Whether you’re in the beginning stages of launching your small business or have been around for 20 years, seeking business financing can feel overwhelming. Having a good grasp of the essential terms to make an informed decision about financing your business can make this process much more comfortable for you.
What’s the difference between a business loan and business line of credit? What is your business credit score, and does it even matter? Here are the key business lending terms every small business owner should know. Study these for smoother sailing next time you navigate the waters of taking out a loan.
- Business credit score
You know the importance of having a strong personal credit score, but do you know your business credit score? Unlike your personal credit, the business credit score ranges from 0 to 100. Your business credit score helps lenders analyze your business’s creditworthiness and determine the kind of loans you can qualify for, along with the interest rates and terms associated with those loan products.
Having a strong business credit score will help you find better rates and terms on small business loans and financing, but it takes time to build — sometimes 10 to 20 years to establish a thorough business credit report. Many lenders will also focus on the financial health of your business through cash flow analysis and bank account history.
Keep in mind: Your business credit score is publicly available, so it’s important to monitor it to ensure its accuracy.
- Business line of credit
One way to build your credit score is to apply for a business line of credit. With a line of credit, you have access to working capital when your small business needs it. Unlike a small business loan, with a line of credit, you only pay interest on the funds you use.
Think of it as a financial cushion to give you peace of mind when it comes to handling gaps in cash flow, seizing opportunities as they come along and dealing with other unexpected needs. While a line of credit is useful for the majority of business needs, keep in mind that it may require collateral in some cases and could have higher interest rates if you have a low credit score.
- Business term loan
Term loans are a lump sum of cash you pay back plus interest over 1 to 5 years. These loans are most appropriate for established businesses, typically used to finance capital improvements, equipment purchases and business expansion.
Term loans come with stable daily, weekly or monthly payments. While they are flexible for a variety of business purposes, generally reported to credit bureaus which could improve your credit, some term loans may require collateral. This means you’ll need to provide more information to qualify such as personal and business tax returns, P&L statements and balance sheets.
- SBA loans
Specially designed for small business owners, these loans are partially guaranteed by the Small Business Administration (SBA). The SBA also sets the guidelines for these loans and offers several types of loans to help small businesses. While SBA loans are significantly easier to obtain than a traditional bank loan, they are more paperwork intensive and often have a longer time to fund.
There are three primary loans from the SBA: SBA 7(a), SBA 504 and SBA Express. The loans come with a variety of terms up to 25 years and have fixed and variable rate options, and each serves a different purpose depending on the specific needs of your business. You can estimate your SBA loan payments with a loan payment calculator. The rates and terms are often comparable to bank loans even when you may not qualify for a bank loan. You may consider an SBA loan to help improve your credit so you can apply for other term loans in the future.
- Equipment loans
Sometimes, all your business needs is a little extra push to get that new piece of equipment that will help you grow your revenue. While equipment may be too expensive to buy with cash, you don’t have to apply for a traditional loan to get the money you need. Business owners can look into financing designed explicitly for equipment which varies depending on your industry, business and, of course, credit score.
Equipment loans are fairly easy to obtain and they help add net value to your business and lead to increased revenue — the immediate ROI from the equipment often pays for the loan earlier than expected.
- Income statement
One of the most important parts of your business loan application is the income statement. Also referred to as a profit and loss statement on some forms, the income statement is an accounting scorecard on the financial performance of your business. Your income statement will include your business’s net income, revenue and expenses for a specific period (quarterly or annually).
Another benefit of income statements when it comes to applying for financing is being able to show trends, especially if you don’t yet have a well-established business credit history, as well as charting future revenue goals for your business.
While this list is not exhaustive by any means, it’s a good foundation to build on as you grow your business. Sure, navigating the business financing landscape can feel intimidating, but the more familiar you are with these terms, the easier it will become.
Lendio helps you explore your business financing needs. Using Lendio’s marketplace, you can view and compare loan rates and terms and from there, select a loan that works best for your business. Lendio’s tools and services make it easy for entrepreneurs to start or grow their businesses.