans, auto loans, and mortgages.

“Credit mix is not a crucial factor in determining your FICO score unless there’s very little other information from which to base a score,” Kaufman stated.

If you have multiple lines of credit open, you probably don’t have to worry about this factor. Instead, focus on changing your credit utilization ratio or improving your repayment history.

5. New credit

The final 10% of your FICO score is determined by how many lines of credit you have opened recently. This aspect is why people say hard checks on your credit score can actually hurt your standing.

“Opening several new credit accounts in a short period of time can signify greater risk—especially for borrowers with a short credit history,” said Kaufman.

When you apply for a new credit card, loan, or lease, lenders look at your credit history. This check itself shows up on your credit report, even if you were denied the line of credit.

Inquiries can remain on your credit report for 2 years, but FICO only includes credit checks made in the last 12 months in determining scores. “Soft” checks on your credit, like credit monitoring services, are not included.

What doesn't affect your credit score?

Several factors contribute to your credit score, but some things don't impact it:

• Personal information: Age, race, ethnicity, nationality, sex, and marital status don't influence your credit score.
• Soft inquiries: Background checks by potential employers or when you check your own credit report don't affect your score.
• Salary and employment: Salary, employment history, and occupation are not considered when calculating your credit score.
• Location and rental payments: These are not factors unless reported to and recorded by credit bureaus.

Lenders may use this information to evaluate credit applications, but it doesn't directly affect your numerical credit rating.

Whether you’ve gone through a personal or business bankruptcy, lenders will consider past bankruptcies when making a loan decision. This post will cover common questions about bankruptcy and how it impacts your loan application.

Can you get a business loan after bankruptcy?

Yes, you can qualify for a business loan if you’ve had a bankruptcy. However, lenders will want to see that you’ve rebuilt your credit and will have varying waiting periods before you are eligible.

When can you qualify for a loan after bankruptcy?

Bankruptcy policy will vary by lender. Some will require waiting seven years when the bankruptcy will be removed from your credit report. Others will consider your application within two to three years after the bankruptcy is closed if you’ve rebuilt your credit score. Some lenders will disqualify you if you have had multiple bankruptcies.

Can you get an SBA loan after bankruptcy?

Yes, you can qualify for an SBA loan if you’ve had a previous bankruptcy. The policy will vary by lender but generally starts at no bankruptcies or foreclosures in the past three years with no more than two total bankruptcies. 

Types of bankruptcy.

Chapter 7 bankruptcy

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of a debtor's non-exempt assets by a trustee. The proceeds are used to pay off creditors. This type of bankruptcy is designed for individuals or businesses that don’t have the means to pay back their debts. For businesses, this usually means the end of operations. However, individuals might see it as a fresh start, albeit with a significant impact on their credit report for 10 years.

Chapter 11 bankruptcy

Chapter 11 bankruptcy is primarily for businesses, allowing them to continue operations while reorganizing their debts. It’s a complex process that involves negotiating with creditors to modify the terms of the debt without selling off assets. This form of bankruptcy can be expensive and time-consuming but offers businesses a chance to recover and eventually return to profitability.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is aimed at individuals with a regular income who want to pay their debts but are currently unable to do so. It involves a repayment plan lasting three to five years, allowing debtors to keep their property while making more manageable monthly payments towards their debt. The successful completion of the payment plan can lead to the remaining debts being discharged. Chapter 13 bankruptcy remains on an individual's credit report for seven years, offering a less severe impact compared to Chapter 7.

Waiting periods

Typically, a bankruptcy will remain on your credit report for at least 7 years. However, because the court filings are public, the fact that you declared bankruptcy would remain part of the public record if someone searches for it.

Steps to qualify for a loan post-bankruptcy.

Rebuild your credit.

Rebuilding your credit after bankruptcy is crucial for qualifying for a business loan. It may seem daunting, but it's possible with a strategic approach:

Start by regularly checking your credit report for inaccuracies. Dispute any errors that can negatively impact your score.

Consider obtaining a secured credit card. This requires a deposit acting as your credit limit.

Make small purchases with this card and pay off the balance in full each month. This shows lenders your responsible credit use.

Always make payments on time, keep your credit utilization low, and be patient. Credit rebuilding takes time, but consistent effort will gradually improve your creditworthiness.

Research lenders.

Find out which lenders will work with business owners with a prior bankruptcy and the thresholds you'll need to meet before you apply.  If you apply through Lendio, we can help match you with lenders who will work with someone with your credit history.

Grow business income.

Lenders will also consider your business's current financial standing and future potential when evaluating your loan application. Focus on increasing revenue and building strong cash flow to demonstrate the ability to repay a loan.

A personal credit score determines the level of risk that comes with lending to you. You use it to apply for credit cards and other financing options to cover major purchases. A business credit score works similarly, except instead of evaluating your risk as an individual, financial institutions evaluate your business’s viability.

Like personal credit, business credit takes time to build. While your equity may be able to boost your business credit, the overall goal is to keep your personal and professional finances separate. This guide will review the factors that go into your business credit score range and what a healthy number looks like.

What is a business credit score?

A business credit score is a numeric expression that represents the creditworthiness of a company. It is used by lenders, suppliers, and other financial institutions to evaluate the likelihood that a business will repay its debts. This score typically ranges from 0 to 100 for most scoring models, with higher numbers indicating better creditworthiness.

Unlike personal credit scores, business credit scores take into account factors such as the company's payment history, credit utilization rate, length of credit history, public records including bankruptcies, and the company’s size and industry. A healthy business credit score is crucial for securing financing, favorable loan terms, and establishing trust with suppliers and vendors.

Business credit score benefits.

Having a high business credit score can unlock numerous advantages for your business that go beyond simply qualifying for loans or credit lines. These include:

• Better financing terms: A strong business credit score can help you secure lower interest rates and more favorable repayment terms on loans and lines of credit.
• Increased borrowing power: With a higher business credit score, you may be able to access larger amounts of capital for major purchases or expansions.
• Improved supplier relationships: Many suppliers and vendors use business credit scores to determine whether or not they want to extend credit to a company. A strong business credit score can help establish trust and open up more opportunities for trade credit.
• Separation of personal and professional finances: By building a solid business credit score, you can keep your personal assets separate from your business assets, protecting yourself in the event of any financial issues.
• Insurance policy rates could be lower: A good business credit score may influence your insurance premiums, potentially leading to lower rates on your business insurance policies.

Overall, investing time and effort into building and maintaining a solid business credit score positions your company for better financial health and long-term success.

How a business credit score works.

A business credit score, much like a personal credit score, is a reflection of a company's financial responsibility and creditworthiness, but with a focus on the business's operations. When a business applies for loans or credit lines, lenders and suppliers will examine this score to decide how risky it is to offer credit. 

This score is calculated based on several factors, including the timeliness of bill payments, the amount of available credit used by the business, the length of the business's credit history, any legal filings such as liens or bankruptcies, and the company's financial stability. Essentially, this score is a numeric summary of a business’s financial history and current financial position, aimed at predicting the likelihood of the business fulfilling its financial obligations.

What goes into your business credit score?

Multiple factors contribute to your business credit score—some are in your control while others aren’t. A few of these factors include:

• Your payment history: If you have paid off your loans steadily over time without missing any payments, you will have built a strong business credit score.
• Credit history and age: How long has your business had financial liabilities? A new business will have a much lower credit score than a company that has maintained good credit for the better part of a decade. 
• Number of accounts: How many accounts do you have? How many are active with existing debits or credits? 
• Credit utilization: What percentage of allowed credit do you have? Have you reached the maximum limits of your business credit cards, or do they still have available credit for you to use? 
• Types of credit: Credit bureaus look for multiple funding sources, otherwise called a credit mix. 
• Recent credit inquiries: Have lenders recently requested information about your business? How many and how long ago?  

Many of these factors are also used for personal credit scores. However, they take on a new meaning when applied to a business. 

For example, the severity of the debt you take on also depends on the size of your business and your expected profits. Your credit can also be impacted by vendors that send unpaid invoices to collections or report overdue bills that you miss. 

Essentially, almost any financial transaction you make as a business owner can contribute to your credit score, which is why it is so important to maintain good, organized bookkeeping.

What is a good business credit score?

The main difference between a personal and business credit score is the number range. While a personal credit score ranges from 300–850, business credit scores are typically developed on a scale of 0–100. Additionally, there are 3 main business credit score bureaus, all of which use this range. These are Dun & Bradstreet (D&B), Equifax, and Experian.    

As a rule of thumb, the higher the score, the better. If you have a business credit score above 75, then you have exceptional business credit and shouldn’t have trouble securing funding. 

A score of 50–75 is considered fair and you should be able to get funding, though maybe at a higher interest rate or more limited terms. Finally, anything below 50 is considered poor credit and a high-risk account.Each of the three major credit bureaus collects and measures different information to calculate your business credit score.

How to improve your business credit score.

Improving your business credit score is a strategic process that requires consistent effort over time. Here are practical steps you can take to enhance your company's financial standing:

• Pay your bills on time or early: Establish a track record of timely payments, as payment history heavily influences your credit score.
• Reduce credit utilization: Aim to use a smaller portion of your available credit to show lenders you're not overly reliant on credit.
• Update your business information: Ensure your business information is accurate and up to date with all credit bureaus. Inaccuracies can negatively affect your score.
• Monitor your business credit report: Regularly review your credit reports from the major credit bureaus to catch and dispute any inaccuracies or fraudulent activities early.
• Establish trade lines with suppliers and vendors: Use trade credit to your advantage by establishing and maintaining positive payment histories with multiple suppliers and vendors.
• Limit credit inquiries: Only apply for new credit when necessary, as too many inquiries in a short time can indicate risk to lenders and negatively impact your score.
• Build a diverse credit mix: Having a mix of credit types, such as a business credit card, a line of credit, and trade credit, can positively affect your score.

By taking these steps, you can improve your business credit score, which can lead to better loan terms, increased funding opportunities, and a stronger financial foundation for your business.

Check your business credit score.

You can find sample business credit score reports for each of these credit bureaus so you can determine which ones you want to use. The scores should stay relatively equal across each report. 

To access your credit scores, visit the websites of these credit bureaus. You can pay from $40 at Experian up to $100 at Equifax for your report.

Understanding your business credit score range can help you secure funding for startup expenses and company expansion. You can be more aggressive in negotiations with lenders when you have a good score and can take steps to improve it before taking out a loan if you have a poor one. Don’t be afraid of your credit score—use it to make sound financial decisions for your business!

Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often emphasize a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’s ability to get funded and its borrowing capacity. 

How does asset-based lending work?

In asset-based lending, a business secures a loan or line of credit by offering its assets as collateral. These assets can include real estate, inventory, accounts receivable, equipment, and other property that holds value. The lending agreement specifies how much money the business can borrow, which is usually a percentage of the collateral's appraised value. This percentage varies depending on the type of asset and its marketability; for instance, receivables might be financed at around 70% to 80% of their value, while inventory may only secure around 50%.

The process begins with the lender evaluating the assets to determine their current market value. If the business defaults on the loan, the lender has the right to seize the collateral, sell it, and recover the owed amount. This makes asset-based loans less risky for the lender compared to unsecured financing, potentially leading to more favorable interest rates for the borrower. However, businesses must consider the risk of losing their assets before entering into such agreements.

How much can you borrow? 

Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details).

Pros and cons of asset-based financing.

If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. 

Pros of asset-based financing.

• Qualification requirements: Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. 
• Fast funding: Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours.
• Less personal risk: With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). 

Cons of asset-based financing.

• Higher costs: It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. 
• Some assets may not qualify: Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash.
• Loss of asset(s): If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral.

Asset-based lending vs. cash-flow lending.

When comparing asset-based lending to cash-flow lending, it's essential to understand the primary differences between these financing options. Asset-based lending focuses on the value of the collateral that a business can provide, such as inventory, equipment, or accounts receivable. This type of financing is particularly beneficial for companies that have significant physical assets but might not have a strong cash flow.

On the other hand, cash flow lending evaluates a business's future cash flows as the main criteria for the loan. Lenders look at the company’s past and projected cash flow statements to assess its ability to repay the loan. This type of lending is more suitable for businesses with strong and predictable cash flows but fewer physical assets to use as collateral.

The choice between asset-based lending and cash-flow lending depends on the specific needs and circumstances of the business. If a company has valuable assets but faces cash flow challenges, asset-based lending may offer a viable solution. Conversely, for businesses with strong cash flows but limited assets, cash-flow lending might provide a more appropriate form of financing. Both options have their merits and potential drawbacks, necessitating a careful analysis to determine the best fit for the business’s financial strategy.

Is asset-based lending right for my business?

Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. 

First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.

The Small Business Administration (SBA) provides attractive loan programs for small business owners. If you’re a small business in search of financing with low rates and lengthy repayment terms, SBA loans are definitely worth considering. 

As you research the various SBA loans out there, you’ll come across SBA 504 and SBA 7(a) loans. Both options are guaranteed by the SBA and issued by SBA-approved lenders, such as banks, credit unions, and online lenders. So which loan makes the most sense for your unique situation? Keep reading to find out.

SBA 504 loan vs. 7(a) loan.

Both the SBA 504 loan and 7a loan are great financing solutions for small businesses, but they’re not created equal. Your particular business status and goals will dictate the ideal choice for your particular business. 

Compared to the SBA 504 loan, the SBA 7(a) loan is far more flexible. You can use it to fund real estate, working capital, inventory, supplies, equipment, and more. The SBA 504 loan, however, is fairly specific and designed to help small business owners purchase, lease, renovate, or improve commercial real estate, buildings, or equipment.

If you’re in need of working capital to purchase inventory or supplies or would like to fill cash flow gaps, for example, the SBA 7(a) loan is an excellent option. This is particularly true if you have collateral to provide and are looking for a faster application process. 

The SBA 504 loan, on the other hand, makes more sense if you’d like to finance real estate, buildings, or equipment and can prove you meet job creation, job retention, or public policy goals. You should also expect a slower application process.

Key differences

The table below outlines the key differences between the SBA 504 loan, the SBA 7(a) loan.

SBA 504 loans.

Formally known as the SBA 504/CDC loan, the SBA 504 loan can come in handy if you’d like to purchase fixed assets, like real estate or equipment. Its loan amounts range from $125,000 to $20 million, with terms of up to 20 years. One of the greatest perks of the SBA 504 loan is its low down payment requirements. 

Depending on your situation, you can lock in financing for as little as 10% of the asset’s purchase price. Also, while the SBA 7(a) loan offers a fixed or variable interest rate, rates for 504 loans are always fixed and never fluctuate. This makes it easy to budget for your payments in advance and avoid unwanted financial surprises. 

The 504 loan is less flexible than the SBA 7(a) loan, as it’s designed for business owners who want to improve fixed assets, like land, buildings, or equipment. These projects should encourage economic development or other public policy goals. A few examples of public policy goals include conserving energy or growing a minority- or women-owned business. 

It’s important to note that the funds from a 504 loan are not for investment properties. If you plan to finance new construction, a minimum of 60% of the building must be owner-occupied once the construction is complete and only 20% of the space can be leased in the long term. 

In most cases SBA 504 loans are self-secured so the underlying fixed assets act as collateral. 

Also, anyone who owns 20% or more of the business must sign a personal guarantee.

What are the eligibility requirements for SBA 504 loans?

For businesses aiming to secure an SBA 504 loan, several specific eligibility requirements must be met. Businesses looking to secure SBA 504 funding must operate as for-profit entities within the United States or its territories. Similar to the SBA 7(a) program, applicants must fall within the definition of a small business according to SBA size standards, which vary by industry.

The objective of the financing must align with the goals of the SBA 504 program, focusing on the purchase or improvement of fixed assets such as land, buildings, and long-term machinery. Applicants are expected to demonstrate a tangible net benefit to the community, such as job creation or retention, which should meet or exceed certain benchmarks set by the SBA.

An essential criterion is the business's ability to repay the loan. This is evaluated through historical and projected cash flows, ensuring that the business generates sufficient income to cover loan payments and other financial obligations. A down payment typically of 10% of the project cost is required, demonstrating the borrower's commitment and reducing the risk of default.

Furthermore, the project financed must be beneficial to the business's operations and cannot be for passive or speculative purposes. Properties financed with a 504 loan must be at least 51% owner-occupied for existing buildings or 60% for new constructions, ensuring the primary use is for the applicant’s business activities.

Business owners seeking an SBA 504 loan must also have a sound character, evidenced by a clean criminal record and a history of responsible fiscal management. This includes no previous defaults on government loans, which would disqualify the applicant from receiving SBA assistance.

What fees and interest rates will I pay on an SBA 504 loan?

For those obtaining an SBA 504 loan, understanding the fee structure and interest rate is crucial for financial planning. The interest rates for SBA 504 loans are fixed for the life of the loan, providing a predictable monthly payment schedule. These rates are typically below market rates for commercial loans, making them an attractive option for small business owners.

In terms of fees, borrowers can expect to pay a variety of costs associated with the SBA 504 loan process. These fees include a processing fee, a funding fee, and a servicing fee, which typically total 3% of the loan amount. Additionally, there may be fees related to the third-party lending institution, legal fees, and other closing costs.

It's important for potential borrowers to factor these fees into the overall cost of their project to ensure affordability and feasibility. Even though these fees can add up, the benefits of fixed, low interest rates and the accessibility of significant funding for major projects often outweigh the costs, making the SBA 504 loan a practical option for many small business owners looking to expand or upgrade their fixed assets.

What are SBA 504 loan collateral requirements?

The collateral requirements for an SBA 504 loan are straightforward, given its focus on fixed asset financing. Essentially, the assets being financed serve as the primary collateral. This generally includes the real estate or heavy equipment that the loan proceeds are used to purchase, renovate, or expand.

In addition to the financed assets, lenders also require personal guarantees from all principal owners of the business. A personal guarantee means that if the business fails to repay the loan, the individual guarantors may be personally responsible for the balance. This requirement is designed to ensure that those with a significant stake in the business are committed to its success and the repayment of the loan.

SBA 504 loan pros and cons.

To fully appreciate the value of SBA 504 loans, it's important to examine both the benefits and potential downsides of this financing option.

Pros

• Low down payment: One of the most appealing aspects of SBA 504 loans is the relatively low down payment requirement, often as little as 10% of the project cost. This makes it easier for small businesses to undertake large projects without significantly impacting their cash flow.
• Fixed, below-market interest rates: SBA 504 loans come with fixed interest rates that are typically below those of commercial loans, providing predictable monthly payments and long-term savings.
• Long-term financing: With terms up to 20 years for real estate and up to 10 years for equipment, these loans offer long-term financing options, helping businesses manage their cash flow more effectively.
• Access to large amounts of capital: SBA 504 loans allow businesses to access significant amounts of capital, ranging from $125,000 to $20 million, enabling them to finance major projects.
• Economic development: The program is designed to support projects that promote economic development within a community, including job creation and retention, which can be a significant advantage for businesses with a focus on growth.
• Favorable collateral conditions: Given that the loan is typically secured by the assets being financed, businesses may not need to provide additional collateral, simplifying the lending process.
• Enhances business creditworthiness: Successfully repaying an SBA 504 loan can improve a business's credit score, making it easier to obtain future financing.

Cons

• Restricted use of funds: Unlike SBA 7(a) loans, the use of funds from an SBA 504 loan is limited to purchasing, constructing, or improving fixed assets such as real estate and heavy machinery, reducing flexibility for other business needs.
• Complex application process: The application process for an SBA 504 loan can be cumbersome and time-consuming, requiring potential borrowers to provide extensive documentation and go through a detailed qualification procedure.
• Requires project to meet specific criteria: Projects financed with SBA 504 loans must contribute to job creation or other community development goals, which may not align with all business objectives.
• Personal guarantees required: Owners holding 20% or more of the business equity must provide personal guarantees, potentially putting personal assets at risk.
• Prepayment penalty: Borrowers face prepayment penalties if the loan is paid off before a specified period, making it costly to refinance or repay early.
• Two-loan structure can be complex: Financing typically involves both a bank loan and a CDC (Certified Development Company) loan, adding to the complexity of the borrowing and repayment process.
• Property occupancy requirements: To qualify, the financed property must be at least 51% owner-occupied for existing buildings or 61% for new constructions, which may not be feasible for all businesses.
• Not available for working capital or inventory: The SBA 504 loan cannot be used for working capital, inventory, consolidating or repaying debt, or for investment in rental real estate, limiting the scope of financial planning for some businesses.

SBA 7(a) loans.

The SBA 7(a) loan is considered the SBA’s flagship program. It’s flexible in that you can use it to cover a variety of business-related expenses, such as working capital, inventory, equipment, and real estate. The SBA 7(a) comes with loan amounts of up to $5 million with repayment terms of up to 25 years. Compared to loans from traditional lenders, like banks and credit unions, the SBA 7(a) loan offers competitive interest rates that can save you hundreds or even thousands of dollars over time. 

In most cases, the SBA 7(a) is the way to go. It’s a flexible, low-interest rate financing solution that is ideal for a number of purposes. To qualify, you must be based in the U.S. and meet the SBA’s definition of a “small business,” which depends on your industry. In addition, you’ll have to show that you’ve invested at least some of your own funds in the business and looked into other financing solutions. 

If you go this route, be prepared to pay an SBA guarantee fee, which will ensure the government has the money to reimburse the lender if you can’t repay the loan. You may also need some type of collateral. In addition, anyone who owns 20% or more of the business will be required to sign a personal guarantee.

What are the eligibility requirements for SBA 7(a) loans?

To be eligible for an SBA 7(a) loan, a business must meet several key criteria. Businesses seeking SBA 7(a) funding must operate for profit within the United States or its territories. The business should also have reasonable invested equity, ensuring that the business owner has personally invested in their venture. Additionally, the business must demonstrate a need for the loan proceeds and use them for a sound business purpose. The business cannot be in the business of lending and must not present a conflict of interest with the SBA.

Applicants must also qualify under the SBA's definition of a small business, which varies by industry. Generally, this means meeting specific size standards related to the number of employees or annual receipts. The business must also show that it has attempted to use other financial resources, including personal assets, before applying for an SBA loan.

The credit history of both the business and its owners will be examined. This includes a review of both personal and business credit scores. Business credit scores of 155 or higher or personal credit scores of 650 or higher are typically required to receive SBA 7(a) loan funding. Applicants need to demonstrate a satisfactory ability to repay the loan from earnings, not reliant on speculative gains. All applicants are also subject to a background check which considers character, criminal history, and previous financial behavior, including any past dealings with the government such as previous loans or tax obligations.

What fees and interest rates will I pay on an SBA loan?

For SBA 7(a) loans, interest rates are typically linked to the prime rate and can be fixed or variable. These rates are often more competitive than those of traditional bank loans, providing an appealing cost-saving benefit for small business owners.

In addition to interest rates, borrowers of SBA 7(a) loans also need to be aware of various fees that can apply. One of the more significant charges is the SBA guarantee fee, which is based on the loan amount and the maturity of the loan. This fee ranges from 0% to 3.5% of the guaranteed portion of the loan, with rates adjusting based on the size of the loan and the repayment term. Additionally, there might be servicing fees, closing costs, and late fees if payments are not made on time.

Understanding these costs upfront is crucial for potential borrowers. It allows for a more accurate calculation of the total cost of the loan, ensuring that businesses can make informed financial decisions and select the loan option that best suits their needs.

What are SBA 7(a) loan collateral requirements?

While SBA 7(a) loans are renowned for their flexibility and favorable terms, potential borrowers should understand the collateral requirements that accompany these loans. Generally, for loans $50,000 or more, the SBA will require its lenders to use the established collateral policies and procedures for their similarly-sized non-SBA guaranteed commercial loans. Types of collateral may vary and can include business assets, personal assets, or both. This might encompass real estate, equipment, inventory, or personal property.

For loans under $50,000, lenders are not required by the SBA to take collateral, making the SBA 7(a) program accessible even for small-scale borrowers who might not possess extensive assets. However, for loans exceeding $350,000, the SBA mandates lenders to collateralize the loan to the maximum extent possible up to the loan amount. If the loan is not fully secured, the lender must demonstrate that the proposed collateral is indeed the maximum available and that the loan is of sound value.

It's important for prospective borrowers to engage in open and honest discussions with their SBA-approved lender about the collateral requirements specific to their loan. Being well-prepared and clear about what assets can be used as collateral will streamline the application process and help set realistic expectations about securing an SBA 7(a) loan.

SBA 7(a) loan pros and cons.

To better understand the SBA 7(a) loan program, it is crucial to weigh its advantages and disadvantages.

Pros

• Versatility: One of the most significant advantages of the SBA 7(a) loan is its flexibility. Funds can be used for a wide range of business purposes, including working capital, debt refinancing, purchasing equipment, or buying real estate.
• Lower down payments: Compared to conventional loans, SBA 7(a) loans often require smaller down payments. This makes it easier for small businesses to access the capital they need without having to tie up too much of their liquid assets.
• Longer repayment terms: With repayment terms of up to 25 years for real estate and 10 years for equipment or working capital, businesses can benefit from lower monthly payments and improved cash flow management.
• Competitive interest rates: The SBA 7(a) loan program offers interest rates that are typically lower than those of equivalent commercial loans, reducing the cost of borrowing for small businesses.
• Available to startups: Unlike many conventional loans that require a business to have a history of profitability, SBA 7(a) loans are available to startups and new businesses, assuming they meet the eligibility requirements.
• Counseling and education: Borrowers have access to SBA resources, including counseling and education services, which can be invaluable for new and growing businesses.
• SBA guarantee: Because the SBA guarantees a portion of these loans, lenders are more willing to fund businesses that might not qualify for traditional loans, thereby increasing access to capital for small businesses.

Cons

• Complex application process: The procedure to apply for an SBA 7(a) loan can be lengthy and complex, requiring extensive documentation and potentially leading to longer wait times for approval.
• Collateral requirements: While not always required, collateral might be necessary for larger loans, posing a challenge for businesses without substantial assets.
• Personal guarantee: Owners with a 20% or greater stake in the business are often required to provide a personal guarantee, putting personal assets at risk if the business fails to repay the loan.
• SBA guarantee fee: Borrowers are subject to pay an SBA guarantee fee, which can add to the overall cost of the loan.
• Prepayment penalties: For loans with terms of 15 years or more, there may be prepayment penalties if more than 25% of the loan is paid off within the first three years.
• Qualification hurdles: The requirements to qualify can be stringent, including strong credit scores, which might exclude some businesses.
• Limited funding amounts: Although the maximum loan amount can reach up to $5 million, the actual amount granted depends on various factors, potentially limiting the funding a business can secure.

How to choose between an SBA 7(a) vs. 504 loan.

Choosing between an SBA 504 and a 7(a) loan boils down to your specific business needs, the nature of your project, and your long-term financial strategy. If your primary goal is to secure working capital, refinance business debt, or cover operational expenses, an SBA 7(a) loan offers the flexibility and versatility to support a wide range of business purposes. Its potentially larger loan amounts and the possibility to cover soft costs make it suitable for businesses seeking a more all-encompassing financial solution.

On the other hand, if your objective is to invest in fixed assets such as real estate or heavy equipment, an SBA 504 loan could be the better choice. With its low down payment requirements, fixed interest rates, and long-term repayment options, it's designed to make sizable capital investments more affordable. Additionally, the SBA 504 loan fosters community development and encourages long-term economic growth, providing not just financial but also societal benefits.

Ultimately, the decision should be informed by a thorough analysis of your financial situation, growth forecasts, and how the loan’s terms align with your business's cash flow and investment plans. Consulting with a financial advisor or a lending specialist can provide insights tailored to your specific circumstances, enabling you to make a well-informed choice between these two SBA loan options.

Bottom line

If you’re in the market for a flexible loan, the SBA 7(a) loan can check off all your boxes. As long as you meet the eligibility criteria, you may lock in a low rate and lengthy repayment term you might not find elsewhere. Plus, you’ll enjoy the peace of mind of knowing your loan is backed by the government. 

An SBA 504 loan can help you meet your goals if you hope to grow through new or updated facilities. You may get approved with a low down payment and secure competitive interest rates and terms for commercial real estate.

Before you choose a loan, consider the current state of your business, as well as your unique business goals and priorities. Ready to learn more about SBA loans? See if you qualify and apply for an SBA loan.

Running a small business often means navigating a financial landscape where debt is vital to growth and sustainability. However, managing business debt can be a double-edged sword. On one hand, it offers liquidity and can fuel expansion; on the other, it can be a significant financial burden if not managed properly.

Understanding when to use business debt.

Debt is not inherently bad. When managed properly, it can help your business take advantage of opportunities and grow. But recognizing the right time and the right reasons for taking on debt is crucial:

Consider debt for investments that will grow your business.

Debt is often used for investments in areas like real estate, inventory, equipment, or acquiring another business that will increase profitability and contribute to long-term success.

Construction

In the construction industry, a loan can facilitate the purchase of state-of-the-art machinery or equipment that increases operational efficiency and allows you to take on larger projects.

Retail

For retail businesses, a loan can be pivotal in expanding inventory, especially before peak shopping seasons. Additionally, it can help acquire bulk inventory at a discounted rate, reducing overall project costs and increasing profit margins.

Healthcare

Healthcare providers can use loans to invest in new medical equipment, expanding their services.

Transportation

In the transportation sector, loans can enable the purchase of additional vehicles, such as trucks or vans, expanding service capacity. Investing in newer, more efficient vehicles can reduce maintenance and fuel costs, leading to higher profitability.

Restaurants

Restaurants can benefit from loans by renovating their space to increase seating capacity or create a more appealing ambiance. Additionally, funds can be used to upgrade kitchen equipment, enhance the efficiency of food preparation, and expand the menu to attract more customers.

Unexpected events and short-term cash flow problems.

Sometimes debt can be a solution to bridge a gap between a large, upcoming expense and liquid funds, as long as you have a plan to pay it back promptly.

For example, a construction or transportation company could use a business loan to cover ongoing expenses while waiting on final payment from customers.

Other factors to consider before taking on debt.

Before you approach a lender, there are several factors to evaluate to ensure that debt is the right decision for your business:

Your business metrics.

Evaluate your business's debt service coverage ratio (DSCR) to determine if you have enough cash flow to cover new debt payments comfortably.

Market conditions.

Consider the current economic climate and market conditions that could impact your business's ability to repay debt, such as interest rate fluctuations or industry-specific risks.

Your business's financial health.

Assess whether you have exhausted all other financing options and whether taking on debt aligns with your overall financial plan and business objectives.

The purpose of the loan.

Be clear on how the loan will be used and how it contributes to the long-term strategy of your business.

Time to increase revenue.

Once you've decided to take on debt to invest in your business, understanding the timeframe in which you can expect an increase in revenue is crucial.  For instance, upgrading equipment may yield quicker productivity gains and revenue increases in manufacturing sectors, while investments in marketing or expansion might take longer to show tangible results.

Debt management strategies

Identifying your financial position and setting the right strategies is essential for effectively managing your business debt.

Create a debt schedule.

Creating a debt schedule might sound daunting, but it's a straightforward process that can bring significant clarity to your financial management. Start by gathering all the relevant information about each debt your business owes. This includes lender names, the original amount borrowed, the current balance, interest rates, monthly payment amounts, and the maturity date for each loan.

Steps to Create a Debt Schedule:

1. List Each Debt: Begin with a spreadsheet or a table. List out each debt individually. This could include bank loans, credit cards, lines of credit, and any other form of debt.
2. Detail Loan Information: For each debt, record the total initial amount borrowed, the current balance owed, the interest rate, and the terms of repayment (such as the loan term or payoff timeline).
3. Monthly Payments: Note down the monthly payment required for each debt. This helps you understand how much of your monthly cash flow is allocated to debt repayment.
4. Update Regularly: Your debt schedule is not a static document. Update it regularly as you make payments or take on new debts. This will help you keep a clear picture of your financial commitments.

Manage your cash flow meticulously.

Effective cash flow management ensures you can meet your debt obligations and prevent undue financial stress. Start with detailed cash flow forecasts and consider seasonal trends in your business.

Increase your business revenue.

Boosting income through sales, diversifying your offerings, or exploring new markets can provide additional funds for debt repayment.

Cut unnecessary expenses.

Reducing costs by renegotiating vendor contracts, eliminating non-essential services, or finding more efficient operational processes can free up money to pay down your debt.

Negotiate with creditors.

If you’re struggling with high debts or interest rates, it's worth reaching out to your creditors to negotiate more favorable terms.

Use windfalls wisely.

Any unexpected funds, such as tax refunds or a robust sales season, can be used to accelerate your debt repayment.

Consider selling off assets.

If you have assets not vital to your business’s operations, consider selling them to generate funds for debt reduction.

Use the snowball or avalanche method for debt payoff.

If you are managing debt from multiple sources such as credit cards and struggling to pay it off, consider adopting a focused method for paying your debt off. The snowball method involves paying off the smallest debts first, gaining motivation as you extinguish individual debts. The avalanche method focuses on paying the debt with the highest interest rate first, saving you money in the long run.

Be cautious with loan stacking.

Loan stacking is when a business takes on multiple loans from different lenders in a short period. This can lead to confusion and overcommitment. Instead, be strategic about the timing and number of loans you take out.

Consider debt consolidation and refinancing.

Debt consolidation involves combining multiple debts into a single loan with a longer repayment period, potentially lowering your monthly payments. Refinancing involves taking out a new loan to pay off your existing business debt, usually to secure a lower interest rate or better terms.

Monitor debt and revise strategies.

Managing business debt is not a one-time action. It requires ongoing attention, especially as your business grows and changes.

Regularly review and update your debt schedule.

New loans or changes in interest rates can affect your overall repayment plan. Updating your debt schedule ensures you're always clear on your financial commitments.

Stay connected with your accountant or financial advisor.

Professional advice can be invaluable in navigating complex financial matters, including debt management and restructuring.

Be proactive in addressing potential issues.

If you anticipate having trouble making debt payments, communicate with your lenders early to explore possible solutions and avoid penalties or damage to your credit.

Debt can be a powerful tool for small businesses, but it must be wielded with care and sound judgment. By following the strategies outlined in this guide, you'll be better equipped to manage and eventually overcome your business debt, positioning your company for long-term success.

Remember, effective debt management is not just about repaying what you owe—it's about using your financial resources wisely to grow a thriving, sustainable business.