Small Business : Most owners start the financing conversation at the wrong end. They ask what rate they can get before deciding what the money is actually for, and they end up with a product whose repayment shape fights the business rather than supporting it. A five-year term loan to cover a six-week cash gap is expensive and inflexible. A revolving line of credit used to buy a delivery van ties up working capital you will need in the next slow quarter.
A small business loan is not one thing. It is at least six distinct products with very different underwriting, cost structures, and failure modes. This guide maps those products to real situations, explains what an underwriter is genuinely looking at, and shows with arithmetic why the fastest money is almost always the most expensive money Small Business.
What this guide covers
- Small Business the six main financing products and what each is for
- What underwriters actually check
- Debt service coverage ratio, worked through
- Factor rates vs. APR — the cost comparison nobody shows you
- The document pack that speeds up approval
- How to strengthen a marginal application
What underwriters actually check
Whatever the product, the analysis reduces to a handful of questions. Small Business Knowing them lets you pre-empt the objections rather than react to them.
Time in business and revenue floor
Banks generally want two years of operating history and often a revenue floor in the low six figures. Online lenders will frequently go down to six months and $100,000 in annual revenue, pricing the extra risk accordingly. If you are pre-revenue, you are looking at microloans, grants, equipment leases, or personal credit — not commercial underwriting.
Personal credit of the owners
Anyone holding twenty percent or more of the Small Business will usually be asked for a personal credit check and a personal guarantee. For bank and guaranteed-loan programs, a personal score in the high 600s is a practical threshold. Online lenders will work in the low 600s Small Business and sometimes below.
Cash flow, not profit
An underwriter works from bank statements Small Business more than tax returns. They are looking at average daily balance, the frequency of negative days, the volatility of deposits, and whether existing lenders are already taking daily or weekly debits. Three overdrafts in the last six months will sink an otherwise strong file.
Collateral and the guarantee
Secured lending prices better because recovery is cheaper. Equipment, Small Business receivables, inventory, and commercial property all count. Expect a blanket lien on business assets for most bank facilities, plus a personal guarantee that survives the business itself.
Debt service coverage ratio: the number that decides it
Commercial credit decisions hinge on debt service coverage ratio — annual cash flow available for debt divided by total annual debt payments. Most lenders want at least 1.25, meaning the business generates $1.25 for every $1.00 of obligation.
Worked example: does the restaurant qualify?
A neighbourhood restaurant shows $96,000 of net operating income after adding back depreciation and the owner’s discretionary expenses. It already carries a vehicle loan costing $22,000 a year. The owner wants $60,000 for a new kitchen line.
A five-year equipment loan at 10.5% costs about $1,290 a month, or $15,480 a year. Total annual debt service becomes $22,000 + $15,480 = $37,480.
DSCR = $96,000 ÷ $37,480 = 2.56. Comfortably above the 1.25 threshold, so the file should underwrite well. Over the full term the owner repays about $77,400 — roughly $17,400 in interest on a $60,000 asset that should last a decade Small Business.
Now run it the other way. If the same business already carried $55,000 of annual debt service, adding $15,480 would push the ratio to 0.99 — below break-even. No amount of enthusiasm about the new kitchen fixes that; the answer is to pay down existing debt first or shrink the request.
Factor rates vs. APR: where the real money leaks
Merchant cash advances and some short-term products are not quoted as interest rates. They are quoted as a factor rate — a multiplier applied to the advance. Because that multiplier says nothing about the repayment period, it systematically disguises the cost.
Worked example: the same $60,000, two ways
Option A — equipment loan. $60,000 at 10.5% over 60 months. Payment $1,290 a month. Total repaid about $77,400. Cost of capital: $17,400.
Option B — merchant cash advance. $60,000 at a factor rate of 1.32. Total repayable $79,200, collected as 12% of daily card receipts and projected to clear in about eleven months. Cost of capital: $19,200.
The advance looks almost competitive — $19,200 against $17,400 — until you account for time. The loan spreads its cost over five years; the advance extracts its cost in under one. On a declining-balance basis the advance works out to an effective annualised rate somewhere in the region of 65% to 70%. And because repayment is a percentage of daily sales, a slow month does not lower your burden — it simply extends the term while the cash keeps leaving the account.
The document pack that speeds up approval
Assembling this before you apply routinely cuts a week or more off the process and signals competence to the credit team.
- Business and personal tax returns for the last two to three years
- Twelve months of business bank statements, all accounts
- Year-to-date profit and loss statement and balance sheet
- Accounts receivable and accounts payable ageing reports
- A debt schedule listing every existing obligation, rate, and monthly payment
- Entity documents: formation certificate, operating agreement, licences, EIN letter
- A one-page use-of-funds statement tying the request to a measurable outcome
- For property or acquisition deals: purchase agreement, appraisal, lease copies
That last item Small Business carries more weight than owners expect. “We need $150,000 for growth” reads as a guess. “We need $150,000 to add a second production line that raises monthly output by 40% and pays for itself in nineteen months” reads as a plan, and gives the underwriter language to defend the file in committee.
Strengthening a marginal application
- Clean up the bank statements for ninety days. No overdrafts, steady balances, no unexplained large transfers. This is the cheapest improvement available to you.Small Business.
- Settle or consolidate short-term advances first. Stacked daily debits are the single biggest red flag in the file.
- Separate business and personal spending completely. Commingled accounts make cash flow unreadable and invite a decline.
- Build a business credit profile. Trade lines with suppliers who report, a business card paid in full, and a listing with the commercial bureaus all help.
- Start with your existing bank or a local credit union. An institution that has watched your deposits for three years has information no algorithm can price.
- Consider a smaller ask. Approval on $75,000 today, repaid cleanly, makes $200,000 realistic in eighteen months.
