Exposé

The truth about small business loans

Learn what a small business loan is, what they fund— and when they suck

What is a small business loan?

Small business loans are financial lifelines for entrepreneurs looking to grow and sustain their operations. Typically offered by banks and other financial institutions, these loans provide a lump sum of money you pay back over time (with interest). Small business loans can be used for anything

Buying new equipment

Expanding your store

Simply keeping the lights on.

The problem with small business loans

While the idea of a major cash infusion sounds relieving to most business owners, this hope can be deceiving. In fact, the very process of attaining a loan can be as stressful (or even more stressful) than the cash flow problems that led you to seek one.

Getting the loan isn’t easy. Banks want to see:

A high credit score of 680+

Extensive financial records including seven or more reports

An offer of collateral (like property, equipment, inventory, or vehicles).

This process can be time-consuming.

It can take seven or more weeks of back-and-forth before business owners receive approval for a loan. Getting a “no” after all that time is even more frustrating for small businesses looking for funding options. This is why many smart business owners are searching for something faster and more flexible.

Check out alternative funding

When should you get a small business loan?

If you:

Are a well-established business

Have years of operation under your belt

Have excellent credit

A loan can be beneficial. Use it to expand, purchase inventory, or manage cash flow. Just be ready for a lot of paperwork — and a long wait.

However, if you:

Are a newer business (albeit with good revenue)

Are lacking the time and resources to create financial reports

Have bad credit

It will be challenging for you to obtain a business loan. Consider alternative funding options available to inject your business with needed cash.

What banks don't want you to understand about small business loans

When looking into small business loans, step one is to understand the small business loan rates and potential additional costs. Many of these are tucked away in fine print, so go in with your eyes wide open.

Interest

Typically loans range from a few hundred dollars to several hundred thousand dollars depending on your business's needs and what you qualify for. Interest rates on small business loans average at 7% but can go up to 30% or more based on your credit score and loan terms as well as the lender, loan type, and economic conditions.

Other Fees

Here’s where the devil is in the details. Often there are additional fees, prepayment penalties, and late payment charges. Being aware of this beforehand can save you from an unpleasant surprise later. Scan the fine print for any of these terms. They all represent fees and charges the bank doesn’t want you to know about:

Application fee

Origination fee

Interest expense

Monthly maintenance fee

Annual maintenance fee

Overdraft fee

Insufficient funds fee

Early repayment penalty

Collateral fee

Modification fee

Servicing fee

Underwriting fee

Closing costs

Documentation fee

Brokerage fee

Renewal fee

Discharge fee

Upfront legal fee

This transparent funding option has ONE clear fee and NO interest

Types of small business loans

There is no one-size-fits-all when it comes to small business loans. Several types of small business loans address specific financial needs.

Startup loans are tailored to help new businesses get on their feet

Equipment loans are intended for purchasing necessary machinery or technology

Working capital loans provide funds for day-to-day operational expenses

Each loan type has its own distinct features and requirements.

Equipment financing

Equipment financing is a type of loan that assists businesses in getting the equipment they need without draining cash flow. This form of funding is utilized by a range of industries, from manufacturing to technology startups, enabling them to purchase or lease equipment while managing their resources effectively.

Equipment financing companies typically require a down payment and have strict credit criteria, so make sure you understand all the terms before requesting equipment funding for your small business.

Also, watch out for common pitfalls:

Interest rates for business equipment loans can fluctuate, so loan payments become higher than expected

There may be additional fees or penalties for early repayment depending on the loan terms (You’d think good behavior like paying early would be rewarded, but no. Go figure.)

If equipment breaks down or becomes outdated, the borrower remains responsible for the remaining balance. Scenarios like that can be bad enough to put owners out of business.

This funding covers equipment — without the BS

Bridge financing

Bridge financing is a short-term financial solution that helps businesses get through funding gaps while waiting for more permanent funding or cash flow improvements. Bridging finance is designed to help cover immediate needs between funding stages, like managing expenses or investing in business opportunities.

Businesses of all sizes may use bridge financing to meet urgent financial needs or facilitate strategic transactions before securing long-term funding. For example, a company waiting for approval on a long-term loan might need a bridge loan to buy equipment in the meantime.

Warning: there are risks involved.

Higher interest rates and associated fees due to their short-term nature of a bridge loan

Possibility of the long-term loan falling through, leaving the borrower with an even bigger financial burden.

Like with any other loan, go in with your eyes wide open. Look for the hidden fees in the fine print. Make an informed decision by first understanding how bridge financing works and carefully assessing the associated costs and risks.

This funding can tide you over — with zero interest

Invoice financing

Invoice financing, also known as accounts receivable financing, is a financial mechanism that allows businesses to access funds based on outstanding invoices. For example:

You’re waiting to receive payments and need cash for day-to-day operations and other expenses

Your business has extended payment terms

You require fast liquidity

In these cases, you may use invoice finance factoring as a short-term option to bridge gaps between issuing invoices and receiving payment.

The downsides of invoice financing:

Fees and interest charges can add up, putting a heavy financial burden on your business for months or years

If your invoice payments are delayed or there is a risk of non-payment, you’ll be stuck with hefty debt and no means to make payments

Before going ahead with invoice financing, make sure you fully understand the terms, know all the hidden fees, and consider whether it makes sense for your business.

Try this. It’s a no-interest alternative to invoice financing

Payroll loans online

Payroll loans are a way for businesses to get cash specifically for payroll expenses. If you’re running low on funds and need to pay your employees, a loan payroll ensures that your employees are paid while you wait for revenue to come in. Payroll loans online are yet another typical loan option
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Businesses of all sizes, from startups to larger firms, use payroll loan companies online to ensure their employees are paid on time. This is handy for sustaining employee satisfaction and operational efficiency.

The problem: Payroll loans (while faster than some other loans) aren’t fast enough for many small businesses. They can take seven weeks or more to process, and require extensive application forms and copious documentation.

Businesses with bad credit won’t get approved. And those that do will have to pay high interest rates and fees due to the short-term nature of the loan

Try this alternative funding option — bad credit may not get in the way

Emergency business loans

Unexpected challenges? Emergency business loans are often seen as a financial safety net. These fast cash loans for small businesses provide relatively quick access to funds for urgent needs or unforeseen business crises.

Companies of all shapes and sizes might use emergency small business loans to manage short-term financial disruptions or urgent requirements. And while fast business loans can be seen as a lifesaver for maintaining a business during emergencies, the facts are not always as rosy.

As with other loans, businesses with bad credit won’t get approved. And those that do will have to pay higher interest rates and fees due to the short-term nature of the loan. And as always, make sure to look for the hidden fees in the fine print.

Here’s funding that comes as fast as ONE DAY — without hidden fees

Bad credit business loans

Poor credit refers to a low credit score that reflects a history of financial challenges or mismanagement. Businesses can get bad credit without doing anything wrong, but in the context of small business loans, having a credit score that is below average can prevent you from getting approved. Often small businesses with poor credit will receive “bad credit business loans” — punitively structured loans with higher interest rates or strict loan conditions.
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If you have bad credit, banks are hesitant to lend to you and the application process is respectively more arduous.

One of the biggest risks of small business loans in Canada with bad credit is that interest rates and fees can add up quickly, making it harder to manage finances. It can also create a vicious cycle in which continuously seeking small business funding with bad credit will pull your credit score down even further.

Try this alternative funding source — even with bad credit, you may still get approved

Summary:
Pros and Cons
of Small business loans

Pros:

Diverse Options

Small business loans come in many forms like equipment financing, invoice financing, and bridge loans.

Capital

Loans can provide the necessary cash for expansion, equipment purchase, or operating expenses.

Flexibility

Funds from loans have a range of purposes, from managing cash flow to seizing new opportunities.

Cons:

Waiting games

Most loan applications take seven WEEKS or more to process, with no guarantee you will get approved

Strict requirements

Traditional loans often require:

P & L statements from the last 3 fiscal years

Business tax returns for the last 3 fiscal years

Personal tax returns for the last 3 fiscal years

Personal financial statements for the last 3 fiscal years

Ownership and affiliations disclosures

Loan application forms

Collateral worth at least the loan amount you're seeking

Bad credit kills it

Most banks will issue an outright rejection to businesses with bad credit.

Hidden fees are rampant

Most borrowers don’t have the time or patience to read the fine print. Loan-issuing banks know this and lace the loan terms with costly hidden fees.

We’ve created this graphic to show you the kind of financial gibberish that masks hidden fees

A better option

Fast, flexible, with a fixed cost and ZERO interest

Try our merchant cash advance now!