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Jun 24, 2024
5 min read
Last update: Jun 24, 2024

From Application to Approval: How Do Business Loans Work?

Understanding how a business loan works is like tending to your campfire. As a camper, a supply of wood is a must for warmth and as a place to cook your food. Let your stockpile run low, and your flame will eventually die out.

The same is true for a business. Businesses need access to a stockpile of capital to fan the flames of expansion, invest in inventory, and sustain cash flow. A business loan is like buying firewood from the roadside stand—it fuels operations until you can cut your own wood. 

While we hope you don’t plan on burning your capital once you get it, we’re here to help explain what business loans are in more technical terms, how to qualify for one, and what makes them so essential to businesses. And, when you’re ready to apply for your next small business loan, partner with SBG Funding to secure rapid funding through our straightforward online application! 

What Exactly is a Business Loan?

When owners think of business loans, the traditional bank-provided lump-sum term loan comes to mind. This business loan involves a borrower receiving a deposit of working capital, which has monthly payments with interest tied to repayment.
Because a traditional loan is a lump-sum deposit, you’ll need to apply for additional funds if you need to borrow more. The lump-sum loan is often available through banks, credit unions, and online lenders, but sometimes these traditional lenders require a downpayment. 

Lenders may further reduce risk by requiring a secured loan backed by collateral, like property or equipment. This collateral means the lender can take ownership of your property if you fail to repay the loan. 

At SBG Funding, we don’t require collateral, meaning you can get unsecured loans for your business lending needs. And that capital is vital for businesses to make investments, perform business acquisitions, purchase real estate, and ensure consistent cash flow.

Decoding the Common Types of Business Loans

While a traditional lump-sum bank loan is a popular option for business financing, it’s hardly the only method to obtain the cash you need. Several variations of funding are available to meet your business needs without going over budget. 

  • SBA loans – The U.S. Small Business Administration guarantees a portion of loans to well-qualified borrowers eligible for various loan programs, including 7(a) loans, CDC/504, CAPLines, and Microloans. SBA loan providers can offer generous terms up to 25 years long at competitive rates and up to $5 million in cash ($10 million with SBG!)
  • Business Lines of Credit (LoC) – A flexible borrowing method that allows owners to draw cash as needed up to a pre-approved credit limit. This revolving credit provides access to more cash after repayment and requires interest only on borrowed amounts. These lines are open for 12-24 months, after which an owner must reapply for access to cash draws. 
  • Merchant cash advance –  A short-term loan option in which a lender provides a lump sum of cash in exchange for a portion of future credit card sales. Payback happens daily or weekly until you pay your total balance. Merchant cash advances are ideal for businesses needing cash and have high daily sales volume. 
  • Invoice factoring – Allows businesses to get a lump of funds in exchange for unpaid invoices. A lender can provide up to 90% of funds upfront, and customers then pay lenders directly, streamlining repayment. Invoice financing is perfect when payment cycles take several weeks, but you need access to cash much sooner. 
  • Equipment financing – Purchase mission-critical hardware and equipment, from office electronics to massive excavators, with a car loan-like financing option. A lender can finance up to 100% of equipment costs, but some require a down payment of between 15 and 20%. 

Small business owners use each type of financing for specific reasons. For example, invoice financing and merchant cash advances ensure consistent cash flow, while a business term loan is better for acquisitions, refinancing, or real estate purchases. 

Navigating Interest Rates and Fees

To complicate matters even more, each financing option and loan type has unique fee schedules, repayment terms, and interest rates. One thing is certain: you can expect to pay back more than you initially borrowed, but how much depends on various factors.

  • Term loans have current interest rates between 3% and 22%. Fees include origination fees, closing costs, late charges, early payoff, and debit/credit repayment fees. 
  • Business Lines of Credit have huge ranges for interest rates. Some are as low as 6%, while others have higher interest rates of 60% APR. Expect origination fees, fees for establishing a line of credit, and annual fees. 
  • Instead of an interest rate, lenders use a factor rate for merchant cash advances. This factor rate is a multiplier for your payback amount. For instance, a $10,000 initial loan with a 1.2 factor rate will translate to a total payback amount of $12,000. Don’t forget that merchant cash advances also have underwriting and administrative fees. 
  • Invoice factor interest rates range from 1-5% of the total unpaid invoice amount. Lenders may also collect fees as a percentage for each month invoices remain unpaid. 
  • Equipment financing has interest rates as low as 2%, but borrowers with bad credit history can see interest much higher. This financing will also have origination, underwriting, and late fees. 

Before taking on any loan or financing, it’s crucial that you consider the total cost of the loan. Your company budget can help you determine the loan amount you can handle, and SBG Funding’s Funding Calculator tool enables you to determine the amount of capital you need. 

Stepping Stones to Approval: Qualifying for a Loan

Like interest rates, fees, and terms, the eligibility requirements to qualify for each specific loan type vary slightly. Regardless, most lenders will require the following minimum requirements: 

  • Personal or business credit score of 600 FICO
  • Annual revenue of at least $250,000
  • Six months in business
  • A business bank account with at least four recent statements

To improve your chances of qualifying, lower interest rates, or boost lending amounts, shoot for the following criteria:

  • A good credit score of 700 FICO or higher
  • Annual revenue of $1 million or more
  • Two years in business
  • Comprehensive business plan with total cost of loan factored into budgets
  • Low debt-to-income ratio (DTI) or healthy debt-service coverage ratio (DSCR of 2.0 or better) 

The Application Process Simplified

Traditional lenders, such as banks and credit unions, often have lengthy application processes for business loans. Many require packets of documents, tax returns, and credit reports, and still take up to 90 days to give you a decision. 

Most business owners don’t have that kind of time to wait around. Instead, partner with SBG Funding. We’ve streamlined the business loan application process to include three simple steps you can complete today:

  1. Fill out our online application.
  2. E-sign your loan agreement application.
  3. Upload required documents (4 most recent financial statements).

At SBG Funding, you can receive a funding decision within hours and cash in the bank by the next business day. Plus, rest easy knowing our customer service is there to help after approval with a 5-star rating across thousands of borrowers! 

Improving Your Loan Terms Over Time

We briefly touched on how a stronger financial picture improves your loan’s interest rates and term length. Even starting from a point of lower credit, short business tenure, and low revenue, it’s possible to improve your lending terms over time. 

First, work on your financial standing. Your personal credit scores are just as crucial as business credit scores, so make sure to pay your debts on time and avoid overborrowing. As you extend your business tenure, focus on revenue growth month-over-month.

As you work on your financials, also develop a killer business plan. The idea is to make it so comprehensive that lenders feel confident in your repayability.  

You can always partner with a lender to obtain short-term financing at less-than-favorable rates. This route allows you to prove you’re a trustworthy borrower, and your next loan will be more in your favor.

Set the Stage for Success with SBG Funding

Business loans are fantastic tools that make it possible to invest, acquire existing businesses, create consistent cash flow, and purchase equipment or property. Knowing that more than one type of loan is available means more business owners can find the financing they need to improve operations. 

While a traditional lender makes sense for some entrepreneurs, alternative lenders, such as SBG Funding, appeal to others on account of our rapid application process, lack of collateral requirements, and outstanding customer service. 

Get in touch with SBG Funding today to personalize your loan solutions and explore the possibilities of working capital. 

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