Certain small business loans are easier to get than others if you have a poor credit history so you have access to fewer financial products. Although it might be difficult to access a start-up business loan, products like a merchant cash advance, business credit card or business line of credit are possible for borrowers with low credit scores.
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Which loan is right for your small business?
Small business loans can be a great way to inject cash into your enterprise. They are used for a variety of reasons such as covering cash flow problems, financing the purchase of equipment to expand product or service lines. The NSBA (National Small Business Association) says they are the key to economic growth in the US.
Apart from traditional bricks-and-mortar banks, you can apply for one of these loans at credit unions but also online. The SBA (Small Business Administration) also offers government-guaranteed (up to a maximum of 85%) long-term loans exclusively for businesses.
What Types of Small Business Loans Are There?
There are a variety of small business loans on offer. They all have different qualifying criteria, loan terms, interest rates and are suitable for a range of purposes.
- A business term loan involves borrowing a lump sum and paying it off over a set period, usually at a fixed interest rate.
- A personal loan for business is similar to a business term loan but depends on the business owner’s own credit score.
- A start-up business loan makes financing available for businesses with little or no financial history.
- A business line of credit allows business owners to draw on capital when needed and only pay interest on the amount they borrow.
- Equipment financing is used exclusively to cover the purchase of new equipment for the business such as machinery, IT equipment or vehicles.
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Comparing Small Business Loans on the Market
Once you have an idea of how small business loans differ and which one is right for you, you should start shopping around for the best lender. When comparing the different lenders on the market, don’t just look at the interest rate on offer. Instead, you should be comparing the APR (Annual Percentage Rate) as this includes all the additional fees and charges you might have to pay such as the origination fee, late payment fees and/or pre-payment fees.
Apart from considering the overall cost of your borrowing, you should also look at the loan term and the repayment structure. Bear in mind that extending your loan term will result in lower monthly repayments but will end up costing you more money overall in charges.
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Your most common small business loans questions
Can You Get Small Business Loans with Poor Credit?
Is Collateral Necessary for Small Business Loans?
Having collateral to put up as security for your lending might make it easier for other kinds of small business loan to be approved. You might also be entitled to better interest rates. However, possessing collateral is not compulsory.
How Can You Qualify for Small Business Loans?
Lenders are mainly concerned that you will repay the loan. To reduce the risk of you defaulting on the loan, they consider your personal and professional history.
Lenders will first look at your credit history and what that reveals about your money management skills. Before you even apply for a loan, you should ensure that your file is accurate and if necessary, correct any mistakes. Most lenders will be looking for a score of over 550. However, to be entitled to the best rates, you should have a score of 620-640 or over.
They will also look at the history of your business. Unless you’re aiming for a start-up small business loan, lenders are reluctant to lend to businesses that have been operating for under a year. This is because so many new businesses fail in their first year. If your business is new, it might be better to apply for a business credit card as a stopgap measure. A business of 2 years or older will be entitled to the best rates.
The lender will also consider the annual revenue of the business. This gives them an insight into how well your business is doing and the affordability of your borrowing.
How Long Does A Small Business Loan Application Take?
It’s fast and easy to apply for a small business loan with us. Your application takes only two minutes and you can expect an answer the same day.
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What Type of Small Business Loan Is Best?
There is no one single small business loan which will suit everyone. It is impossible to say which kind of loan is best because this depends on your personal and professional circumstances. In order to decide, you need to think about a number of factors:
1. Reason for borrowing
Certain small business loans are highly specialized. For example, if you need to purchase, replace and/or upgrade business equipment, then equipment financing might suit your needs. However, a business line of credit is ideal if you’re looking for the security of quick access to money to cover unexpected emergencies or cash flow difficulties.
If you’re borrowing money to expand your business, you should make some projections about how you expect the loan to boost your profits. If the loan won’t pay for itself, you should reconsider your decision to borrow.
2. Small business loan amount
You should accurately calculate how much you need to borrow. Certain types of small business loans give you access to higher loan amounts. For example, you can borrow up to around $500,000 with a business term loan while a personal loan for business usually only gives loan amounts up to a maximum of about $35,000.
Although your lender will undertake its own underwriting procedure, you must be realistic about how much you can afford to borrow. To do so, you should work out your DSCR (debt service coverage ratio). This entails dividing your cash flow by your estimated loan repayment – either on a monthly or yearly basis.