Lending Library

If you're considering purchasing commercial real estate, it's worth exploring the option of a commercial real estate loan, also known as a commercial mortgage. This type of loan can be a valuable tool for small business owners looking to expand their operations or acquire additional property.

But getting approved for a commercial real estate loan is not always easy. Lenders typically have stricter requirements compared to residential loans, and the process can be more complicated and time-consuming.

However, with proper planning and preparation, you can increase your chances of obtaining a commercial real estate loan. In this blog post, we'll discuss the steps you can take to secure financing for your commercial property.

What is a commercial real estate loan?

These small business loans have been precisely engineered for real estate projects. Here are some examples of relevant uses:

• Building a new office building
• Renovating your existing restaurant
• Opening a new retail space
• Purchasing an existing warehouse
• Getting out of a lease so you can become a property owner
• Refinancing for an extension of your payment term

As you can see, commercial real estate loans are more versatile than the name suggests. So if your project is real estate-related, there’s a good chance that it qualifies.

These loans are unique because they offer more generous interest rates than many other types of small business loans, largely because the real estate involved with the loan will actually be used as collateral.

When you secure a loan with such a valuable and readily accessible asset, you can expect rates that begin as low as 6.25%. As for the dollar amount, a commercial real estate loan can start at $250,000 and go as high as $5,000,000. Expect the repayment terms to fall somewhere between 10 and 25 years.

How to find the right commercial real estate loan.

Finding the right commercial real estate loan can be a complex decision, involving careful evaluation of your business needs, financial capacity, and long-term objectives. Let's dive into the key factors to consider in choosing the right loan for your business.

1. Determine your goals.

The first step of any loan process is identifying the financing option that best matches your purposes. To do this, you’ll need to decide exactly how much money your project will require and how soon you’ll need to get that money. These two factors help to narrow the list of viable options and save you valuable time.

After reviewing your loan amount and timeline, you may find that a commercial real estate loan is the ideal solution. You’ll then need to figure out the costs of various loans to separate the top contenders for your business. This process is done by lining up comparable elements between loans.

2. Compare lenders.

There are a plethora of lenders offering commercial real estate loans, each with their distinctive terms, conditions, and rates. It's crucial to take time and compare various lenders, considering factors such as interest rates, loan terms, additional costs (like origination fees), and customer reviews. Traditional banks, credit unions, and online lenders all have different merits and demerits.

Before proceeding with the loan application, check whether you meet the lender's minimum qualifications. These may encompass your credit score, annual revenue, and years in business. In addition, most lenders will require a down payment of 10% to 30% of the property's purchase price.

3. Apply for the loan.

Once you've determined your needs and compared lenders, the next step is to apply for a commercial real estate loan. The application process requires you to provide various documents and data.

• Financial records - Lenders will want to see your business' financial records to assess your ability to repay the loan. You will need to provide business and personal financial statements, income tax returns, and a credit report. If your business is new, you may be asked for a business plan or revenue projections.
• Property information - You’ll need to share details about the property you wish to purchase or renovate. This includes the property's address, purchase price, appraisal value, and blueprints (or renovation plans, if applicable).
• Legal documents - Lenders may also request legal documents such as incorporation documents, commercial leases, and contracts.

Remember, every lender has different requirements, so it's essential to understand what is needed before starting the application process. The sooner you can gather and provide this information, the smoother the application process will be.

The approval process can take anywhere from a few weeks to several months. Once you've been approved, you'll need to review the loan terms carefully before agreeing to them.

Requirements for a commercial real estate loan.

To secure a commercial real estate loan, you must meet certain requirements that prove your ability to repay the loan.

• Credit score - Most lenders require a personal credit score of at least 650. This gives them confidence in your ability to handle credit responsibly. Higher scores can lead to better interest rates.
• Business plan - Lenders want to see a well-crafted business plan that outlines your strategies for growth and income. This should include market analysis, competitive analysis, marketing strategies, and detailed financial projections.
• Debt service coverage ratio (DSCR) - The DSCR measures your business’ ability to service its debt. A ratio of 1.25 or higher is typically considered good.
• Property value - The property's appraisal value needs to be high enough to cover the loan amount. Lenders will conduct their own appraisal as part of the application process.
• Down payment - You’re typically required to put down 10% to 30% of the property's purchase price.
• Business financials - Lenders will want to see at least two years of financial statements for your business to evaluate its profitability.

Remember, every lender could have slightly different requirements, so make sure to check with your lender to know exactly what you need to apply.

Additional qualification criteria for a construction loan.

In addition to the general requirements for a commercial real estate loan, obtaining a construction loan often necessitates additional qualifications.

• Construction blueprints and detailed plans - Lenders will need to see a comprehensive set of construction plans and blueprints before they can accurately assess the risk associated with your project. These should be prepared by a qualified architect or engineer.
• Qualified builder - A legitimate, licensed, and insured builder is a requirement for most construction loans. The lender will need to validate the builder's qualifications and reputation before approving the loan.
• Cost estimate - A detailed cost breakdown is necessary. This estimate should include costs for labor, materials, permits, land development, and contingencies.
• Appraisal - The lender will want an appraisal of the future value of the building upon completion. This is sometimes called the after-repair value (ARV).
• On-site inspections - Lenders will conduct periodic on-site inspections to ensure the construction is proceeding as planned and the funds are being used appropriately.

Remember, the qualifications can vary based on the lender and the specifics of the construction project, so it's essential to have a thorough discussion with your lender about what is needed.

Interest rates and fees

Just like any other loan, a commercial real estate loan comes with its own set of interest rates and fees.

Interest rate

Your interest rate—often expressed as an Annual Percentage Rate (APR)—is the amount you'll be charged for borrowing money, represented as a percentage of your loan amount. Commercial real estate loans generally offer more competitive interest rates, sometimes as low as 6.25%, because the real estate you're purchasing will serve as collateral for the loan.

Fees

The fees associated with a commercial real estate loan can vary, but some common fees include application fees, origination fees, and appraisal fees. Application fees cover the cost of processing your loan application, while origination fees are charged by the lender for creating the loan. Appraisal fees are paid to a third party to assess the value of the property being purchased.

Prepayment penalties

In addition, some loans may include prepayment penalties, which are fees charged if you pay your loan off early. It's crucial to understand all the fees and interest associated with your loan so you can accurately calculate the total cost of borrowing and ensure it aligns with your business's budget and financial plan.

Comparing costs

As you evaluate your best loan options, here are four popular pricing metrics that will help you break down the cost into manageable views:

• Annual percentage rate (APR) - Anyone who has purchased a home or vehicle is familiar with this metric, which represents the cost of your loan on an annual basis.
• Total cost of capital (TCC) - Sometimes it helps to get a macro view. With the TCC, you’ll see an overall cost that takes into account interest—fees on loans that don’t charge interest, plus ancillary fees.
• Average monthly payment - Because budgets are often viewed on a monthly level, this metric is helpful. Even if your loan were to have daily or weekly payments, you could still calculate those payments on a monthly scale.
• Cents on the dollar - The simplest of all the pricing metrics, cents on the dollar breaks down the amount you’ll pay in fees and interest for every dollar you borrow.

While these metrics will give you a clearer view of your loan costs, they’re far from your only resource. Commercial mortgage calculators are readily available and are a simple way to crunch the numbers and improve your understanding of various costs.

Where to get a commercial real estate loan.

There are multiple sources from which you can secure a commercial real estate loan. Each has its own benefits and drawbacks, thus your choice depends on your specific needs and circumstances. Here are some of your main options:

• Banks - Banks are traditional sources of commercial real estate loans. They typically offer competitive interest rates and longer terms. However, they also have stringent approval criteria and require extensive documentation, which can be a challenge for some small businesses.
• Non-bank lenders - These include online lenders, credit unions, and private lenders. Non-bank lenders generally have less stringent approval criteria, faster approval times, and more flexible terms than banks. However, their interest rates can be higher.
• Commercial mortgage-backed securities (CMBS) lenders - Also known as conduit lenders, they pool and sell commercial mortgages on the secondary market. These loans have fixed, low-interest rates and longer terms and are typically nonrecourse, meaning the lender can only claim the collateral in case of default.
• Hard money lenders - These are mostly private investors who offer short-term, high-rate loans. The advantage here is speed and a less rigorous approval process, making them suitable for short-term investment opportunities or when a faster closing time is paramount.
• Real estate investment trusts (REITs) - These are companies that own, operate, or finance income-generating real estate. They provide loans for commercial real estate but usually require a higher return on their investment.
• SBA 504 loan - The SBA 504 loan is offered by the U.S. Small Business Administration (SBA) for purchasing fixed assets, such as land and buildings. The advantage here is that you can access lower interest rates with a longer term with a 10% down payment.
• SBA 7(a) loan - The SBA also offers the SBA 7(a) loan for any kind of business expense including purchasing real estate. 

Repaying a commercial real estate loan.

Repaying a commercial real estate loan typically involves a combination of regular interest payments and a final balloon payment at the end of the loan term. The specific repayment schedule will depend on the terms set by your lender and the type of loan you have obtained.

• Regular interest payments - Most commercial real estate loans require monthly interest payments for the duration of the loan term. These payments are calculated based on the loan's interest rate and the remaining principal balance. Interest rates can be either fixed or variable, depending on the terms of the loan.
• Principal amortization - Some loans include a principal amortization schedule, in which a portion of each payment is applied towards reducing the principal balance of the loan. This means that over the term of the loan, you'll gradually reduce the principal until the loan is fully repaid. However, some commercial real estate loans have a shorter amortization schedule than the loan term, leading to a balloon payment at the end.
• Balloon payment - If your loan has a balloon payment, this means that the remaining balance of the loan is due at the end of the loan term. This could be a substantial amount, depending on the size of the loan and the amortization schedule. It's important to plan for this payment and ensure that you have a strategy for covering it. This could involve selling the property, refinancing the loan, or using other business assets.
• Prepayment - Some commercial real estate loans allow for prepayment, where you can pay off the loan before the end of the term without incurring a penalty. Others might impose a prepayment penalty to compensate for the interest the lender would lose. Check the terms of your loan agreement to understand the rules around prepayment.

Remember, the specifics of your repayment plan will depend on the terms of your loan agreement, so it's crucial to understand these details before you sign. Also, ensure that you manage your finances effectively to avoid defaulting on the loan, as this could lead to the loss of your property.

Conclusion

Getting a commercial real estate loan is a significant undertaking that requires careful consideration and preparation. However, with proper planning and research, you can find the right option.

*The information in this blog is for informational purposes. It should not be used as legal, business, tax, or financial advice. The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (December 7, 2023). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.

Running a small business often requires making savvy decisions about acquiring necessary equipment without overspending. One popular strategy among small business owners is equipment leasing, which allows you to use high-quality equipment without the financial burden of buying it outright. 

This guide will demystify equipment leasing, explaining why it's an attractive option for your business and providing insights to navigate the process effectively.

What is equipment leasing?

Equipment leasing is a long-term rental agreement. A piece of equipment is purchased by a lender and rented to a business for a specific period. In return, the business pays the lender a monthly fee for the duration of the rental agreement (aka lease) and can use the equipment as if it were their own.

When the lease ends, the business has the option to renew the lease, purchase the equipment, or return the equipment to the lender. 

Lease payments usually remain consistent throughout the lease term.

Terms

While term lengths vary and will depend on your lender and unique situation, two-, five-, and 10-year terms are common.

The amount available will depend on the cost of the equipment you are leasing, but can range from $5,000 to $5 million.

Cancellation provisions.

An equipment lease agreement will likely have a cancellation provision that addresses whether and when a lease agreement can be canceled and if there are any fees associated with a cancellation.

Qualification criteria.

Lenders will look at a combination of your credit score, annual revenue, time in business, and the value of the equipment you are leasing. In general, you will need a minimum credit score of 520 and an annual revenue of $50,000. While some equipment lenders do work with day-one startups, they will have higher minimum credit score requirements starting at 650.

If you are leasing used equipment, the financier may also place restrictions on the age or mileage of the equipment.

Equipment leasing vs. equipment financing.

Your decision to lease equipment vs. finance equipment involves several considerations including the type of equipment you’re considering, how often you’ll use it, the cost of maintenance, the projected ROI, the resale value, and, of course, what you can afford (our equipment loan calculator can help with this). But these general rules will hold true across the board:

• Lease, if you’re considering a piece of equipment in danger of becoming obsolete.
• Finance, if the equipment is integral and a long-term part of your operation.
• Lease, if immediate cash flow is a concern, leasing may be more affordable.
• Finance, if investment, resale, and ROI are important to you.

Is it cheaper to lease or buy equipment?

The answer to this question depends on various factors, such as the cost of the equipment, the length of time it will be used, and the financial situation of your business. In general, leasing may be more affordable in the short term due to lower monthly payments, but buying can be more cost-effective in the long run, as you will own the equipment outright after making all payments. It's best to weigh the pros and cons of your specific situation before making a decision.

Capital lease vs. operating lease.

Think of a capital lease as something akin to ownership. When you enter into a capital lease, it's generally for the long haul, and the asset in question appears on your balance sheet. It's like taking out a loan to purchase the equipment outright, but you're making lease payments instead. This type of lease is usually for longer terms and by the end of it, you might even have the option to purchase the equipment for a nominal price.

An operating lease is more like a rental arrangement. You're essentially renting the equipment over a shorter period, and it doesn't show up on your balance sheet. Operating leases are typically for less than the full useful life of the equipment, and once the lease term is up, the equipment is returned to the lender. This type of lease can be a good fit if you're after the latest tech and want to regularly upgrade your equipment.

Types of equipment capital leases.

The following are examples of how a capital lease would be structured.

Equipment financing agreement - Fixed payments are made over a set term, after which you own the equipment in full. While similar to a loan, you pay a financing fee instead of interest. If you go this route, be prepared for slightly higher payments, but with no additional buyout cost at the end of the agreement. Note that tax benefits could help offset the cost of the monthly payments.

$1 buyout lease - A $1 buyout lease is a lot like an equipment loan. You make payments to rent the equipment and purchase it for $1 at the end of the lease.

10% purchase upon termination (PUT) lease - With a 10% PUT lease, you purchase the equipment for 10% of its original cost when the lease ends. This structure allows for lower monthly payments with a predetermined cost for the final purchase.

Types of equipment operating leases.

The following are examples of how an equipment operating lease would be structured.

Fair market value lease - With a fair market value lease, you make payments and use the equipment during the lease. At the end of the lease, you have the option to buy the equipment at fair market value, return it, or renew the lease. This type of lease is generally used for equipment that quickly loses its value such as computers or gym equipment.

10% option lease - The 10% option lease lets you make payments and purchase the equipment for 10% of its initial value or walk away once the lease comes to an end.

Terminal rental adjustment clause (TRAC) lease - Typically used for semi-trucks and other vehicles, a TRAC lease comes with the option to purchase the commercial vehicle for the agreed-upon residual amount, or the lender will sell the vehicle to a third party. If the vehicle is sold for less than the residual amount, the lessee will owe the difference.

Equipment leasing rates

The cost of an equipment lease is determined primarily by the depreciation rate of the equipment, plus fees and taxes.

The fee the company charges is called a money factor instead of an interest rate. It is multiplied by the financed amount plus the residual value of the equipment to create the monthly rent charge. That rent charge is then added to monthly depreciation to come up with your final lease payment. 

Depending on the structure of the lease, you will also either pay taxes up front, or they will be incorporated into your monthly payment.

What is depreciation?

Depreciation refers to the gradual loss of value of an asset, such as a piece of equipment, over time due to usage, wear and tear, obsolescence, or age. 

Additional costs

• Down payment - Many lease agreements offer 100% financing with no down payment. However, they may require your first and last monthly payment upfront.
• Documentation/processing fee - Some will require this fee, which is paid to the lender for processing your loan or lease application.
• Appraisal/site inspection fees - There may be a fee to appraise the equipment being purchased or to inspect a work site.
• Insurance - Equipment breakdown insurance is typically the responsibility of the lessee. You'll likely have to provide proof of insurance before you can take possession of the equipment.
• Maintenance costs - Depending on the structure of the lease, you may be responsible for any maintenance costs.
• Transportation/assembly costs - If the equipment needs to be transported to your place of business or assembled, you may have to cover that cost as well, which can be included in your total lease amount.

Benefits of equipment leasing.

There are numerous benefits that equipment leasing offers to small businesses, making it a compelling option for many. Let's delve into some of these advantages.

Manages obsolescence.

Some pieces of equipment risk becoming outdated. If you are considering using a piece of equipment that is in danger of being obsolete in the future, an equipment lease may be a better option than a loan. 

Cash flow benefits.

Equipment leasing often has a lower impact on cash flow. Leasing spreads payments out over the duration of the lease, allowing your business’ cash to be used for other opportunities like paying expenses or funding your growth. 

Tax benefits.

Lease payments are considered a tax-deductible expense. For a capital lease, businesses can also deduct the depreciation of the equipment. For operational leases, businesses can deduct depreciation if they purchase the equipment at the end of the lease.

100% financing.

Unlike an equipment loan, which requires a down payment, many equipment leases offer 100% financing with no down payment.

No debt on the balance sheet.

If a company opts for an operational lease, it doesn’t appear on the debt or balance sheet, opening up more opportunities to secure other types of business financing at the same time.

Steps to get an equipment lease.

Getting an equipment lease involves a systematic process. Here are the suggested steps to follow:

1. Identify your needs - Determine what type of equipment you need for your business. Whether it's machinery, vehicles, or office equipment, knowing what you need is the first step.

2. Research leasing companies - There are numerous equipment leasing companies out there. Take your time to research and find the ones that cater to businesses like yours.

3. Acquire quotes - Once you've identified suitable leasing companies, reach out to them for quotes. This will give you an idea of what the lease will cost you.

4. Review the terms of the lease - Read the terms of the lease agreements you receive. Make sure you understand all the terms and conditions, including the lease duration, monthly payments, and what happens at the end of the lease period.

5. Apply for the lease - After you've decided which leasing company and lease terms work best for you, fill out an application. You'll likely need to provide information about your business and financial situation.

6. Approval and signing - If your application is approved, review the terms one last time, sign the lease agreement, and make any required down payment.

7. Start using the equipment - Once everything is signed and sealed, the equipment is yours to use for the duration of the lease.

Remember, always consult with a financial advisor or legal counsel before signing any lease agreements to ensure you're making the best decision for your business.

In conclusion, equipment leasing and loans are powerful tools that can help you acquire the necessary equipment for your business' operation without breaking the bank. The right choice will largely depend on your business' unique needs and financial situation.  

At Lendio, we're here to make the process of acquiring business equipment as straightforward and cost-effective as possible. Visit our equipment financing page to learn more about how we can help your business grow.

Small Business Administration (SBA) loans are a popular financing option for small businesses. These loans offer affordable interest rates and flexible terms, making them an attractive choice for entrepreneurs looking to start or expand their business. However, like any loan, there are limits on how much money you can borrow through the SBA program. 

Let's dive into the details of maximum SBA loan amounts and what they mean for small business owners.

Understanding maximum SBA loan amounts.

The maximum SBA loan amount refers to the highest loan limit set by the SBA. These limits are in place to ensure that the loans are being used for their intended purpose—to help small businesses grow and succeed. The SBA sets different maximum loan amounts for various types of loans, which we'll explore in more detail below.

Maximum SBA loan amount for purchasing a business.

If you are looking to buy an existing business, the maximum SBA loan amount is $5 million. This includes both the purchase price of the business and any working capital needed to operate the business. However, keep in mind that this is the maximum amount and not all businesses will qualify for such a large loan. The SBA also requires a down payment of at least 10% to 20% for purchasing a business.

Maximum SBA loan amount for commercial real estate and commercial property.

For small businesses looking to purchase or refinance commercial real estate or commercial property, the maximum SBA loan amount is $5 million. This includes both the cost of purchasing the property and any renovations or improvements needed for business operations. Again, like with purchasing a business, not all businesses will qualify for the full $5-million loan amount.

Maximum SBA 7(a) loan amount.

The most popular SBA loan program is the 7(a) loan program, which provides working capital for small businesses. The maximum SBA 7(a) loan amount is $5 million, and this can be used for a variety of business purposes, such as purchasing inventory, refinancing debt, or expanding operations. However, the SBA typically guarantees only up to 85% of the total loan amount, meaning the lender is still responsible for a portion of the loan.

When it comes to the SBA 7(a) loan, business owners should be prepared to make a down payment. While the exact amount can vary, it's typically around 10% of the total loan amount. It's important to note that this down payment requirement can be higher if you're using the loan for certain purposes, such as purchasing real estate or an existing business.

Maximum SBA 504 loan amount.

The SBA 504 loan program is specifically designed to support small businesses in acquiring major fixed assets, such as real estate or equipment. Unlike the 7(a) program, the 504 loan does not have a maximum limit. Instead, it is structured as a partnership, where the borrower contributes at least 10% of the total project costs, a certified development company (usually a non-profit) provides up to 40%, and a lender covers the remaining 50%.

The SBA's contribution (through the CDC) can range anywhere from $25,000 to $5.5 million, depending on the nature of the project and the business' eligibility. However, keep in mind that the total project costs (including all three contributors) can significantly exceed the maximum SBA 7(a) loan amount. The SBA 504 loans are an excellent option for businesses looking to make large investments in long-term assets, while benefiting from low down payments and fixed interest rates.

For the SBA 504 loan, the borrower typically has to make a down payment of around 10% of the total project costs. However, this can increase to 15% for newer businesses (less than two years-old) or when the project involves a limited or single-purpose building.

Maximum SBA microloan amount.

The SBA offers a microloan program designed specifically to aid small businesses and non-profit childcare centers in need of small-scale financing. This program caters to businesses that require smaller amounts of funding than offered under the larger SBA loan programs. The maximum SBA microloan amount is $50,000, but the average loan awarded tends to be around $13,000. 

Microloans can be used for various business expenses, such as purchasing inventory, furniture, machinery, or equipment. However, it's important to note that they cannot be used for buying real estate or paying off existing debts. The repayment term for these microloans can go up to six years, providing an accessible and manageable financing option for small businesses.

For the SBA microloan program, the down payment requirements can vary heavily depending on the lender's policies and the borrower's creditworthiness. While some lenders may not require a down payment, others might ask for an upfront contribution. It's crucial that prospective borrowers discuss their specific situation with their lender or a financial advisor to understand the exact requirements and plan accordingly.

Understanding the nuances of financial transactions can be intimidating, with credit card factoring being a prime example. Despite its appealing facade of quick money, it's a practice that often lands businesses in hot water. 

In this article, we'll dissect the concept of credit card factoring, delve into why it's illegal, explore common examples, and examine the potential consequences of engaging in such activities. Awareness is the first line of defense against scams, so we will also share some cautionary tales to keep you vigilant. Let's dive in and unravel the complexities of credit card factoring.

What is credit card factoring?

Credit card factoring is a practice where a business uses a merchant account of another business to process credit card transactions.

This could include the following scenarios:

1. A business owner uses a friend's merchant account to process their transactions. Despite appearing to be a practical solution for businesses struggling with cash flow, this method is considered illegal due to its close resemblance to money laundering.
2. A fraudster with stolen credit card information asks a legitimate business to process credit card transactions for them in exchange for a portion of the proceeds. The business processes the credit card charge and sends the proceeds to the fraudulent company. When the credit card owner identifies the credit card charges as fraudulent, the legitimate business is on the hook for paying the credit card owner back.

Consequences of credit card factoring.

Engaging in credit card factoring can have far-reaching consequences for businesses, both legally and financially. On the legal front, credit card factoring is considered illegal due to its resemblance to money laundering. Businesses found guilty of this practice may face hefty fines and legal ramifications. In severe cases, business owners may even face criminal charges such as fraud, which can lead to imprisonment.

From a financial perspective, if a business falls victim to a scammer, it could be on the hook for thousands of dollars of chargebacks.

To make matters worse, your processor could place you on the Terminated Math File. After this, you would find it almost impossible to acquire a merchant account.

Merchant cash advances vs. credit card factoring.

Credit card factoring is sometimes confused with merchant cash advances, but they are two different things.

A merchant cash advance (MCA) is a legal type of business financing where a company sells a portion of its future credit card sales in exchange for a lump sum of cash up front. This is typically a quick and easy way for businesses—especially those with poor credit or those unable to secure traditional loans—to access needed capital. However, MCAs often come with high factor rates and fees, making them a costly solution over time.

On the other hand, credit card factoring, as previously discussed, is a practice where a business uses another business' merchant account to process credit card transactions. This is often seen as a workaround for businesses unable to secure their own merchant accounts, but it's a risky and illegal practice closely resembling money laundering.

Merchant cash advance vs. invoice factoring.

In invoice factoring, you sell your business’ invoices to a third party called a factor. It is then up to the factor to collect the payment from the customer. The factor typically advances 80% to 90% of the value and then provides the rest (minus processing fees) upon receiving payment from the customer.Merchant cash advances, on the other hand, are cash advances secured by your business’ future credit card sales. To do this, a merchant cash advance company gives you upfront cash and then deducts a percentage of your credit card sales each day until the amount is fully paid.

Benefits of a merchant cash advance.

The greatest benefit of a merchant cash advance is the speed and ease with which you can get financed. Many companies can fund your advance in as little as 24 hours and will work with business owners with a credit score of 500 or higher.To learn what works best for your business, you can weigh your cash advance options with other business loan options through Lendio’s free loan match tool.

Are you a small business owner looking to buy new equipment? If so, then you may already know that purchasing equipment can be a costly endeavor. Fortunately, the Small Business Administration (SBA) offers loan programs specifically designed to help small businesses purchase necessary equipment. 

In this blog post, we’ll discuss how to get an SBA loan for equipment purchases, as well as the benefits of using these loans and where you can go to apply.

Reasons to use an SBA loan to buy equipment.

Small businesses are the backbone of our economy, but they often struggle with limited resources and cash flow. This is especially true when it comes to purchasing expensive equipment. Traditional loans from banks or other financial institutions can be difficult to obtain, and they may come with high interest rates and strict repayment terms. In contrast, SBA loans offer favorable terms and lower interest rates, making them an attractive option for small businesses in need of equipment financing.

SBA loans are backed by the government, which means that lenders are more willing to take on the risk of lending to small businesses. This increased accessibility makes it easier for small business owners to secure the financing they need. Additionally, SBA loans typically have longer repayment terms and lower down payments compared to traditional loans, making them more manageable for small businesses with limited cash flow.

Types of SBA loans you can use to buy equipment.

The SBA offers several loan programs that can be used for equipment purchases. These include the 7(a) loan program, the CDC/504 loan program, and the Microloan program.

SBA 7(a) loan program

The 7(a) loan program is the most popular SBA loan and can be used for a variety of business purposes, including equipment purchases. The maximum loan amount is $5 million, and repayment terms can range from 10 to 25 years. The interest rates for an SBA 7(a) loan range from 3% to 8% above the base rate. The process of obtaining an SBA 7(a) loan can take between 60 to 90 days, depending on the complexity of the application and the responsiveness of the applicant in providing necessary information.

The SBA 7(a) loan program also includes the SBA Express Loan option. This subset of the program offers expedited loan approval and funding, typically within 36 hours of application submission. While the maximum loan amount is lower, capped at $500,000, the accelerated timeline can be especially beneficial for small businesses requiring immediate access to funds for equipment purchase.

Qualifications for an SBA 7(a) loan:

• The borrower must be a for-profit business operating in the United States or its territories.
• The business needs to have invested equity, meaning the owner has contributed their own time and money into the business.
• The business must have sought and used other financial resources, including personal assets, before applying for an SBA loan.
• The borrower must demonstrate a need for the desired credit.
• The borrower needs to provide a sound business plan, showcasing the purpose of the loan and a plan for repayment.
• Personal and business credit history of the borrower will be considered (generally a credit score of 650 or higher).
• The borrower must have the ability to repay the loan on time with the projected operating cash flow.

SBA CDC/504 loan program

The CDC/504 loan program is specifically designed for fixed asset financing, such as equipment purchases. This program allows businesses to borrow up to $5 million and has a longer repayment term of 10, 20 or 25 years. The interest rate typically totals 3% of the loan amount. The CDC/504 loan program is particularly beneficial for businesses looking to purchase long-term equipment, as it provides financing options that cater to the extended lifespan and usage of such assets.

The CDC in the name stands for Certified Development Companies, which are nonprofit corporations certified and regulated by the SBA, that work with participating lenders to provide financing to small businesses. This unique partnership between the CDC, the SBA, and lenders allows small businesses to access large amounts of capital with more favorable terms and conditions than traditional loans.

Qualifications for an SBA CDC/504 loan:

• The business must be a for-profit entity operating within the United States or its territories.
• The business' net worth should not exceed $15 million, and it should have an average net income of less than $5 million after federal income taxes for the preceding two years.
• The funds obtained must be used for eligible business expenses, such as the purchase of long-term equipment.
• The borrower must not have access to other sources of financing on reasonable terms.
• The business must have a feasible business plan and the potential to create or retain jobs.
• The borrower's personal and business credit history will be considered (generally a credit score of 650 or higher).
• The borrower must demonstrate the ability to repay the loan on time based on the projected operating cash flow.

SBA microloan program

The microloan program is ideal for small businesses looking to purchase smaller equipment with a maximum loan amount of $50,000. The terms vary depending on the lender, but typically range from five to seven years, and interest rates typically range from 8% to 13%. SBA Microloans are available through a network of intermediary lenders, typically nonprofit organizations with a mission to promote economic development within their local communities.

Qualifications for an SBA microloan:

• The business must be a for-profit enterprise operating within the United States or its territories.
• The borrower must demonstrate a need for the loan proceeds.
• The borrower must show a sound business purpose for the funds.
• A strong business plan is required, detailing how the funds will be used and the plan for repayment.
• The borrower's personal and business credit history will be examined (generally a credit score of 620 or higher).
• The borrower must not have access to other sources of financing on reasonable terms.
• The borrower must demonstrate the ability to repay the loan from the business’ operating cash flow.

It's important to remember that each lender will have its own specific qualification guidelines, in addition to the general SBA criteria, when determining loan eligibility. Therefore, the exact requirements may vary from one lender to another. Also, you should note that eligibility requirements for microloans can be less strict than other SBA loan programs, making them an attractive option for small businesses that might not qualify for larger loan amounts.

Where to get an SBA loan to buy equipment.

SBA loans are not directly provided by the government. Instead, they are administered through partnering banks and financial institutions. This means that you can apply for an SBA loan at any bank or credit union that participates in the program.

It’s important to note that the application process for an SBA loan may be more involved compared to traditional loans. The lender will require detailed financial information and may also ask for a business plan, personal credit score, and collateral. However, with the right documentation and a solid business plan, you can increase your chances of getting approved for an SBA equipment loan.

The first step is to research and find SBA participating lenders in your area. You can also use the SBA website to search for lenders based on your location and preferred loan program. Once you’ve identified potential lenders, it’s important to compare their rates, terms, and requirements before deciding on the best option for your business.

In conclusion, if you’re a small business owner looking to purchase equipment, an SBA loan can be a great financing option. With favorable terms and increased accessibility, these loans can help small businesses overcome the financial barriers of purchasing necessary equipment. Just remember to do your research, gather all necessary documentation, and choose the right lender for your business’ needs.

As a small business owner, you may have heard of the Small Business Administration (SBA) loans as a potential funding source for your business. These loans are backed by the SBA, providing lenders with a guarantee in case of default. However, one aspect that often raises questions and concerns is collateral requirements. 

In this blog post, we'll break down everything you need to know about SBA collateral requirements, including common misconceptions and personal guarantees.

Is collateral required for SBA loans?

The short answer is yes, collateral is typically required for SBA loans. This means that the borrower must provide assets or property to secure the loan in case of default. However, the type and amount of collateral may vary depending on the specific SBA loan program and lender.

Some things that may count as collateral for an SBA loan include:

• Commercial real estate or land
• Machinery and equipment
• Inventory
• Accounts receivable
• Cash savings or deposits
• Personal assets (e.g., a home or car)
• Investment properties
• Financial instruments such as stocks or bonds

What are some common misconceptions about SBA loan collateral requirements?

One common misconception is that only physical assets (Ex: real estate or equipment) can be used as collateral. While these are common forms of collateral, lenders may also consider other assets such as accounts receivable or inventory.

It's also important to note that the SBA has specific guidelines for the type and value of collateral required for their loan programs. Lenders must follow these guidelines when determining collateral requirements.

Another misconception is that the SBA itself provides the loan. In reality, the SBA guarantees a portion of the loan provided by an approved lender, reducing the lender's risk and making it easier for small businesses to access funding.

Many business owners believe that the SBA provides collateral for SBA loans. This is not the case. The SBA guarantees a portion of the loan, but it's still up to the lender to determine collateral requirements.

Do SBA loans require a personal guarantee?

Yes, it is SBA policy that every SBA loan must be backed by a guarantee. A personal guarantee is a promise from the business owner to personally repay the loan in case of default. This means that even if your business fails, you will still be responsible for repaying the loan with your personal assets.

What to know about personal guarantees.

It's important to understand the implications of a personal guarantee before signing on the dotted line. While providing a personal guarantee may increase your chances of getting approved, it also puts your personal assets at risk. It's crucial to carefully consider your ability to repay the loan and any potential risks before agreeing to a personal guarantee.

Additionally, some lenders may require multiple guarantors, which means that multiple individuals, such as business partners or investors, will be responsible for repaying the loan if the business is unable to do so.

The SBA does allow third parties to assume the liability of a personal guaranty.

Will I be able to get an SBA loan without collateral or a personal guarantee?

It's possible but rare. Some SBA loans, such as the 7(a) program, may provide financing without collateral for loans of $50,000 or less. However, in these cases, the lender will still require a personal guarantee.

As a small business owner, understanding SBA collateral requirements is crucial when considering financing options for your business. While collateral and personal guarantees may seem daunting, they are necessary measures to protect lenders and make loans more accessible for small businesses. With the right information and preparation, you can confidently navigate SBA collateral requirements and secure the funding your business needs to thrive.

Remember, the SBA is here to support and assist small business owners like you in achieving their goals, so don't let the concept of collateral discourage you from exploring the option of an SBA loan. So, do your research and find the best fit for you and your business.

Small businesses know the importance of staying flexible and agile. It’s not unusual for expensive challenges and unexpected opportunities to appear without much notice, especially in the early days of a new business. As a result, a revolving line of credit is a popular financing solution among many business owners. 

Just as the seasons change, so businesses evolve over time. Costs expand and contract. Growth often happens in spurts. With a revolving line of credit, entrepreneurs have the freedom to access financing as they need it. 

Read on to learn more about revolving lines of credit and how they work. You’ll also discover the pros and cons of this flexible form of business financing, along with tips on how to apply for this type of account if you determine that it’s a good fit for your business.

What is a revolving line of credit?

A revolving line of credit is a form of financing that offers business owners the flexibility to borrow money on an as-needed basis. Also known as a business line of credit, a revolving line of credit is similar to a credit card in several ways. 

There’s no lump sum disbursement of funds like you would receive with a business loan. Instead, with a business line of credit you are able to request funds as your company needs them.

How does a revolving line of credit work?

When your business qualifies for a new revolving line of credit, the lender will set a cap on the amount of money your company can borrow at any given time. This cap is more commonly known as the credit limit. 

Depending on your borrowing terms, your business may be able to borrow money against its credit line (up to the credit limit on the account) on a repeated basis. Of course, you will need to make timely payments. You’ll pay interest only on the amount borrowed. Use our revolving line of credit calculator to estimate payments.

If your account has a draw period, once that expires you would no longer be able to borrow against the credit line. However, your business would remain responsible for repaying the funds it borrowed, plus any interest and fees that apply to the debt. 

While you are able to borrow up to the credit limit, remember that a high credit utilization ratio can impact your credit score. In general, you want to keep your credit utilization to 30% or less.

Line of credit vs. business loan vs. credit card

A revolving line of credit is more similar to a business credit card than it is to a small business loan. Unlike most small business loans, such as term loans, line of credit borrowers do not receive a large disbursement of funds up front that requires regular repayments. You only receive funds as needed, and your monthly repayment schedule may vary according to how much you borrow and the APR and fees on your account.

Another similarity between revolving lines of credit and credit cards is the fact that both are often unsecured. This means they don’t require collateral. Some larger lines of credit (such as those over $100,000), however, may require borrowers to offer cash or assets as collateral. On the other hand, you can often use revolving lines of credit for purchases that you cannot pay for with a business credit card, like rent or bulk inventory. 

A revolving line of credit can give you access to cash like a business loan might do. You may be able to access cash via a small business credit card as well, but you’ll typically have to pay cash advance fees and a higher APR for this privilege.

Types of revolving credit.

The term revolving credit refers to a type of account that allows a customer to borrow and repay money on a repeated basis. The most common examples of revolving credit are as follows. 

• Credit cards are perhaps the most recognizable form of revolving credit. Both consumers and businesses may qualify for credit card accounts. In general, better credit scores lead to better interest rates and borrowing terms. 
• A business line of credit is a type of revolving credit that’s available for business purposes. This borrowing option can be secured or unsecured, with varying credit limits, loan terms, and interest rates based on the creditworthiness of the business and other factors. 
• A commercial building equity line of credit is a type of financing where the borrower receives a line of credit based on the amount of equity that’s available in their commercial property. The property serves as collateral.

A home equity line of creditor HELOC is another type of revolving credit in which a borrower’s property serves as collateral to secure the account. However, in this scenario, the borrower is an individual consumer, not a business.

Pros and cons of revolving line of credit.

As with any type of financing, there are benefits and drawbacks to using a revolving line of credit to fund your business. Here are some of the pros and cons you should consider if you’re thinking about applying for a revolving line of credit. 

Why choose a revolving line of credit?

There are numerous reasons your business may want to consider opening a revolving line of credit. Here are a few signs that this type of account might work well for your company. 

Your business needs: 

• Access to a flexible source of funding. 
• Working capital on a periodic or seasonal basis. 
• A non-specific amount of funding for an upcoming project or investment.
• The ability to borrow money quickly in an emergency.
• A way to build better business credit history and credit scores for the future.

Revolving lines of credit for people with bad credit.

In terms of credit requirements, revolving lines of credit occupy a space between small business loans and business credit cards. Your credit score may not need to be as high as it does to qualify for some traditional forms of small business lending, like a term loan from a bank. The application process for revolving lines of credit also tends to be less demanding, depending on the lender.

On the other hand, revolving lines of credit usually have higher credit limits and lower interest rates than credit cards do. That often makes them harder to qualify for than a business credit card account.

Depending on the lender, you might be able to qualify for a revolving line of credit with:

• A personal credit score of at least 600 
• At least 6 months in business
• $50,000 or more in annual revenue

Revolving line of credit alternatives.

If your credit is suboptimal or your business is very new, you can seek other types of business loans for bad credit. Many people can get approved for business credit cards within minutes. 

You might also seek out a startup loan if your company has been around for at least a few months. 

Other entrepreneurs may opt to make use of personal funds or investors to get a business going in its first few weeks.

In conclusion, a revolving line of credit can be a valuable financial tool for small businesses that need flexible access to financing. It offers the ability to borrow funds as needed and repay them on a schedule that works best for your business. Additionally, it can help to improve your credit score and build a relationship with a lender that can provide additional financial support in the future. However, it's important to carefully consider the pros and cons before applying for a revolving line of credit and to ensure that you have a solid plan for managing your debt and using the funds responsibly.

If you're a business owner, you may have considered applying for a revolving line of credit. This type of financing can be a flexible and accessible way to access funds when you need them. However, before committing to a revolving line of credit, it's important to do the math and understand the terms of the loan. In this article, we'll explore how to calculate the interest and payment on a revolving line of credit and provide tips for applying for this type of financing.

Revolving line of credit calculator.

Interest rates for revolving lines can range widely. The interest rate a lender offers you will depend on multiple factors, including your personal credit score, business revenue, and the amount of credit you request. Whatever terms a lender offers you, it’s important to do the math before you commit to a revolving line of credit. You want to make sure that payments on the account won’t put your business in a financial bind. A free online calculator can help you crunch the numbers.

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Terms and explanation

Here are the essential pieces of information you’ll need to enter and notice as outputs on our revolving line of credit calculator.

Amount seeking

This refers to the borrowing limit or the maximum amount of money a lender will allow you to borrow. You can withdraw funds as needed, so you don’t have to borrow the entire approved amount.

Loan term

The loan term is the amount of time you’ll take to pay back the money you withdraw. A longer term will lower your monthly payments, but be more expensive in the long run.

Interest rate

The amount you’ll pay to be able to pull funds from a business line of credit is your interest rate. The better your credit score, the lower your interest rate will be.

Estimated daily repayment

This is what you’ll pay on a daily basis to repay your business line of credit.

Total repayment

Total repayment is your overall cost of borrowing. It includes principal and interest and can give you an idea of the total cost of your line of credit.

How to calculate interest on a line of credit.

In general, you pay interest only on a revolving line of credit if you carry a balance on the account. But there may be fees associated with the account that apply on a monthly or annual basis as well. So be sure to add that cost into your budget calculations. 

Depending on your terms, a lender may calculate revolving line of credit interest based on your principal balance—aka the amount of balance outstanding for the previous billing cycle (often 30 days). You’ll usually only pay interest on the funds you withdraw from the revolving line of credit account. Unlike credit cards, you likely won’t pay interest on interest.

The lender may calculate your interest based on a whole year and display it as a percentage. From there, the revolving line of credit interest formula is the principal balance multiplied by the interest rate, multiplied by the number of days in a given month. This number is then divided by 365 to determine the interest you’ll pay on your revolving line of credit.

When you know the basic figures, calculating the interest for a revolving line of credit is straightforward. Business lines of credit are built to be simple due to their flexibility and accessibility. They remain a great option for many types of small businesses.

How to apply for a revolving line of credit.

If you’re interested in a revolving line of credit, it’s easy to see what sort of revolving line of credit your business can be approved for online. Looking over your financing options through Lendio is simple and fast, and the process often doesn’t require a hard credit check.