Starting and running a small business often requires access to capital, making small business loans an essential resource. 

Whether you’re looking to launch a new venture, expand your existing operations, or manage day-to-day expenses, it’s paramount to understand how small business loans work.

Read on to learn more about the key considerations to keep in mind so that you can make informed financial decisions.

Let’s dive in!

What is a Small Business Loan?

Small business loans provide either a lump sum of money or a line of credit to meet the funding needs of small and medium-sized companies.

Once you’ve borrowed the money, you must repay the loan, plus interest and fees.

These loans are available from various sources, including:

• Banks, 
• Credit unions, 
• Online lenders, and 
• Nonprofit organizations.

Where Would You Use Small Business Loans?

Overall, small business loans provide essential funding to help you manage and grow your businesses. 

Nonetheless, you can leverage small business loans for a variety of purposes:

• Launching a business to cover permits, licenses, and initial inventory expenses.
• Managing day-to-day expenses, such as payroll, rent, and utilities, especially during periods of fluctuating cash flow.
• Acquiring or upgrading equipment
• Expanding operations, be it opening new locations, increasing production capacity, or entering new markets.
• Financing marketing campaigns to attract new customers and increase brand awareness.
• Crisis management to get the funds to navigate through tough times.
• Refinancing existing debt at lower rates.
• Buying commercial real estate or leasing office space.

4 Main Elements of Small Business Loans

Although small business loans can differ, they all share common characteristics:

✨ Eligibility Criteria

When applying for a small business loan, lenders evaluate several key factors to determine your business's creditworthiness and how likely you’ll repay it. 

1. Credit Score

Lenders typically assess both personal and business credit scores. 

A higher score indicates a lower risk for the lender. 

For example, if you apply for loans in the US, you’ll most likely need a score of at least 680 for traditional loans, while lower scores may be acceptable for alternative types of financing.

If you apply within the EU, the FICO scoring system will apply, and you’ll need a score over 740 for really favorable terms.

💡 ProTip:

Did you know Puls Project doesn’t require credit scores but looks into your cash flow management for decision-making?

Furthermore, we set our own risk assessment, which doesn’t depend on banks.

2. Business Revenue

In order to get a loan, you’ll need to provide proof of sufficient annual revenue to ensure that your business can support future debt payments.

The minimal amount varies from lender to lender and depends on the type of loan, but it usually ranges from $100,000 to $250,000.

Traditional banks often require at least $150,000 to $250,000 in annual revenue due to their risk-averse nature, while online lenders may accept lower figures, sometimes starting around $50,000.

💡 ProTip:

Since Puls Project isn’t a bank but grants loans from our fund, Montold SME Lending Fund GmbH & Co. KG, registered with BaFin, we only need to see that your business is active and that you generate some profit that can cover your repayment rates.

You can get up to €100,000 for 12 months within 48 hours of submitting your application.

However, you can increase the amount by connecting additional bank accounts.

3. Time in Business

The time your business has been operational is paramount when determining your eligibility.

Most traditional lenders prefer that you’ve been in business for at least one year.

On the other hand, alternative lenders can accept 6 months.

💡 ProTip:

If you apply for a loan with Puls Project, you need to be operational for 6 months.

4. Business Plan

Many lenders ask for a well-structured business plan outlining how you will use the loan. 

In addition, a well-crafted business plan shows your cash flow management and how you handle the money.

Moreover, it also provides forecasts and projections, making it easier for lenders to assess your repayment capabilities.

💡 ProTip:

Besides loaning capabilities, Puls Project offers cash flow management solutions to efficiently:

• View, 
• Manage, 
• Track and 
• Organize all your financial transactions and balances across the companies from a single dashboard.

Furthermore, we sync all the transactions that flow into the dashboard multiple times daily, enabling you to always have and work with real-time data and info. 

This way, you can make accurate forecasts and take preventive measures if you spot a liquidity issue along the way.

5. Debt-to-Income Ratio

This ratio measures your business's existing debt against its income, helping lenders assess whether you can take on additional debt without jeopardizing financial stability.

For example, if you use Puls Project, our cash flow management tool lets us see how you manage finances and how timely your repayments are.

By understanding your business more, we can grant an additional loan that we’ll issue within 24 hours.

Again, you only need to repay the amount you actually used.

6. Collateral and Personal Guarantees

In order to reduce risks, lenders may ask for collateral, such as real estate or equipment, which they can seize if you don’t repay the loan.

In addition, some lenders may ask for a personal guarantee from the business owner, which means that if the business defaults, the owner is personally responsible for repaying the loan.

💡 ProTip:

Puls Project doesn’t require any collateral but the loan agreement and personal identification of beneficial owners and directors as per GwG.

✨ Interest Rates

Rates can differ significantly depending on the lender, loan type, and creditworthiness. 

Generally, if you are an established business with good credit scores, you should be able to secure lower rates.

✨ Repayment Terms

Loan terms can range from a few months to several years. 

Thus, it is crucial to fully understand the repayment schedule and any associated fees before committing.

✨ Loan Fees

Small business loan fees can significantly impact the overall cost of borrowing. Again, fees and types of fees can vary, but here are the most common ones:

• Origination Fee — A one-time fee for processing and underwriting the loan application. 

It typically ranges from 1% to 6% of the loan amount and is often deducted from the total loan proceeds.

• Application Fee — An upfront fee when you submit your loan application. 

It covers the cost of reviewing your application and conducting credit checks, and it's usually non-refundable, regardless of whether your loan is approved.

• Servicing Fee — A monthly servicing fee for managing the loan, which includes sending statements and processing payments.
• Draw Fee — Applicable to business lines of credit and charged whenever you draw money, typically as a percentage of the amount borrowed.
• Appraisal Fee — If collateral is involved, lenders may require an appraisal to determine its value, which incurs an additional cost.
• Prepayment Penalty—Some loans may charge a fee if you pay off the loan early, compensating the lender for lost interest income.
• Late Payment Fee — Lenders often charge a late fee if you don’t pay on time.
• Annual Fees—These fees are more common for lines of credit, and you pay them annually to keep the account active.

Types of Small Business Loans

Small business loans come in many forms, and depending on your needs, one type may be better than the other.

Term Loans

You receive a lump sum of cash upfront and agree to repay the loan in regular installments over a predetermined timeframe, ranging from 1 to 10 years. 

The repayment schedule usually involves fixed monthly payments that include both principal and interest, which can be fixed or variable.

In addition, term loans may require collateral, and the interest rates often depend on the borrower’s creditworthiness and the nature of the loan.

Business Lines of Credit

Business lines of credit are a flexible financial option where you can withdraw funds up to a set limit.

What makes this option attractive is that you pay the interest only on the amount drawn.

Thus, it’s ideal for managing cash flow and covering short-term expenses.

This credit type can be secured and unsecured, depending on whether you need to provide collateral or not.

Merchant Cash Advances (MCAs)

The MCA represents a lump sum you get in exchange for a percentage of future sales. You repay the loan through daily or weekly deductions from sales revenue.

However, this loaning option can be expensive due to high fees, with effective APRs (Annual Percentage Rate) often reaching triple digits.

MCAs are particularly popular among retail and service-oriented businesses that rely heavily on credit card transactions and need quick access to funds without the lengthy approval processes associated with traditional loans.

📌Note:

APR (Annual Percentage Rate) — Represents the yearly cost of borrowing without considering compounding effects. 

It may include fees and other costs associated with the loan.

On the other hand, effective APR incorporates compounding effects, providing a clearer picture of how much you will actually pay or earn over a year.

Another difference is that effective APRs have wide use in Europe and many other regions for loans and investments, while APR is more common in the United States for credit products.

Invoice Factoring

This loan type refers to you selling unpaid invoices to a third-party company, known as a factor, in exchange for immediate cash. 

Thus, you can improve cash flow by accessing funds quickly rather than waiting for customers to pay their invoices, which can take 30 to 90 days.

Usually, you should receive 70% to 90% of the invoice value upfront while the factor takes over collecting payment from the customers.

Once the customer pays the invoice, the factor sends the remaining balance to the business minus a factoring fee, which typically ranges from 1% to 5% of the monthly invoice value.

Equipment Financing

As the name suggests, this loan helps you get the machinery, vehicles, or equipment you need to operate without requiring full upfront payment.

You usually repay the loan in set installments over a predetermined period, where the equipment usually serves as collateral for the loan.

The interest rates generally range from 7% to 15%.

Working Capital Loan

A working capital loan is a short-term financing option that helps you cover everyday operational expenses.

Unlike long-term investment loans or asset purchases, working capital loans meet immediate financial needs, such as payroll, rent, inventory purchases, and other short-term obligations.

You usually repay the loan weekly, biweekly, or monthly.

Wrapping It Up

Understanding the different types of loans available, the factors that influence approval, and the various ways you can use the funds allows you to make informed decisions that align with your financial goals.

With careful planning and a clear strategy, you can leverage these loans to enhance your business's potential.

How to Improve Your Finances with Puls Project?

Puls Project is an all-in-one cash flow management tool that provides liquidity management and financing solutions for small businesses.

Thus, with Puls Project, you get a comprehensive tool to:

💰 Get quick access to necessary funding within 48 hours. 

💰 Tailor the loan and set the amount and the repayment period that you feel most comfortable with.

💰 Leverage credit limits without any costs and without them affecting your creditworthiness with banks.

💰 Store your data and sensitive information securely thanks to our Amazon Aurora encrypted DB clusters, which use AES-256 encryption.

💰 Leverage multi-banking possibilities to enhance credit limits and organize all financial activities in one place.

You can connect over 4,000 banks.

💰 Categorize your transactions and financial activities for easier cash flow management.

💰 Improve credit limits through regular financial planning,  ensure the accuracy of business decisions by using reliable data, and recalculate your credit availability based on the data.

💰 Input your monthly expenses and see them displayed the following month to automate your expense tracking.

💰 Generate future-dated draft payments to see how they affect your cash flow instantly, and we’ll inform you when we spot a cash gap so you can take necessary actions.

Ready to try Puls Project?

Sign up for Puls Project today to improve your financing while cultivating a healthy cash flow.

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