Small Business Loans Guide 2021
Small Business Loans Guide 2021

Small Business Loans are required for various purposes, it could be for something as small as day to day operations or for something as big as buying new equipment or purchasing raw materials.

These enable small businesses to keep running when the client has not paid or when they don’t have sufficient funds to undertake expansion. So in this guide, we will look at various aspects of these loans for a thorough understanding.

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How do business loans work?

Loans create time-value and for that, there is a price in the form of interest and fees. There are two parties, a lender who gives out the loan and a borrower who receives the loan. 

In exchange, the borrower pays back the loaned amount in installments or lump sum along with interest and fees as per the loan’s terms and conditions.

There can be different types of loans and repayment structures, each would result in a different amount of repayment and interest. These calculations are discussed in detail in the business loan calculator section.

 

Government Small Business Loans 

The US government has started the SBA or Small Business Administration for funding of small businesses. Generally, lenders require collateral against the loan they give. This is an asset which it could forfeit and sell to recover the loan amount in case the borrower defaults on loan payments. 

However, most small businesses don’t have sufficient collateral. In such cases, SBA comes to their rescue. The SBA has a network of lending partners that lend you the loan amount because the SBA guarantees some portion of this amount. 

Not only do these loans have competitive terms, but they also have some unique benefits too such as lower down payments, no collateral requirement for some loans, and so on. Further, SBA also provides businesses funding related to education and counseling.

Although SBA loans can be used for various purposes, some loans have restrictions on usage of funds, so consult with an SBA professional before you decide on taking up a loan.

 

SBA Loan Rates:

Below rates are based on the September 2020 update:

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There are greater complications when it comes to a loan of a higher amount. Some of these complications are:

  • Guarantee fee
  • A three-tier interest rate structure

To get the latest and the most appropriate rate for your need for funds, you should consult the SBA.

 

Getting A Business Loan With Bad Credit And No Collateral

As you know that you have a bad credit score, review your credit report, and find out the problems bringing your score down. Identify ways of improving your score and eliminating these problems.

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In case you are unable to get financing even after boosting your score, try for P2P financing. There are many online portals that will connect you to individual lenders. If you are lucky, you will find a lender.

You can go to crowdfunding or ask your family and friends for loans. Or you may even look at altering your business structure by forming a partnership. This might bring in the necessary capital.

 

How To Write A Promissory Note For A Business Loan

Promissory Note binds the borrower to pay the lender the amount mentioned in the note. It is a contract between the two parties and acts as proof of the loan document. It is created by the lender or a legal professional.

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It should include:

  1. Date of lending
  2. Loan amount
  3. Schedule payments
  4. Interest rate
  5. Secured or Unsecured nature of the note
  6. Names, signature & prints of all the parties
  7. Any other important information

 

Some Popular Small Business Loans

Based on the type of the borrower or the lender, these loans are categorized here for the sake of the interested parties:

Paypal Business Loan

As Paypal is a common mode of payment for much small business, it also offers a credit product. It’s a simple step by step process:

  1. Check eligibility based on the loan requirement and duration
  2. Fill a loan application
  3. Receive approval (Automatic process)
  4. Receive the funds (Automatic process)
  5. Payment of fixed fee known beforehand
  6. There are no other fees for late or early payment, however, if a payment is returned, Paypal charges $20
  7. Terms and conditions are tailored for your requirement
  8. The repayment process is also automated
  9. Weekly repayments

 

Unsecured Business Loans

As explained earlier, smaller businesses might not have enough to put in as collateral. Further, newer businesses might not even have a good track record to prove a good credit rating. In such cases, if they approach alternative lenders and acquire funding without collateral, such a loan is known as an unsecured loan.

As these are riskier, they have higher interest rates too so it is a trade-off between providing collateral or settling for higher interest rates.

 

Small Business Loans For Women

There are several platforms including the SBA which provide special terms for Business loans for women. These may involve better terms, easier schedules, and such benefits to encourage female entrepreneurship. 

Some good names in this domain are Lendio, Blue Vine, Fundbox, Kabbage & Funding Circle. Some of these provide lower funding rates while others require low credit scores or give loans up to $5 million.

Therefore, if you are a female entrepreneur, then do check out these platforms and find out the most suitable loan for your business. 

 

Small Business Loans For Veterans

A specialized loan known as the VA or the Veteran Administration loan is available for veterans. Eligible Veterans or their spouse can get better terms on their small business loans.

In the case of Veteran loans, the terms of the loans and the purpose for which the money can be used is highly flexible as compared to other loans. 

 

Best Small Business Loans

Below is our pick of some best small business loans:

Sl. No. Provider Benefits Drawbacks
Kabbage
  • Transparency
  • 0 Application Fee
  • Several options
  • 1-year business existence
  • Minimum Annual revenue of $50000

Several options

Fundbox
  • Not severe grilling over the credit report
  • Quick
  • Borrow as much as required and pay interest on only that much (Line of credit) 
  • Line of credit upper limit of $100000
  • Can’t borrow lump sum at the beginning
Kiva
  • No interest
  • Display product to multiple lenders
  • 3-year borrowing allowed
  • Maximum borrowing limit of $15000
  • Takes 30 days or more for the loan to process
Fundera
  • Several loan products
  • Multiple lender comparison available
  • It connects lenders to borrowers, doesn’t lend itself
  • Minimum credit score requirement of 600
Ondeck
  • Same-day fund transfer
  • A small business loan of $250000 is available
  • A line of credit of $100000 is available
  • Transparency
  • 1 year of business existence required
  • $100000 annual revenue required
  • Minimum credit score requirement of 600

 

 

Business Loan Calculator

To understand different types of loans let’s take an example:

Suppose, ABC Inc. borrows $100,000 for 5 years at an annual interest rate of 6%. The terms of the loan state that ABC Inc. will pay annual interest and repay the principal amount at the end of the 5th year.

This is a simple interest loan and the total repaid amount and total interest will be calculated as follows:

Particulars Symbol Values
Loan Principal P  $ 100,000.00 
Time T  5 years 
Rate R  6.00%
Annual Interest AI  $      6,000.00 
Total Interest I  $   30,000.00 
Total Amount Repaid A  $ 130,000.00 

 

Let’s look at the calculations of Annual interest, Total interest, and Total Amount repaid

 

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Now suppose instead of annual interest payment, the loan terms state that only a single lump-sum payment is required at the end of 5 years.

This is a case of compound interest because the amount repaid will be higher than the amount repaid in the case of simple interest terms. 

This is a result of interest on interest premise. The interest for the 5 years gets accumulated and increases the loan amount and as the payment is made after 5 years, the lender charges for lost investment interest that he would have earned had the borrower made annual interest payments.

 

Calculations change for this case:

Let’s use the same data of ABC Inc.

Particulars Symbol Values
Loan Principal P  $ 100,000.00 
Time T 5 years
Rate R 6%
Total Amount Repaid A  $ 133,822.56 
Total Interest I  $   33,822.56 

 

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Finally, the last type of loan could be an amortizing loan. This involves periodic payments of both interests and principal so that at the end of the loan period, no loan amount is left outstanding.

This kind of loan results in the lowest total amount repaid, however, this has the strictest terms for the borrower, who has to repay higher amounts each period.

Using the data from the same example:

Particulars Symbol Values
Loan Principal P  $ 100,000.00 
Time T 5.00
Rate R 6%
Annual Payment PMT  $   23,739.64 
Total Amount Repaid A  $ 118,698.20 
Total Interest I  $   18,698.20 

 

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equation_18.pdf 23,739.64 

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equation_21.pdf $ 118,698.20 

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So it is clear that the amortizing loan is the cheapest from an interesting point of view. Another important thing that should be noticed is that in each of the above examples, it has been assumed that the payments are made at the end of the period. 

At times there are loans that require the beginning of the period annuities so the calculations change in that case. Further, if the period is shorter than a year, such as half a year or a quarter, then also calculations change. So it is best to consult a loan advisor for the correct calculations.

 

Conclusion

So this was our comprehensive guide on small business loans, hope you find it useful. The basic loan concept remains the same, only a few regulations change considering the circumstances of the borrowers and their ability to provide collateral and other such differences.