How Long Does it Take to Get Business Financing?
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Starting or growing a business often requires financing, but one of the most common questions entrepreneurs have is how long it takes to get business funding. The answer varies depending on the type of loan (if you opt for a loan at all) and the lender or funder you choose. In this blog post, we will explore the main types of business funding, including term loans, SBA loans, and merchant cash advances, and discuss their respective timeframes for approval and funding.
Term Loans
Term loans are a popular choice for small business owners who need a lump sum of cash for a specific purpose, like purchasing equipment or expanding their business. The loan process for term loans involves submitting an application to a lender, who will then review your credit history, financial statements such as balance sheets, and other relevant information to determine your eligibility and loan amount.
The time it takes to get a small business loan depends on several factors, including the lender, your credit score, and the complexity of your application. Traditional banks generally have a longer approval process, which can take anywhere from a few weeks to a couple of months. Conversely, online funders have a more streamlined application process, and businesses may receive a decision within a few business days.
SBA Loans
The U.S. Small Business Administration (SBA) offers several loan programs to help small business owners obtain financing. SBA loans are known for their lower interest rates and more extended repayment terms, making their loan offers an attractive option for many entrepreneurs. However, they’re also one of the slower loan options on the market: the underwriting process and fund dispersal can take weeks or months.
The Small Business Administration (SBA) guarantees loans made by participating lenders to eligible small businesses by agreeing to cover a significant portion of the loan amount in case the borrower defaults on repayment.
This guarantee reduces the risk for lenders, encouraging them to extend credit to businesses that might not otherwise qualify for conventional loans due to factors such as insufficient collateral or a shorter operating history.
The SBA guarantee percentage varies depending on the loan program and the loan amount but can cover up to 85% of loans under $150,000 and up to 75% of loans greater than $150,000. This government-backed assurance enables small businesses to access much-needed capital to fund growth, create jobs, and contribute to the overall economy.
The four main types of SBA loans are:
SBA 7(a) Loan: This is the most popular and versatile SBA loan program, designed to support various business needs such as working capital, equipment purchases, real estate acquisition, and business expansion. The loan amount can be up to $5 million, and the terms can range from 5 to 25 years, depending on the loan purpose. The SBA 7(a) loan approval process typically takes between 2 to 3 months, but it can vary depending on the lender, borrower’s preparedness, and the complexity of the application.
SBA 504 Loan: This loan program is specifically designed to acquire fixed assets, such as commercial real estate and heavy machinery or equipment. The SBA 504 loan can offer up to $5.5 million in financing, with terms ranging from 10 to 25 years. The approval process for an SBA 504 loan can be more time-consuming than the 7(a) loan due to its focus on asset-based financing, often taking between 3 to 4 months or more.
SBA Microloan: The SBA Microloan program targets small businesses and nonprofit organizations needing smaller loan amounts, typically up to $50,000. These loans can be used for working capital, inventory, equipment, and other business needs. The terms of an SBA Microloan can extend up to 6 years. Since the loan amounts are smaller, the approval process is usually quicker than the other SBA loan programs. Securing an SBA Microloan can take anywhere from a few weeks to a couple of months.
SBA Express Loan: The SBA Express Loan program is designed to provide expedited financing for small businesses that require a faster loan approval process. With a maximum loan amount of $500,000, these loans can be used for various business purposes such as working capital, equipment financing, and debt refinancing. One of the main advantages of the SBA Express Loan is its quick processing time, which can be as fast as 36 hours for a credit decision and several weeks for the final loan disbursement. However, it’s important to note that the actual processing time can vary based on the SBA lender, borrower’s preparedness, and the overall complexity of the loan application.
Equipment Financing
Equipment financing is a popular funding option for businesses that need to purchase or lease machinery, vehicles, or other equipment necessary for their operations. This type of financing is typically secured by the equipment itself, meaning that the lender has a claim on the equipment in case of default. Equipment financing can be a convenient solution for businesses that need quick access to funds for purchasing or leasing essential equipment.
The type of equipment you’re financing can impact the turnaround time. For example, financing specialized or custom-made equipment might require a more thorough review and approval process than financing standard, off-the-shelf equipment.
In general, equipment financing can be obtained relatively quickly, with many funders offering approval within a few business days. However, the specific timeline will depend on the factors mentioned above, so it’s essential to be prepared and work closely with your provider to ensure a smooth application process.
Business Lines of Credit
A business line of credit is a flexible small business financing option that allows business owners to access funds up to a predetermined credit limit. Instead of receiving a lump sum, businesses can draw funds as needed, only paying interest on the amount they’ve borrowed. This financing option is ideal for managing short-term cash flow needs, covering unexpected expenses, or investing in growth opportunities.
If you already have an established relationship with a financial institution, such as a business bank account or a previous loan, the approval process for a business line of credit may be quicker, as the lender is already familiar with your business and its financial history.
Alternative Financing: Merchant Cash Advances
Not a loan, a merchant cash advance (MCA) is a type of financing option that provides a lump sum of cash to businesses in exchange for a percentage of their future sales. This type of financing is generally faster to obtain than loans, as the approval process is less stringent and focuses more on the business’s cash flow and sales rather than the business’s credit score.
The application process for a merchant cash advance typically involves providing the funder with your business bank account statements. The funder will then review your bank statements to understand sales history and determine the advance amount and repayment* terms. The timeframe for obtaining a merchant cash advance can be as short as 24 hours, making it an attractive option for businesses that need quick access to working capital.
Factors Affecting the Timeframe for Business Financing
Several factors can influence how long it takes to get business financing, including:
Type of financing: As mentioned earlier, the type of loan or financing option you choose can significantly impact the processing time. Term loans and SBA loans typically have more extended processing times, while merchant cash advances can be obtained more quickly.
Risk assessment: Larger loan amounts generally carry higher risks for the lender. As a result, lenders tend to scrutinize loan applications more thoroughly when the requested amount is higher. This in-depth analysis can prolong the approval process as the lender seeks to ensure that the borrower can repay the loan without defaulting. Likewise, start up businesses can be viewed as risky as well since they often lack a lengthy credit history.
Lender: The lender you choose can also affect the time it takes to get financing. Banks often have more stringent requirements and longer processing times, while online funders and alternative financing providers may offer a faster, more streamlined application process.
Collateral requirements: Larger loans often require collateral to secure borrowed funds. The process of evaluating and appraising the collateral can take time, especially if the assets involved are complex or require third-party assessments. This step can extend the overall timeline of securing a business loan.
Credit history: Your credit history can significantly influence the loan approval process. Borrowers with a strong credit score score and a solid financial background may experience a faster approval process, while those with lower credit scores or a history of financial difficulties might face additional scrutiny and longer processing times.
Loan amount: The financing you seek can also impact the time it takes to secure funding. Smaller loans may be approved more quickly, while larger loan amounts may require additional documentation and a more thorough review process.
Documentation and financial statements: The accuracy and completeness of your application and supporting documents can influence the loan approval process. Having your financial statements, tax returns, a business plan, and other required documentation in order and readily available can help speed up the process.
Conclusion
The timeframe for obtaining business financing can vary widely depending on the type of loan, the lender or funder, and the specifics of your application. While non-loan financing options like merchant cash advances can be obtained quickly, others like term loans and SBA loans may require more time and documentation.
To increase your chances of securing financing in a timely manner, make sure to research different providers and financing options, have all necessary documentation in order, and maintain a strong credit history. By being prepared and understanding the various factors that impact the loan process, you can help ensure your business gets the financing it needs to grow and succeed.
*Repayment in this context describes the process of repurchasing a merchant cash advance. It does not describe the process of repaying a loan. MCAs are legally distinct from loan products.
