Lending Library

A personal credit score determines the level of risk that comes with lending to you. You use it to apply for credit cards and other financing options to cover major purchases. A business credit score works similarly, except instead of evaluating your risk as an individual, financial institutions evaluate your business’s viability.

Like personal credit, business credit takes time to build. While your equity may be able to boost your business credit, the overall goal is to keep your personal and professional finances separate. This guide will review the factors that go into your business credit score range and what a healthy number looks like.

What is a business credit score?

A business credit score is a numeric expression that represents the creditworthiness of a company. It is used by lenders, suppliers, and other financial institutions to evaluate the likelihood that a business will repay its debts. This score typically ranges from 0 to 100 for most scoring models, with higher numbers indicating better creditworthiness.

Unlike personal credit scores, business credit scores take into account factors such as the company's payment history, credit utilization rate, length of credit history, public records including bankruptcies, and the company’s size and industry. A healthy business credit score is crucial for securing financing, favorable loan terms, and establishing trust with suppliers and vendors.

Business credit score benefits.

Having a high business credit score can unlock numerous advantages for your business that go beyond simply qualifying for loans or credit lines. These include:

• Better financing terms: A strong business credit score can help you secure lower interest rates and more favorable repayment terms on loans and lines of credit.
• Increased borrowing power: With a higher business credit score, you may be able to access larger amounts of capital for major purchases or expansions.
• Improved supplier relationships: Many suppliers and vendors use business credit scores to determine whether or not they want to extend credit to a company. A strong business credit score can help establish trust and open up more opportunities for trade credit.
• Separation of personal and professional finances: By building a solid business credit score, you can keep your personal assets separate from your business assets, protecting yourself in the event of any financial issues.
• Insurance policy rates could be lower: A good business credit score may influence your insurance premiums, potentially leading to lower rates on your business insurance policies.

Overall, investing time and effort into building and maintaining a solid business credit score positions your company for better financial health and long-term success.

How a business credit score works.

A business credit score, much like a personal credit score, is a reflection of a company's financial responsibility and creditworthiness, but with a focus on the business's operations. When a business applies for loans or credit lines, lenders and suppliers will examine this score to decide how risky it is to offer credit. 

This score is calculated based on several factors, including the timeliness of bill payments, the amount of available credit used by the business, the length of the business's credit history, any legal filings such as liens or bankruptcies, and the company's financial stability. Essentially, this score is a numeric summary of a business’s financial history and current financial position, aimed at predicting the likelihood of the business fulfilling its financial obligations.

What goes into your business credit score?

Multiple factors contribute to your business credit score—some are in your control while others aren’t. A few of these factors include:

• Your payment history: If you have paid off your loans steadily over time without missing any payments, you will have built a strong business credit score.
• Credit history and age: How long has your business had financial liabilities? A new business will have a much lower credit score than a company that has maintained good credit for the better part of a decade. 
• Number of accounts: How many accounts do you have? How many are active with existing debits or credits? 
• Credit utilization: What percentage of allowed credit do you have? Have you reached the maximum limits of your business credit cards, or do they still have available credit for you to use? 
• Types of credit: Credit bureaus look for multiple funding sources, otherwise called a credit mix. 
• Recent credit inquiries: Have lenders recently requested information about your business? How many and how long ago?  

Many of these factors are also used for personal credit scores. However, they take on a new meaning when applied to a business. 

For example, the severity of the debt you take on also depends on the size of your business and your expected profits. Your credit can also be impacted by vendors that send unpaid invoices to collections or report overdue bills that you miss. 

Essentially, almost any financial transaction you make as a business owner can contribute to your credit score, which is why it is so important to maintain good, organized bookkeeping.

What is a good business credit score?

The main difference between a personal and business credit score is the number range. While a personal credit score ranges from 300–850, business credit scores are typically developed on a scale of 0–100. Additionally, there are 3 main business credit score bureaus, all of which use this range. These are Dun & Bradstreet (D&B), Equifax, and Experian.    

As a rule of thumb, the higher the score, the better. If you have a business credit score above 75, then you have exceptional business credit and shouldn’t have trouble securing funding. 

A score of 50–75 is considered fair and you should be able to get funding, though maybe at a higher interest rate or more limited terms. Finally, anything below 50 is considered poor credit and a high-risk account.Each of the three major credit bureaus collects and measures different information to calculate your business credit score.

How to improve your business credit score.

Improving your business credit score is a strategic process that requires consistent effort over time. Here are practical steps you can take to enhance your company's financial standing:

• Pay your bills on time or early: Establish a track record of timely payments, as payment history heavily influences your credit score.
• Reduce credit utilization: Aim to use a smaller portion of your available credit to show lenders you're not overly reliant on credit.
• Update your business information: Ensure your business information is accurate and up to date with all credit bureaus. Inaccuracies can negatively affect your score.
• Monitor your business credit report: Regularly review your credit reports from the major credit bureaus to catch and dispute any inaccuracies or fraudulent activities early.
• Establish trade lines with suppliers and vendors: Use trade credit to your advantage by establishing and maintaining positive payment histories with multiple suppliers and vendors.
• Limit credit inquiries: Only apply for new credit when necessary, as too many inquiries in a short time can indicate risk to lenders and negatively impact your score.
• Build a diverse credit mix: Having a mix of credit types, such as a business credit card, a line of credit, and trade credit, can positively affect your score.

By taking these steps, you can improve your business credit score, which can lead to better loan terms, increased funding opportunities, and a stronger financial foundation for your business.

Check your business credit score.

You can find sample business credit score reports for each of these credit bureaus so you can determine which ones you want to use. The scores should stay relatively equal across each report. 

To access your credit scores, visit the websites of these credit bureaus. You can pay from $40 at Experian up to $100 at Equifax for your report.

Understanding your business credit score range can help you secure funding for startup expenses and company expansion. You can be more aggressive in negotiations with lenders when you have a good score and can take steps to improve it before taking out a loan if you have a poor one. Don’t be afraid of your credit score—use it to make sound financial decisions for your business!

Asset-based lending, also known as asset-based financing, is a type of business loan or line of credit that companies secure with collateral. With traditional loans, lenders often emphasize a company’s creditworthiness and cash flow when determining whether to approve applications for business funding. Yet with asset-based lending, the value of the collateral that backs the financing plays a more meaningful role in your business’s ability to get funded and its borrowing capacity. 

How does asset-based lending work?

In asset-based lending, a business secures a loan or line of credit by offering its assets as collateral. These assets can include real estate, inventory, accounts receivable, equipment, and other property that holds value. The lending agreement specifies how much money the business can borrow, which is usually a percentage of the collateral's appraised value. This percentage varies depending on the type of asset and its marketability; for instance, receivables might be financed at around 70% to 80% of their value, while inventory may only secure around 50%.

The process begins with the lender evaluating the assets to determine their current market value. If the business defaults on the loan, the lender has the right to seize the collateral, sell it, and recover the owed amount. This makes asset-based loans less risky for the lender compared to unsecured financing, potentially leading to more favorable interest rates for the borrower. However, businesses must consider the risk of losing their assets before entering into such agreements.

How much can you borrow? 

Depending on the lender you work with and other factors, your business might be able to borrow up to 80% of the face value of its accounts receivable. When taking out an equipment loan to purchase equipment, eligible borrowers may be able to secure up to 100% financing. However, if your goal is to use equipment your business already owns as collateral for an asset-based loan, some lenders may be willing to extend only up to 50% of the equipment’s value (depending on the type of equipment, its condition, projected depreciation, and other details).

Pros and cons of asset-based financing.

If you’re considering applying for an asset-based loan to secure additional capital for your business, it’s important to evaluate the pros and cons associated with this type of financing. 

Pros of asset-based financing.

• Qualification requirements: Perhaps the biggest appeal of asset-based financing is the fact that these loans and lines of credit tend to be easier to obtain, compared with traditional business funding options. Cash flow challenges, limited time in business, and even poor personal and business credit scores may not be deal-breakers with this type of financing, depending on the lender. 
• Fast funding: Certain types of asset-based lending may feature faster funding speeds compared with traditional business loans (especially SBA loans). Accounts receivable loans, for example, could provide eligible borrowers with access to capital in as little as 24 hours.
• Less personal risk: With traditional business loans, the business owner often has to sign a personal guarantee to secure funding. Asset-based financing, however, may not feature this requirement (though it’s important to verify the details before signing any financing agreement). 

Cons of asset-based financing.

• Higher costs: It’s common for asset-based financing to feature higher interest rates and fees compared with traditional business loans or lines of credit. In some cases, the cost difference could be significant. 
• Some assets may not qualify: Your asset will need to satisfy a lender’s criteria to qualify as collateral for an asset-based loan or line of credit. In general, acceptable assets are high value, have a low depreciation rate, and are easily converted to cash.
• Loss of asset(s): If your business defaults on its debt, you risk losing the asset(s) it pledged as collateral.

Asset-based lending vs. cash-flow lending.

When comparing asset-based lending to cash-flow lending, it's essential to understand the primary differences between these financing options. Asset-based lending focuses on the value of the collateral that a business can provide, such as inventory, equipment, or accounts receivable. This type of financing is particularly beneficial for companies that have significant physical assets but might not have a strong cash flow.

On the other hand, cash flow lending evaluates a business's future cash flows as the main criteria for the loan. Lenders look at the company’s past and projected cash flow statements to assess its ability to repay the loan. This type of lending is more suitable for businesses with strong and predictable cash flows but fewer physical assets to use as collateral.

The choice between asset-based lending and cash-flow lending depends on the specific needs and circumstances of the business. If a company has valuable assets but faces cash flow challenges, asset-based lending may offer a viable solution. Conversely, for businesses with strong cash flows but limited assets, cash-flow lending might provide a more appropriate form of financing. Both options have their merits and potential drawbacks, necessitating a careful analysis to determine the best fit for the business’s financial strategy.

Is asset-based lending right for my business?

Asset-based financing can come in many different shapes and sizes. Therefore, the best way to determine whether a financing solution makes sense for your business is to research and ask questions before you apply for any new loan, line of credit, or cash advance. 

First, you should make sure your business can afford to borrow additional money. If you’re confident you can manage the new indebtedness and the repayment schedule that involves, you should then assess the risks, benefits, and costs. Finally, take the time to shop around and compare business financing options. Interested in asset-based lending and how your business might benefit from this type of financing solution? Learn more about accounts receivable financing here.

The Small Business Administration (SBA) provides attractive loan programs for small business owners. If you’re a small business in search of financing with low rates and lengthy repayment terms, SBA loans are definitely worth considering. 

As you research the various SBA loans out there, you’ll come across SBA 504 and SBA 7(a) loans. Both options are guaranteed by the SBA and issued by SBA-approved lenders, such as banks, credit unions, and online lenders. So which loan makes the most sense for your unique situation? Keep reading to find out.

SBA 504 loan vs. 7(a) loan.

Both the SBA 504 loan and 7a loan are great financing solutions for small businesses, but they’re not created equal. Your particular business status and goals will dictate the ideal choice for your particular business. 

Compared to the SBA 504 loan, the SBA 7(a) loan is far more flexible. You can use it to fund real estate, working capital, inventory, supplies, equipment, and more. The SBA 504 loan, however, is fairly specific and designed to help small business owners purchase, lease, renovate, or improve commercial real estate, buildings, or equipment.

If you’re in need of working capital to purchase inventory or supplies or would like to fill cash flow gaps, for example, the SBA 7(a) loan is an excellent option. This is particularly true if you have collateral to provide and are looking for a faster application process. 

The SBA 504 loan, on the other hand, makes more sense if you’d like to finance real estate, buildings, or equipment and can prove you meet job creation, job retention, or public policy goals. You should also expect a slower application process.

Key differences

The table below outlines the key differences between the SBA 504 loan, the SBA 7(a) loan.

SBA 504 loans.

Formally known as the SBA 504/CDC loan, the SBA 504 loan can come in handy if you’d like to purchase fixed assets, like real estate or equipment. Its loan amounts range from $125,000 to $20 million, with terms of up to 20 years. One of the greatest perks of the SBA 504 loan is its low down payment requirements. 

Depending on your situation, you can lock in financing for as little as 10% of the asset’s purchase price. Also, while the SBA 7(a) loan offers a fixed or variable interest rate, rates for 504 loans are always fixed and never fluctuate. This makes it easy to budget for your payments in advance and avoid unwanted financial surprises. 

The 504 loan is less flexible than the SBA 7(a) loan, as it’s designed for business owners who want to improve fixed assets, like land, buildings, or equipment. These projects should encourage economic development or other public policy goals. A few examples of public policy goals include conserving energy or growing a minority- or women-owned business. 

It’s important to note that the funds from a 504 loan are not for investment properties. If you plan to finance new construction, a minimum of 60% of the building must be owner-occupied once the construction is complete and only 20% of the space can be leased in the long term. 

In most cases SBA 504 loans are self-secured so the underlying fixed assets act as collateral. 

Also, anyone who owns 20% or more of the business must sign a personal guarantee.

What are the eligibility requirements for SBA 504 loans?

For businesses aiming to secure an SBA 504 loan, several specific eligibility requirements must be met. Businesses looking to secure SBA 504 funding must operate as for-profit entities within the United States or its territories. Similar to the SBA 7(a) program, applicants must fall within the definition of a small business according to SBA size standards, which vary by industry.

The objective of the financing must align with the goals of the SBA 504 program, focusing on the purchase or improvement of fixed assets such as land, buildings, and long-term machinery. Applicants are expected to demonstrate a tangible net benefit to the community, such as job creation or retention, which should meet or exceed certain benchmarks set by the SBA.

An essential criterion is the business's ability to repay the loan. This is evaluated through historical and projected cash flows, ensuring that the business generates sufficient income to cover loan payments and other financial obligations. A down payment typically of 10% of the project cost is required, demonstrating the borrower's commitment and reducing the risk of default.

Furthermore, the project financed must be beneficial to the business's operations and cannot be for passive or speculative purposes. Properties financed with a 504 loan must be at least 51% owner-occupied for existing buildings or 60% for new constructions, ensuring the primary use is for the applicant’s business activities.

Business owners seeking an SBA 504 loan must also have a sound character, evidenced by a clean criminal record and a history of responsible fiscal management. This includes no previous defaults on government loans, which would disqualify the applicant from receiving SBA assistance.

What fees and interest rates will I pay on an SBA 504 loan?

For those obtaining an SBA 504 loan, understanding the fee structure and interest rate is crucial for financial planning. The interest rates for SBA 504 loans are fixed for the life of the loan, providing a predictable monthly payment schedule. These rates are typically below market rates for commercial loans, making them an attractive option for small business owners.

In terms of fees, borrowers can expect to pay a variety of costs associated with the SBA 504 loan process. These fees include a processing fee, a funding fee, and a servicing fee, which typically total 3% of the loan amount. Additionally, there may be fees related to the third-party lending institution, legal fees, and other closing costs.

It's important for potential borrowers to factor these fees into the overall cost of their project to ensure affordability and feasibility. Even though these fees can add up, the benefits of fixed, low interest rates and the accessibility of significant funding for major projects often outweigh the costs, making the SBA 504 loan a practical option for many small business owners looking to expand or upgrade their fixed assets.

What are SBA 504 loan collateral requirements?

The collateral requirements for an SBA 504 loan are straightforward, given its focus on fixed asset financing. Essentially, the assets being financed serve as the primary collateral. This generally includes the real estate or heavy equipment that the loan proceeds are used to purchase, renovate, or expand.

In addition to the financed assets, lenders also require personal guarantees from all principal owners of the business. A personal guarantee means that if the business fails to repay the loan, the individual guarantors may be personally responsible for the balance. This requirement is designed to ensure that those with a significant stake in the business are committed to its success and the repayment of the loan.

SBA 504 loan pros and cons.

To fully appreciate the value of SBA 504 loans, it's important to examine both the benefits and potential downsides of this financing option.

Pros

• Low down payment: One of the most appealing aspects of SBA 504 loans is the relatively low down payment requirement, often as little as 10% of the project cost. This makes it easier for small businesses to undertake large projects without significantly impacting their cash flow.
• Fixed, below-market interest rates: SBA 504 loans come with fixed interest rates that are typically below those of commercial loans, providing predictable monthly payments and long-term savings.
• Long-term financing: With terms up to 20 years for real estate and up to 10 years for equipment, these loans offer long-term financing options, helping businesses manage their cash flow more effectively.
• Access to large amounts of capital: SBA 504 loans allow businesses to access significant amounts of capital, ranging from $125,000 to $20 million, enabling them to finance major projects.
• Economic development: The program is designed to support projects that promote economic development within a community, including job creation and retention, which can be a significant advantage for businesses with a focus on growth.
• Favorable collateral conditions: Given that the loan is typically secured by the assets being financed, businesses may not need to provide additional collateral, simplifying the lending process.
• Enhances business creditworthiness: Successfully repaying an SBA 504 loan can improve a business's credit score, making it easier to obtain future financing.

Cons

• Restricted use of funds: Unlike SBA 7(a) loans, the use of funds from an SBA 504 loan is limited to purchasing, constructing, or improving fixed assets such as real estate and heavy machinery, reducing flexibility for other business needs.
• Complex application process: The application process for an SBA 504 loan can be cumbersome and time-consuming, requiring potential borrowers to provide extensive documentation and go through a detailed qualification procedure.
• Requires project to meet specific criteria: Projects financed with SBA 504 loans must contribute to job creation or other community development goals, which may not align with all business objectives.
• Personal guarantees required: Owners holding 20% or more of the business equity must provide personal guarantees, potentially putting personal assets at risk.
• Prepayment penalty: Borrowers face prepayment penalties if the loan is paid off before a specified period, making it costly to refinance or repay early.
• Two-loan structure can be complex: Financing typically involves both a bank loan and a CDC (Certified Development Company) loan, adding to the complexity of the borrowing and repayment process.
• Property occupancy requirements: To qualify, the financed property must be at least 51% owner-occupied for existing buildings or 61% for new constructions, which may not be feasible for all businesses.
• Not available for working capital or inventory: The SBA 504 loan cannot be used for working capital, inventory, consolidating or repaying debt, or for investment in rental real estate, limiting the scope of financial planning for some businesses.

SBA 7(a) loans.

The SBA 7(a) loan is considered the SBA’s flagship program. It’s flexible in that you can use it to cover a variety of business-related expenses, such as working capital, inventory, equipment, and real estate. The SBA 7(a) comes with loan amounts of up to $5 million with repayment terms of up to 25 years. Compared to loans from traditional lenders, like banks and credit unions, the SBA 7(a) loan offers competitive interest rates that can save you hundreds or even thousands of dollars over time. 

In most cases, the SBA 7(a) is the way to go. It’s a flexible, low-interest rate financing solution that is ideal for a number of purposes. To qualify, you must be based in the U.S. and meet the SBA’s definition of a “small business,” which depends on your industry. In addition, you’ll have to show that you’ve invested at least some of your own funds in the business and looked into other financing solutions. 

If you go this route, be prepared to pay an SBA guarantee fee, which will ensure the government has the money to reimburse the lender if you can’t repay the loan. You may also need some type of collateral. In addition, anyone who owns 20% or more of the business will be required to sign a personal guarantee.

What are the eligibility requirements for SBA 7(a) loans?

To be eligible for an SBA 7(a) loan, a business must meet several key criteria. Businesses seeking SBA 7(a) funding must operate for profit within the United States or its territories. The business should also have reasonable invested equity, ensuring that the business owner has personally invested in their venture. Additionally, the business must demonstrate a need for the loan proceeds and use them for a sound business purpose. The business cannot be in the business of lending and must not present a conflict of interest with the SBA.

Applicants must also qualify under the SBA's definition of a small business, which varies by industry. Generally, this means meeting specific size standards related to the number of employees or annual receipts. The business must also show that it has attempted to use other financial resources, including personal assets, before applying for an SBA loan.

The credit history of both the business and its owners will be examined. This includes a review of both personal and business credit scores. Business credit scores of 155 or higher or personal credit scores of 650 or higher are typically required to receive SBA 7(a) loan funding. Applicants need to demonstrate a satisfactory ability to repay the loan from earnings, not reliant on speculative gains. All applicants are also subject to a background check which considers character, criminal history, and previous financial behavior, including any past dealings with the government such as previous loans or tax obligations.

What fees and interest rates will I pay on an SBA loan?

For SBA 7(a) loans, interest rates are typically linked to the prime rate and can be fixed or variable. These rates are often more competitive than those of traditional bank loans, providing an appealing cost-saving benefit for small business owners.

In addition to interest rates, borrowers of SBA 7(a) loans also need to be aware of various fees that can apply. One of the more significant charges is the SBA guarantee fee, which is based on the loan amount and the maturity of the loan. This fee ranges from 0% to 3.5% of the guaranteed portion of the loan, with rates adjusting based on the size of the loan and the repayment term. Additionally, there might be servicing fees, closing costs, and late fees if payments are not made on time.

Understanding these costs upfront is crucial for potential borrowers. It allows for a more accurate calculation of the total cost of the loan, ensuring that businesses can make informed financial decisions and select the loan option that best suits their needs.

What are SBA 7(a) loan collateral requirements?

While SBA 7(a) loans are renowned for their flexibility and favorable terms, potential borrowers should understand the collateral requirements that accompany these loans. Generally, for loans $50,000 or more, the SBA will require its lenders to use the established collateral policies and procedures for their similarly-sized non-SBA guaranteed commercial loans. Types of collateral may vary and can include business assets, personal assets, or both. This might encompass real estate, equipment, inventory, or personal property.

For loans under $50,000, lenders are not required by the SBA to take collateral, making the SBA 7(a) program accessible even for small-scale borrowers who might not possess extensive assets. However, for loans exceeding $350,000, the SBA mandates lenders to collateralize the loan to the maximum extent possible up to the loan amount. If the loan is not fully secured, the lender must demonstrate that the proposed collateral is indeed the maximum available and that the loan is of sound value.

It's important for prospective borrowers to engage in open and honest discussions with their SBA-approved lender about the collateral requirements specific to their loan. Being well-prepared and clear about what assets can be used as collateral will streamline the application process and help set realistic expectations about securing an SBA 7(a) loan.

SBA 7(a) loan pros and cons.

To better understand the SBA 7(a) loan program, it is crucial to weigh its advantages and disadvantages.

Pros

• Versatility: One of the most significant advantages of the SBA 7(a) loan is its flexibility. Funds can be used for a wide range of business purposes, including working capital, debt refinancing, purchasing equipment, or buying real estate.
• Lower down payments: Compared to conventional loans, SBA 7(a) loans often require smaller down payments. This makes it easier for small businesses to access the capital they need without having to tie up too much of their liquid assets.
• Longer repayment terms: With repayment terms of up to 25 years for real estate and 10 years for equipment or working capital, businesses can benefit from lower monthly payments and improved cash flow management.
• Competitive interest rates: The SBA 7(a) loan program offers interest rates that are typically lower than those of equivalent commercial loans, reducing the cost of borrowing for small businesses.
• Available to startups: Unlike many conventional loans that require a business to have a history of profitability, SBA 7(a) loans are available to startups and new businesses, assuming they meet the eligibility requirements.
• Counseling and education: Borrowers have access to SBA resources, including counseling and education services, which can be invaluable for new and growing businesses.
• SBA guarantee: Because the SBA guarantees a portion of these loans, lenders are more willing to fund businesses that might not qualify for traditional loans, thereby increasing access to capital for small businesses.

Cons

• Complex application process: The procedure to apply for an SBA 7(a) loan can be lengthy and complex, requiring extensive documentation and potentially leading to longer wait times for approval.
• Collateral requirements: While not always required, collateral might be necessary for larger loans, posing a challenge for businesses without substantial assets.
• Personal guarantee: Owners with a 20% or greater stake in the business are often required to provide a personal guarantee, putting personal assets at risk if the business fails to repay the loan.
• SBA guarantee fee: Borrowers are subject to pay an SBA guarantee fee, which can add to the overall cost of the loan.
• Prepayment penalties: For loans with terms of 15 years or more, there may be prepayment penalties if more than 25% of the loan is paid off within the first three years.
• Qualification hurdles: The requirements to qualify can be stringent, including strong credit scores, which might exclude some businesses.
• Limited funding amounts: Although the maximum loan amount can reach up to $5 million, the actual amount granted depends on various factors, potentially limiting the funding a business can secure.

How to choose between an SBA 7(a) vs. 504 loan.

Choosing between an SBA 504 and a 7(a) loan boils down to your specific business needs, the nature of your project, and your long-term financial strategy. If your primary goal is to secure working capital, refinance business debt, or cover operational expenses, an SBA 7(a) loan offers the flexibility and versatility to support a wide range of business purposes. Its potentially larger loan amounts and the possibility to cover soft costs make it suitable for businesses seeking a more all-encompassing financial solution.

On the other hand, if your objective is to invest in fixed assets such as real estate or heavy equipment, an SBA 504 loan could be the better choice. With its low down payment requirements, fixed interest rates, and long-term repayment options, it's designed to make sizable capital investments more affordable. Additionally, the SBA 504 loan fosters community development and encourages long-term economic growth, providing not just financial but also societal benefits.

Ultimately, the decision should be informed by a thorough analysis of your financial situation, growth forecasts, and how the loan’s terms align with your business's cash flow and investment plans. Consulting with a financial advisor or a lending specialist can provide insights tailored to your specific circumstances, enabling you to make a well-informed choice between these two SBA loan options.

Bottom line

If you’re in the market for a flexible loan, the SBA 7(a) loan can check off all your boxes. As long as you meet the eligibility criteria, you may lock in a low rate and lengthy repayment term you might not find elsewhere. Plus, you’ll enjoy the peace of mind of knowing your loan is backed by the government. 

An SBA 504 loan can help you meet your goals if you hope to grow through new or updated facilities. You may get approved with a low down payment and secure competitive interest rates and terms for commercial real estate.

Before you choose a loan, consider the current state of your business, as well as your unique business goals and priorities. Ready to learn more about SBA loans? See if you qualify and apply for an SBA loan.

Running a small business often means navigating a financial landscape where debt is vital to growth and sustainability. However, managing business debt can be a double-edged sword. On one hand, it offers liquidity and can fuel expansion; on the other, it can be a significant financial burden if not managed properly.

Understanding when to use business debt.

Debt is not inherently bad. When managed properly, it can help your business take advantage of opportunities and grow. But recognizing the right time and the right reasons for taking on debt is crucial:

Consider debt for investments that will grow your business.

Debt is often used for investments in areas like real estate, inventory, equipment, or acquiring another business that will increase profitability and contribute to long-term success.

Construction

In the construction industry, a loan can facilitate the purchase of state-of-the-art machinery or equipment that increases operational efficiency and allows you to take on larger projects.

Retail

For retail businesses, a loan can be pivotal in expanding inventory, especially before peak shopping seasons. Additionally, it can help acquire bulk inventory at a discounted rate, reducing overall project costs and increasing profit margins.

Healthcare

Healthcare providers can use loans to invest in new medical equipment, expanding their services.

Transportation

In the transportation sector, loans can enable the purchase of additional vehicles, such as trucks or vans, expanding service capacity. Investing in newer, more efficient vehicles can reduce maintenance and fuel costs, leading to higher profitability.

Restaurants

Restaurants can benefit from loans by renovating their space to increase seating capacity or create a more appealing ambiance. Additionally, funds can be used to upgrade kitchen equipment, enhance the efficiency of food preparation, and expand the menu to attract more customers.

Unexpected events and short-term cash flow problems.

Sometimes debt can be a solution to bridge a gap between a large, upcoming expense and liquid funds, as long as you have a plan to pay it back promptly.

For example, a construction or transportation company could use a business loan to cover ongoing expenses while waiting on final payment from customers.

Other factors to consider before taking on debt.

Before you approach a lender, there are several factors to evaluate to ensure that debt is the right decision for your business:

Your business metrics.

Evaluate your business's debt service coverage ratio (DSCR) to determine if you have enough cash flow to cover new debt payments comfortably.

Market conditions.

Consider the current economic climate and market conditions that could impact your business's ability to repay debt, such as interest rate fluctuations or industry-specific risks.

Your business's financial health.

Assess whether you have exhausted all other financing options and whether taking on debt aligns with your overall financial plan and business objectives.

The purpose of the loan.

Be clear on how the loan will be used and how it contributes to the long-term strategy of your business.

Time to increase revenue.

Once you've decided to take on debt to invest in your business, understanding the timeframe in which you can expect an increase in revenue is crucial.  For instance, upgrading equipment may yield quicker productivity gains and revenue increases in manufacturing sectors, while investments in marketing or expansion might take longer to show tangible results.

Debt management strategies

Identifying your financial position and setting the right strategies is essential for effectively managing your business debt.

Create a debt schedule.

Creating a debt schedule might sound daunting, but it's a straightforward process that can bring significant clarity to your financial management. Start by gathering all the relevant information about each debt your business owes. This includes lender names, the original amount borrowed, the current balance, interest rates, monthly payment amounts, and the maturity date for each loan.

Steps to Create a Debt Schedule:

1. List Each Debt: Begin with a spreadsheet or a table. List out each debt individually. This could include bank loans, credit cards, lines of credit, and any other form of debt.
2. Detail Loan Information: For each debt, record the total initial amount borrowed, the current balance owed, the interest rate, and the terms of repayment (such as the loan term or payoff timeline).
3. Monthly Payments: Note down the monthly payment required for each debt. This helps you understand how much of your monthly cash flow is allocated to debt repayment.
4. Update Regularly: Your debt schedule is not a static document. Update it regularly as you make payments or take on new debts. This will help you keep a clear picture of your financial commitments.

Manage your cash flow meticulously.

Effective cash flow management ensures you can meet your debt obligations and prevent undue financial stress. Start with detailed cash flow forecasts and consider seasonal trends in your business.

Increase your business revenue.

Boosting income through sales, diversifying your offerings, or exploring new markets can provide additional funds for debt repayment.

Cut unnecessary expenses.

Reducing costs by renegotiating vendor contracts, eliminating non-essential services, or finding more efficient operational processes can free up money to pay down your debt.

Negotiate with creditors.

If you’re struggling with high debts or interest rates, it's worth reaching out to your creditors to negotiate more favorable terms.

Use windfalls wisely.

Any unexpected funds, such as tax refunds or a robust sales season, can be used to accelerate your debt repayment.

Consider selling off assets.

If you have assets not vital to your business’s operations, consider selling them to generate funds for debt reduction.

Use the snowball or avalanche method for debt payoff.

If you are managing debt from multiple sources such as credit cards and struggling to pay it off, consider adopting a focused method for paying your debt off. The snowball method involves paying off the smallest debts first, gaining motivation as you extinguish individual debts. The avalanche method focuses on paying the debt with the highest interest rate first, saving you money in the long run.

Be cautious with loan stacking.

Loan stacking is when a business takes on multiple loans from different lenders in a short period. This can lead to confusion and overcommitment. Instead, be strategic about the timing and number of loans you take out.

Consider debt consolidation and refinancing.

Debt consolidation involves combining multiple debts into a single loan with a longer repayment period, potentially lowering your monthly payments. Refinancing involves taking out a new loan to pay off your existing business debt, usually to secure a lower interest rate or better terms.

Monitor debt and revise strategies.

Managing business debt is not a one-time action. It requires ongoing attention, especially as your business grows and changes.

Regularly review and update your debt schedule.

New loans or changes in interest rates can affect your overall repayment plan. Updating your debt schedule ensures you're always clear on your financial commitments.

Stay connected with your accountant or financial advisor.

Professional advice can be invaluable in navigating complex financial matters, including debt management and restructuring.

Be proactive in addressing potential issues.

If you anticipate having trouble making debt payments, communicate with your lenders early to explore possible solutions and avoid penalties or damage to your credit.

Debt can be a powerful tool for small businesses, but it must be wielded with care and sound judgment. By following the strategies outlined in this guide, you'll be better equipped to manage and eventually overcome your business debt, positioning your company for long-term success.

Remember, effective debt management is not just about repaying what you owe—it's about using your financial resources wisely to grow a thriving, sustainable business.

Given the potential impact financing can have on your business, you need to find the best place to get a small business loan. Lendio reviewed the largest SBA lenders and national banks to find the ones with the best small business loan options. Let’s look at some of the prime bank options available to you.

US Bank: Best for smaller loan amounts.

US Bank offers a specialized business “quick loan”, which is a term loan from $5K to $250K with terms of up to 7 years and no origination fee. The loan is “quick” because it can be applied for online. Both unsecured and secured options are available. 

Products offered:

• “Quick” term loan from 5K-250K with terms up to 7 years
• Line of credit up to $250K
• Commercial real estate loans with terms of up to 15 years
• SBA loans

Online application: Yes

Huntington National Bank: Best for underserved communities.

Huntington National Bank is the number one distributor of SBA loans in the U.S. It also runs a program called “Lift Local Business” that supports minority, woman, and veteran-owned small businesses through loans with reduced fees and lower credit requirements.

Products offered:

• SBA loans
• Term loans
• Lines of credit

Online application: Yes- for current customers.

JPMorgan Chase: Best for no origination fees.

Chase offers term loans, lines of credit, commercial real estate, and SBA loans. The bank charges no origination fees on its term loan and has no prepayment penalty on loans less than $250K. 

Products offered:

• Line of credit up to $500K 
• Term loan up to $500K with terms of 1-5 years
• Commercial real estate loans from $50,000 with terms of up to 25 years
• SBA loans

Online application: No

TD Bank: Best online application options.

TD Bank is the 2nd-largest SBA loan distributor in the U.S. and offers an online application for any of its loan products for amounts less than $250,000.

Products offered:

• Line of credit from $25K-$500K
• Term loan from $10K-$1M with terms of 1-5 years
• SBA loans
• Commercial real estate loans of up to $1M with 5-year terms

Online application: Yes

Wells Fargo: Best for unsecured lines of credit.

While Wells Fargo offers fewer loan products to small businesses than other banks, it offers multiple unsecured line of credit options with no fee. For businesses with less than two years of business, they can apply for an unsecured line of credit of up to $50K. For those with two years in business or more, Wells Fargo offers a line of credit of up to $150K.

Products offered:

• Line of credit
• SBA loans

Online application: Yes

PNC Bank: Best for unsecured loan options.

PNC Bank offers multiple unsecured loan products including an unsecured line of credit and an unsecured term loan. The unsecured line of credit and unsecured term loan are both available for amounts from $20-$100K.

Products offered:

• Unsecured line of credit from $20K-$100K
• Secured line of credit from $100K
• Unsecured term loan from $20K-$100K with 2-5 year terms
• Secured term loan from $100 K with 2-7 year terms

Online application: Yes - for existing customers for limited loan products.

BayFirst National Bank: Best for fast SBA loans.

BayFirst, the third-largest SBA lender in the U.S. offers a specialized SBA 7(a) loan called “BOLT”. The loan is available for up to $150,000 with a 10-year term. The streamlined online application process can you get funded as quickly as six days.

Products offered:

• SBA loans

Online application: Yes

Bank of America: Best for building credit.

Bank of America offers a secured business line of credit to business owners with six months in business and $50K annual revenue. The credit line’s purpose is to help the business owner build business credit, so the lines start as low as $1000 and are secured by a refundable cash deposit equal to the line amount. Once the business has established its credit history and reached a revenue of $100K/year, the business can graduate to a larger unsecured line of credit.

Products offered:

• Secured line of credit from $1K
• Unsecured line of credit from $10K
• Unsecured term loan from $10K with 1-5 year terms
• Commercial real estate loans from $25K with terms of up to 15 years
• SBA loans

Online application: Yes

Eligibility criteria for bank business loans.

While some banks will have specialized products with more flexible requirements, the most common eligibility criteria for a bank business loan are:

• 700 credit score
• 2 years in business
• $100,000 annual revenue

Other lender options.

Community banks

Community banks have a smaller footprint than banks listed above, but your local community bank may have more flexible options and a more personalized customer experience.

Online lenders

Online lenders don’t offer bank accounts. Instead, they focus solely on lending. These lenders offer several alternative financing options like business cash advances and invoice factoring that can be easier to qualify for in addition to term loans and lines of credit.

Microlenders

Nonprofit lenders offer loans of less than $50,000 called microloans. Microlenders often have less strict eligibility requirements and frequently cater to specific locations or underserved groups.

Learn more about how to get a business loan.

Methodology

Lendio based its selection on the following criteria:

• The largest number of SBA loans originated according to SBA data.
• Largest national banks by assets held according to federal reserve data.
• Loan products the bank offers according to the bank’s website.
• Special features such as an online application, unsecured loan, or faster processing times as identified by the bank’s website.

One key aspect that small business owners encounter when applying for Small Business Administration (SBA) loans is the SBA guarantee fee. This fee is a critical component of the loan process, yet it can cause confusion and questions among entrepreneurs. In this guide, we'll explain everything you need to know about it, including its implications, to help you make informed financial decisions for your business.

What is the SBA guarantee fee?

Unlike origination fees that are usually charged on traditional business loans through banks, a guarantee fee is charged to cover the costs if a business defaults on a loan. Although guarantee fees are charged to lenders, they will typically pass guarantee fee costs on to borrowers. Borrowers will then be responsible for paying the guarantee fee.

The SBA guarantee fee is a fee that the Small Business Administration (SBA) charges on the guaranteed portions of SBA 504 and 7(a) loans, but not on SBA microloans. The SBA guarantees between 75% and 90% of each loan issued, meaning the guarantee fee does not apply to the total approved loan amount, but only to the guaranteed portion.

SBA guarantee fee costs.

SBA guarantee fees are based on the guaranteed amount on your SBA loan and your repayment term. It is important to note that guarantee fees change each fiscal year. The tables below reflect the SBA guarantee fees for the 2024 fiscal year (October 1, 2023, through September 30, 2024) per SBA loan type.

SBA 7(a) loan guarantee fees range from 0.00% up to 3.75%.

*The SBA guarantees a maximum of $3.75 million on 7(a) loans.

For the 504 loan program, the SBA establishes distinct guarantee fees each year. This program features a unique funding structure, involving contributions from the borrower, a Certified Development Company (CDC), and a third-party lender. SBA guarantee fees are applied solely to the CDC portion of the loan.

There is no guarantee fee on SBA 504 loans for the 2024 fiscal year. However, with this loan type, lenders can charge the SBA's annual service fee (0.364% for the 2024 fiscal year) to borrowers.

How are SBA guarantee fees calculated?

Calculating the SBA guarantee fee can seem complex, but once understood, it becomes more manageable. Here is a simplified process:

1. Identify the guaranteed portion: Determine the amount of the loan that the SBA guarantees. This typically ranges between 50%-90% of the entire loan, depending on the specific SBA loan program.
2. Apply the fee structure: Using the fee rates provided by the SBA, which vary depending on the size and term of the loan, calculate the fee charged on the guaranteed portion.
3. Total loan cost: Add up the fee amount and any additional associated loan costs to understand the total cost of the loan.

It's critical to note the fee is based on the guaranteed portion of the loan, not the total loan amount, which implies that the actual amount paid can be less than the full percentage of the entire loan.

Reach out to your SBA lender for assistance if you are having difficulties calculating potential guarantee fees. You can also check out the SBA’s online calculator which could be helpful to you.

Are there additional SBA loan fees?

Beyond the guarantee fee, small business owners should be aware of other potential charges associated with an SBA loan. This includes origination fees, packaging fees, closing costs, and service fees. Some of these costs are paid upfront, while others may be annual or ongoing over the life of the loan.

It's important to get a complete breakdown of all fees from your lender when considering an SBA loan, so there are no surprises later on. Being informed allows you to better compare your financing options and make the most financially sound decision for your business.

Conclusion

For small business owners accessing capital through SBA loan programs, understanding the SBA guarantee fee is fundamental. It's just as important to plan for this expense as it is to forecast other business costs. Always make sure to assess the full picture of loan costs and discuss any fee-related questions with your SBA-approved lender.

With careful consideration, the SBA's programs can be a powerful tool in growing and sustaining your business. Your efforts to comprehend the fee structures will position you to make well-informed financial decisions that keep your business's bottom line healthy. Remember, staying informed about the costs of borrowing is essential in the stewardship of your enterprise.

The 3 Cs – character, collateral, capacity – summarize the elements that a financier uses to underwrite a loan. This technique of assessing the client comprises both qualitative and quantitative measures.

Character

Character refers to the borrower’s reputation. The shareholders who are going to guarantee the loan and the management of the business will all come under scrutiny to determine if they are reliable and will repay the funds.

The lender will usually look at the credit history of the business owner to gauge honesty and reliability. Considerations may include:

• Whether or not they pay bills on time.
• Whether or not they’ve used credit before.
• How long they’ve been in business, and what positions they held before starting the business.
• How long they’ve lived at their respective addresses.

Lenders will also look at the credit scores of the owners of the business. This score is numeric, typically between 300 and 850, gleaned from the info in your credit report. High scorers generally have a lower risk. Each lender has its own standards, but many of them use credit scores to assist them in making their evaluations. It all depends on the level of risk they find suitable for a particular credit product.

Credit scores are weighted as follows: 35 percent payment history, 30 percent amount owed, 15 percent length of credit history, 10 percent new credit, and 10 percent types of credit in use. 

Collateral

Collateral is any asset used to secure the loan. Savings, real estate, inventory, accounts receivable, and equipment are all assets that could be used as collateral.

The lender asks for collateral because, in the event of insolvency, it can be sold or collected to generate funds to pay the loan. Since in the experience of most lenders asset classes such as prepaid amounts, goodwill, and investments will not raise any significant amounts, they are generally not considered for collateral.

If you’re using a property as collateral, its location and quality, and its adaptability are some of the features your future lender will look at.

Capacity

Most commercial credit officers refer to capacity as cash flow, and it represents the ability of the company to repay debt. Since a big down payment will reduce the risk of default, the lender will consider any capital the borrower puts into a potential investment. In short, the lender is looking at how much debt the borrower can comfortably handle. The following are usually requested from the borrower for the lender to evaluate cash flow/debt service:

• Business tax returns
• Historical financials, such as the balance sheet and profit & loss statements, interim financials, and/or projections
• Personal financial statements for each guarantor
• Rent rolls for leased property

If you’re considering a business loan, understanding the 3 C’s will give you a high-level understanding of what a potential lender will look for. Visit this post for more in-depth information on business loan requirements.

Even if you don’t know what ACH stands for, you’ve probably taken advantage of ACH transfers. If you’ve received your paycheck as direct deposit, sent a few bucks to a friend through Venmo, or paid your power bill online, you’ve used ACH.

ACH payments, which launched in 1974, have become such a common part of modern life that most people don’t even think about the mechanism that moves money in and out of their bank accounts.

For small businesses, understanding the basics of ACH is important on two fronts: you can make and receive payments through ACH, and ACH is a common method funders use to collect repayment of a business cash advance.

What are Automated Clearing House (ACH) transactions?

ACH is an acronym for “Automated Clearing House.” Essentially, it is the method banks use to send money between accounts electronically.

ACH is maintained, developed, and administered by the National Automated Clearing House Association (NACHA), a nonprofit funded by the financial companies that use ACH.

Used by millions of companies, the federal government, and all banks, the amount of money that moves through NACHA’s network is staggering. In 2019, some 24.7 billion payments were processed through the ACH network, a figure that has grown by more than 1 billion payments every year since 2014.

Not only are bill payments, salaries, and charitable gifts sent through ACH—Social Security, tax refunds, and other government benefits are deposited through ACH as well. Because of this, the federal government regulates the ACH network along with NACHA. NACHA estimated that the total value of all payments processed through ACH in 2019 was more than $55.8 trillion.

How do ACH payments work?  

While the result of an ACH transaction is similar to writing a check, the process is different.

ACH transactions are instructions to move money electronically from one bank account to another. These transactions can either be initiated by the person sending the money (credit) or the person receiving the money (debit). They are processed in batches and the transfer of funds takes place between banks.

Before banks are contacted, authorization must be provided by the people involved. To receive a direct deposit as an employee, for example, you must sign an agreement with your employer. To pay a bill through ACH, you must authorize the transaction first. Oftentimes, you agree to the transaction once, and then the direct deposits or automatic payments continue until you want them to stop.

In all ACH transactions, instructions are sent from an originating depository financial institution (ODFI) to a receiving depository financial institution (RDFI), which are usually both banks—sometimes even the same bank. The instructions from the ODFI can be to either request or deliver money.

How does ACH work for employee direct deposits?

If an employee agrees to be paid through direct deposit, the employer’s bank is the ODFI in this instance. The employer shows the ODFI that the employee approved the transaction. The ODFI verifies this information and submits it to the ACH network. The ACH network routes the transaction to the RDFI of the employee. The RDFI makes the money available by crediting it to the employee’s bank account; at the same time, the ODFI is debiting money out of the employer’s bank account. Finally, the ACH network settles the transaction with both banks.  

The process sounds complicated, but because it is automated and electronic, it usually only takes 1 to 2 business days.

How to pay employees using ACH.

To set up direct deposit for your employees, you should talk to your bank (i.e., the ODFI in this case) about what information they need and how much it will cost you.

Interested employees will agree to direct deposit and provide you with a bank account and routing numbers. You then provide this information to the ODFI.

When payday comes, you submit your payment files to the ODFI. The ODFI then submits the transaction to the ACH network, which results in your employees receiving funds in their accounts soon after.

Depending on your agreement with your bank, you will be charged a flat fee or a percentage based on the amount moved through the ACH network.

How does ACH work for accepting payments?

The system is the reverse when a person is paying a company like a consumer buying a product through Square or paying an insurance bill online. The ODFI would be the insurance company’s bank. The money would flow from the RDFI to the ODFI.

How to accept ACH payments.

To accept electronic payments for your goods or services, talk to your bank. Banks, credit card processors, and merchant account providers all offer various ACH services that vary in cost.

Especially if your operation is very small, new, or both, a popular way to accept ACH payments is Square, Venmo, or other mobile payment processors. Many businesses opt for these new payment processors because the fees are easy to understand, and it allows them to provide for customers who want to pay with plastic.

How funders use ACH payments.

Many funders who offer a business cash advance will utilize ACH to receive repayment on the advance. This is why you may occasionally hear this type of funding referred to as an “ACH loan.” 

A business cash advance provides access to money upfront based on expected future revenue. The funder will then set up an automatic withdrawal via ACH of a preset amount on a daily or weekly basis.

Difference between ACH payments and wire transfers.

Wire transfers are another common way to send money between bank accounts, but these transactions are different from ACH payments in several ways. ACH payments only work within the United States, while wire transfers can be sent around the world. Wire transfers are immediate, which can be beneficial but has also made this method of payment popular with fraudsters. The cost of wiring money is typically quite high, too, compared with the relatively slight cost of ACH transfers.

You may also hear about Electronic Fund Transfers (EFTs), a blanket term that encompasses ACH payments, wire transfers, and pretty much any time money is exchanged electronically. All transactions that require a PIN code are EFT, too, including using an ATM or paying with a debit card at a grocery store.

Why use ACH?

The benefits of ACH are pretty clear: it’s fast, accurate, and relatively cheap. Because it is utilized by the US government and all the major banks, ACH is highly regulated and secure. 

The fees range depending on your bank and how much money you process through ACH, but they are generally less expensive than what credit card processors charge. The low fees and overall convenience are major reasons why many businesses turn to ACH.

Additionally, ACH will make a huge dent in the amount of paper your business has to handle. Maintaining a check registry has long been a headache for most small business owners, while the automation and simplicity of ACH make payments much more streamlined. And no one has ever lost an ACH payment in the mail.

The drawbacks of ACH

By automating your payroll with ACH or enrolling in repeating payments, you may feel like you have less control of your cash outflows.

As a practice, you should always pay close attention to your bank accounts, even if you use ACH often. Automated payments can overdraw your account. You might also continue paying for services that you stop using if the payments are automatic and you stop paying attention.

Keep in mind that ACH payments can only happen between 2 bank accounts based in the U.S.

You must also consider the costs involved with ACH, even though they are typically lower than most other electronic payment options.

How much will it cost?

The cost of using ACH transfers will depend on the financial institution, how much money you are transferring, and how regularly you transfer money. Banks may also charge rates that are different from mobile payment processors like Square, so you should do some research on what options are available to you.

Many ACH processors will charge a flat fee on every transaction, often between $0.25 and $0.75, although some processors charge as much as $1.50 per transaction. Other companies will charge a percentage on each transaction, usually between 0.5% and 1.5%.

ACH transfer fees are almost always lower than credit card processing fees, which can range from 1.5% to 4% on each transaction.

Is ACH secure?

Because it is regulated by federal law, ACH transfers are one of the most secure ways to move money between bank accounts. To prevent fraud, NACHA requires a significant amount of identifying information from every person, business, and bank involved in the ACH process.

With such safety, speed, and convenience, it makes sense that so many small businesses adopt ACH processing into their banking practices.