SMB Archives

Jul

2024

A Guide to Trade Credit in Business

By Lauren Ward | SMB | Comments Off

A trade credit is a business-to-business (B2B) transaction where one business is able to procure goods or services from the other without immediately paying for them. It’s called a trade credit because when a seller allows a buyer to pay for goods or services at a later date, they are extending credit to the buyer.

Trade credit can be a great tool for a small business that can free up cash flow and grow a company’s assets. However, there are some drawbacks, including a short financing window and potentially high interest if you need to extend that window. Here’s what every small business needs to know about trade credit.

What Is Trade Credit?

Trade credit is a formal name for a common agreement between two companies where one company is able to purchase goods from the other without paying any cash until an agreed upon date. You can think of trade credit the same way as 0% financing but with shorter terms. Sometimes trade credit is also referred to as vendor financing.

How Does Trade Credit Work?

Sellers that grant their customers trade credit generally give them anywhere between 30 and 120 days to pay for the goods or services they received on credit. The range, however, can be higher or lower depending on the industry and individual seller.

Often, the seller will offer the buyer a discount if they settle their account earlier than the balance due date. If they do offer a discount, the terms of the trade credit sale are usually written in specific format. For example, if the seller offers a 5% discount if the invoice is paid within 20 days, but is willing to give the buyer a maximum of 45 days to pay the invoice, that agreement would be written as:

5/20, net 45.

If the buyer is unable to pay their invoice within the set time period (which is 45 days in the above example), the vendor will typically charge interest. If that happens, trade credit is no longer an interest-free form of financing.

Recommended: What Is a Trial Balance Sheet?

Who Uses Trade Credit?

Business trade credit is very common in the B2B ecosystem. Businesses that use trade credit include:

• Accountants/bookkeepers

• Advertising/marketing agencies

• Construction/landscaping companies

• Food suppliers

• Restaurants

• Manufacturers

• Wholesalers

• Retailers

• Cleaning services

Pros and Cons of Trade Credit

For Buyers

Pros:

• Frees up cash: Because payment is not due until later, trade credits improve the cash flow of businesses, enabling them to sell goods they acquired without having to pay for those goods until a future date. It can be a good option for companies expanding into a new market or that have seasonal peaks and dips.

• Possible discount: Depending on the trade credit agreement, if the buyer pays the invoice within a certain amount of time, they may receive a discount on the goods or services they purchase.

• 0% interest: The cost of capital can be a burden on some small businesses. If the buyer can settle the invoice within the agreed upon time frame, there is no interest charged on this type of financing.

Cons:

• Short payment period: The length of the trade credit payment term varies, but they are often less than 120 days, which is shorter than most types of small business loans. For a growing small business, this may not be enough time. Companies that need a longer repayment period may want to look into other types of debt instruments.

• It’s easy to over-commit: With discounts and wholesale prices, it can be tempting to buy too much of a particular good. Not only does this create excess inventory, but it also creates a bigger debt obligation.

• Possible penalties for late payments: Depending on the trade credit agreement, there may be negative consequences for late payments, such as interest or a fine. In addition, the company might report your late payment to the credit bureaus, which could damage your business’s credit score.

Recommended: Five Year Business Plan

For Sellers

Pros:

• Beat out competitors: Companies offering trade credit may be able to gain an advantage over industry peers that don’t offer trade credit. Because it can be difficult for some small businesses to get a bank loan, they may seek out suppliers offering trade credit.

• Develop a strong relationship with clients: Offering trade credit increases customer satisfaction, which can lead to customer loyalty and repeat business.

• Increase sales: Trade credits are still sales even if payment is delayed. Trade credit can also encourage customers to purchase in higher volumes, since there is no cost to the financing. Therefore, a trade credit can provide the opportunity for growth and expansion.

Cons:

• Delayed revenue: If your business has plenty of cash, this may not be an issue. However, if budgets are tight, delayed revenue could make it difficult to cover your operating costs.

• Risk of buyer default: Sometimes customers are unable to pay their debts. Depending on the trade credit agreement, there may be little to nothing the seller can do other than sell the debt to a collection agency at a fraction of the cost of the goods provided.

• Less profit with early payment discounts: If the seller offers a discount for early payment, they will earn less on the sale than they otherwise would.

Trade Credit Accounting

Trade credit needs to be accounted for by both buyers and sellers. The process, however, will vary depending on the company’s accounting method — specifically, whether they use accrual vs cash accounting.

With accrual accounting (which is used by all public companies), revenue and expenses are recorded at the moment of transaction, not when money actually changes hands. With cash accounting, on the other hand, a business records transactions at the time of making payments.

A seller who offers trade credits and uses accrual accounting can face some complexities if the buyer ends up paying early and getting a discount or defaulting (and never paying). In this case, the amount received doesn’t match their account receivables and the difference becomes an account receivable write-off, or liability that must get expensed.

Trade Credit Instruments

Typically, the only formal document used for trade credit agreements is the invoice, which is sent with the goods, and that the customer signs as evidence that the goods have been received. If the seller doubts the buyer’s ability to pay in the allotted time, there are credit instruments they can use to guarantee payment.

Promissory Note

A promissory note, or IOU, is a legal document where the borrower agrees to pay the lender a certain amount by a set date. While it’s usually used for repaying borrowed money, it can also be used to pay for goods or services.

Commercial Draft

One hitch with a promissory note is that it is typically signed after delivery of the goods. If a seller wants to get a credit commitment from a buyer before the goods are delivered, they may want to use a commercial draft.

A commercial draft typically specifies what amount needs to be paid by what date. It is then sent to the buyer’s bank along with the shipping invoices. The bank then asks the buyer to sign the draft before turning over the invoices. After that, the goods are shipped to the buyer.

Banker’s Acceptance

In some cases, a seller might go even further than a commercial draft and require that the bank pay for the goods and then collect the money from the customer. If the bank agrees to do this, they must put it in writing — this document is called a banker’s acceptance. It means that the banker accepts responsibility for payment.

Trade Credit Trends

Trade credit is widely used worldwide. In fact, the World Trade Organization estimates that 80% to 90% of all world trade relies on trade credit in some capacity. It’s so widespread, it’s given rise to a type of financing called accounts receivable financing (also known as invoice financing).

With invoice financing, a company that offers trade credit can get a loan based on their outstanding invoices, effectively enabling them to get paid early. When they receive payments from their customers, they give that money (plus a fee) to the financing company.

Recommended: Understanding Business Liabilities

The Takeaway

Trade credit in business is very common and occurs when one company purchases goods or services from another company but doesn’t pay until a later date.

Essentially an interest-free loan, trade credit can be particularly rewarding for young businesses or seasonal businesses that may find themselves occasionally strapped for cash. A key drawback of trade credit, however, is that the buyer is generally expected to pay the invoice relatively quickly, sometimes within a month or two. For many small businesses, that may not be enough time, and they might be better served by getting a small business loan.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

What is an example of trade credit?

Let’s say a restaurant offers kobe beef on its menu and gets its beef from a food supplier in Japan. The supplier offers them a 5/30, net 60 trade. This means that the restaurant has 60 days to pay for a shipment of beef. If they pay the invoice within 30 days, however, they will receive a 5% discount on the purchase price.

Are there any benefits to trade credit?

Yes, benefits of trade credit include:

• Interest-free financing for buyers

• Improves cash flow for buyers

• Increases sales volumes for sellers

• Builds strong relationships and customer loyalty for sellers

When do businesses typically use trade credit?

Businesses use trade credit when they do not have the capital on hand to make a purchase or to temporarily free up cash for other expenses. Trade credit is also a good option for young businesses that may not qualify for other forms of business financing.

Photo credit: iStock/Hiraman

SOSB-Q224-1878665-V1

Jul

2024

Guide to Alternative Small Business Loan Options

By Susan Guillory | SMB | Comments Off

If you’re in search of financing to launch or grow a small business, you may find that in some situations you don’t qualify for traditional business loans. That could be because you haven’t been in business long enough or because your credit scores aren’t strong enough for lenders to be willing to lend to you.

Whatever the reason, alternative small business loans may give you an option for getting the capital you need. These loans are offered by non-bank lenders and may be open to businesses that don’t qualify for more traditional financing. They do, however, tend to have higher interest rates and fees than other lending products.

What Are Alternative Small Business Loans?

As you might guess from the name, alternative small business loans provide alternatives to more traditional financing offered through banks. These may include lending products similar to those provided by traditional banks or different products. Qualifications for these loans tend to be less stringent than, say, what’s required for SBA loans or lines of credit offered through a bank.

Because the requirements are less strict, alternative lenders take on more risk when they approve these loans. For that reason, they generally charge higher interest rates.

Recommended: Comparing Small Business Loans and Grants

10 Alternative Business Loan Types

If you don’t qualify for more traditional types of financing, like term business loans, alternative business funding offers nearly a dozen products that you might consider.

1. Business Line of Credit

Sometimes you don’t need your money all at once, in a lump sum. Having access to a line of credit allows you to borrow what you need when you need it. You pay back only what you’ve borrowed, plus the interest on that amount.

Many alternative lenders offer lines of credit. If your application is approved, you’ll be told the maximum amount of money that you can draw money against. If you borrow a portion and pay it back, you can borrow from the full line of credit amount again, up to that maximum.

For example: let’s say you’re approved for a $10,000 line of credit. You use $5,000 now and pay it back over a few months. Then later, you borrow the full $10,000, which is available because you’ve already paid back what you previously borrowed, plus interest.

2. Term Loans

If you’re having a cash flow crunch and need capital quickly, a term loan from an alternative lender can often put funds in your account the same day you’re approved.

The difference between an alternative term loan and a traditional bank term loan is that the period you have to pay back the former is usually much shorter, sometimes as little as six to 12 months. It’s a good idea to be sure you’ll be able to make the higher payments that a shorter term may require.

3. Invoice Financing and Factoring

If your business sends invoices to clients, you may be able to leverage them as collateral for financing in one of two ways. The first is invoice financing, which allows you to borrow the value of unpaid invoices to get a loan. The lender takes a percentage of the invoice value as a fee. Once you receive payment on the invoices, you pay back the loan.

The second is invoice factoring. It’s similar to invoice financing in that you can use your unpaid invoices to get access to capital. But instead of you being responsible for getting the payment from your clients, you essentially sell the invoices to the lender, usually for a percentage of what’s owed. The lender is then responsible for getting your clients to pay the invoices. When they do, you get back the remainder of what the clients owed, minus the lender’s fee.

4. Equipment Loans

Either traditional or alternative loans may in some cases require you to put up collateral like real estate, a cash deposit, or other assets. If you don’t have qualifying assets like these but need to purchase equipment like heavy machinery, a refrigerator for your restaurant, or computers, you might want to consider an equipment loan.

The equipment you’re purchasing acts as the collateral for the loan. That means that if you default on the loan, the lender could take that equipment to cover your debt.

While equipment loans can be considered alternative financing, they may still ask applicants to meet certain qualifications, which can include a minimum credit score, a minimum time in business, and/or minimum annual revenue.

5. Merchant Cash Advances

Another type of alternative funding is the merchant cash advance. If you don’t qualify for any other type of financing, this could be your best bet. Even if you don’t have good credit, you may still be eligible, since merchant cash advance loans are made based on your business’s credit card sales.

Unlike other types of loans, merchant cash advances don’t require a monthly payment on what you borrow. Instead, a percentage of your daily credit card transactions is deducted until you have paid back the loan in full.

Merchant cash advances charge what’s called a factor rate (which is different from interest rate). That fact can make it confusing to understand the true cost of one of these lending products. Here’s how to look at it. If you get an advance of $25,000 with a factor rate of 1.2, you would multiply the two numbers together to get the total cost you’ll pay back, which is $30,000, $5,000 of which is the fee. That means you’re essentially paying 20% on the loan.

6. Online Loans

Online lenders offer various types of business loans, including common term loans and lines of credit.

They typically come with less stringent requirements regarding credit score, annual revenue, and time in business. Traditional banks prefer to see two years in business. Online lenders don’t demand that. Applications are simpler; decisions come faster.

The downside: You may pay higher interest rates and be offered shorter repayment periods.

7. Short-Term Loans

Speaking of online lenders, short-term loans come online rather than through a traditional bank. In most cases, they must be paid off within six months to a year — at most, 18 months.

Short-term loans are a form of personal loan. The lender looks at daily cash flow rather than evaluating an applicant primarily on credit score and length of time in business. You could get funded in one or two days.

However, here, too, you are usually looking at a higher total loan cost. Rates and fees vary, but the APR is typically higher for short-term business loans than long-term loans. Be prepared for repayments that will be due far more frequently than monthly.

8. Business Credit Cards

A business credit card is a credit card for business rather than personal use.

Business credit cards can pay for business expenses like travel and supplies without the owner having to get a loan. They can fund large- or small-ticket items while earning rewards.

Be prepared for expensive annual fees and high APRs. Also, note that business credit cards are not legally required to provide all the legal protections that personal credit cards give users.

9. Crowdfunding

Money that flows into a business through crowdfunding is not actually a loan, as it’s not debt financing. Crowdfunding falls under the category of equity financing. You are offering shares of your company to family, friends, and acquaintances in your networks in exchange for money.

You could be pitching to venture capitalists (employees of risk capital companies who invest money in companies) or angel investors (individuals who offer their own money in exchange for a piece of the business).

Or you may not have to produce shares at all. The several types of business crowdfunding include reward-based crowdfunding, when individuals contribute to a brand’s crowdfunding campaign in exchange for a token of appreciation, and donation crowdfunding, when nothing is ever expected.

The most popular platforms for crowdfunding for businesses include Indiegogo, SeedInvest Technology, Kickstarter, Fundable, and StartEngine.

10. Microloans

Microloans for business resemble traditional bank loans–but they’re for smaller amounts. Few of them exceed $50,000. They can help business owners who have applications that haven’t been approved by traditional banks.

The SBA sponsors a small business microloan program. SBA-approved lenders offer financing up to $50,000 to qualifying companies.

Things to Know About Alternative Business Loans

As spelled out in the 10 options above, alternative business loans can be convenient, especially since you generally get your funds faster than you would with traditional choices. But the alternatives often have much higher rates.

Naturally, rates vary from one type of alternative loan to another, and from one lender to another. If the rate you’re offered seems too high, you may want to consider whether you can wait a little longer for the funds. If so, you may be able to work on building your credit or even hold off until your business has been operating long enough to help you qualify for lower rates.

When to Consider Alternative Financing

Alternative business lending serves the purpose of providing financing when other avenues aren’t an option or when you can’t afford to wait for slower, more traditional routes. Otherwise, they aren’t necessarily the most ideal lending options. That’s why it’s best to explore other possible financing sources before deciding to pay more for an alternative business loan.

However, there are some situations in which it could be a good idea to take out one of these lending options. If you have a once-in-a-lifetime opportunity to grow your business, perhaps by purchasing another company or a costly piece of equipment at a great price, the added expense of the alternative loan might be worth it.

Or if you need an infusion of cash quickly (to cover payroll or other expenses, for example), and you can’t afford to wait until clients pay you, an alternative small business loan could be a good fit.
And finally, if you have a large project or order to fulfill, an alternative loan can get you the capital you need for upfront expenses. Then you may be able to pay back the loan quickly once your client pays you.

How to Qualify for Alternative Business Loans

When you’re trying to figure out how to get a business loan through an alternative channel, you may find that the process is similar in many ways to what you’d go through with a bank. You’ll generally need to provide information about your company, including how long it’s been in business and its revenues.

Alternative finance companies may or may not consider your credit score, depending on the type of loan you’re applying for. If your credit score is poor, there are poor credit business loans that look at other factors, such as your daily credit card sales or revenues, rather than your credit.

While you’re comparing small business loans and their terms, be sure to note the requirements for each. That way, you’ll know which ones you’re most likely to qualify for as well as get the best rates on.

The Takeaway

When it comes to business loan alternatives, small business owners do have choices about the type of financing they take out and the rates they pay. However, it can take some legwork to find the deals you like best.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

What are some alternatives to small business loans?

People turn to business lines of credit, business credit cards, microloans, equipment loans, and merchant cash advances if they can’t qualify for a traditional small business loan.

What exactly is an alternative finance company?

Alternative finance companies offer business owners forms of finance that are outside the traditional finance system of banks and capital markets, such as an online lender.

What are some examples of alternative lending?

Alternative lenders are usually online, private companies that offer a range of products, including business lines of credit, invoice financing, and equipment financing.

Photo credit: iStock/Andrii Dodonov

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB-Q224-1883324-V1

Jul

2024

How Do You Structure a 3-Year Business Plan?

By Lauren Ward | SMB | Comments Off

A business plan is a must-have for any company, no matter how long it has existed.

A three-year business plan gives you a healthy timeframe to work with when you’re writing up a plan. It’s long enough to let you develop robust strategies and revenue estimates, but it’s not so far out that your projections aren’t based on quality data.

Learn how to create a business plan structure that is easy to craft while also able to serve as a compelling resource for anyone interested in your company’s overall strategy — especially lenders and investors.

Why Should You Write a Business Plan?

Writing a business plan offers you several benefits, both in terms of operating the company and seeking out small business loans.

Taking the time to write a thoughtful business plan can help you have a firm understanding of where you’re taking the company and how you’re going to get there. Without a plan, it can be easy to be pulled in many directions, especially if you’re a new small business. Use your business plan as a reference for how to prioritize in order to best meet your goals.

Using a three-year business plan template can make it easier to get started since you’re focusing on the near-term. It’s simpler to create milestones in a shorter time frame compared to making the projections required by a five-year business plan or longer.

Finally, a solid three-year business plan could help you secure external financing. Both lenders and investors typically want to see a business plan as part of the vetting process. Having one on hand lets you be more flexible in seeking financing exactly when you need it. This three-year project business plan is especially helpful for startups who need capital to launch to the next level.

Recommended: Getting a Million Dollar Business Loan

What to Include in a 3-Year Business Plan

Here are the key things to make sure you do in your three-year business plan.

Describe Your Business

This section is often called an executive summary. It should outline the goods or services you plan to provide.

This is also where you should state where and how you plan to sell your product, and whether it’s an online or a brick-and-mortar store.

Another important component of this section is your differentiator. Are you marketing to a specific audience? Are you selling a product that’s new to market? Investors and lenders want to know how you plan to outperform your competition.

This is also where you can talk about where your company is today and where you plan to be in the next few years.

Define Your Goals

Once you outline the structure of your business, it’s time to set goals for the next three years.

Revenue is a frequently used metric here. Provide a year-by-year estimate of expected revenue growth based on your specific company and the broader industry.

Gross margin is another important goal to consider, especially since your expenses may grow as your revenue increases.

All of this information helps you figure out how to calculate cash flow and prepare for any upcoming financing needs to meet these goals.

Depending on your business structure, here are some other goals that might make sense to include in your three-year business plan:

• Number of new and repeat customers

• Net profit

• Net income

• EBITDA

• Locations

• Product line revenue

• Sales closing ratios

• Market share

Analyze Your Potential Market

In order for your new small business to be competitive, you need to understand the market you’re entering. Or if you have a more established business, a market analysis helps you figure out where you currently stand.

In this section, you can explain the size of your industry, as well as growth projections and current trends.

Also, research your target audience to determine its size and buying habits. You should also perform an in-depth analysis of your competition to identify their strengths and weaknesses.

Explain Your Marketing Plan

Your three-year business plan outline should include a clear strategy for your marketing efforts.

Describe any advertising or promotions you plan to do, whether it’s through online, print, TV, or radio media. Also include the costs involved and the reach you expect to gain with your target audience.

A key part of your marketing strategy should be a calendar outlining your campaign schedule. Creating that calendar gives you the chance to think about the upcoming seasonal flow of your business. It’s also helpful for lenders to see that you’re thinking ahead, in case you need to get a business loan in the future.

Estimate Costs and Revenues

As you nail down the details of your business operations and marketing strategy, it’s also important to estimate your costs and revenues.

Figure out your business’s current amount of capital, whether from a business loan, investor capital, early earnings, or your own personal money.

Then calculate the costs of business activities you outlined in the sections above. Find a conservative balance between inventory and customer demand.

Or, if you’re a service-based business, figure out how quickly you can scale your workforce size to meet your customers’ needs.

Lenders and investors also want to see your customer acquisition cost, which accounts for the expenses involved in your marketing strategy.

Example of a 3-Year Business Plan

Start your business plan by covering each of the previous sections under its own heading. Then you can write your strategy in narrative form and input graphs and tables as appropriate.

You can also create a timeline using this three-year business plan template example:

Year 1	Year 2	Year 3
Goal:	Goal:	Goal:
Strategy:	Strategy:	Strategy:
Quarterly Target:	Quarterly Target:	Quarterly Target:
Q1:	Q1:	Q1:
Q2:	Q2:	Q2:
Q3:	Q3:	Q3:
Q4:	Q4:	Q4:

The Takeaway

A three-year business plan will require some effort, but thinking it through can give you some clarity on what you want from your small business and how you can best achieve it. And it can help your company in several ways, from giving you clear objectives to attracting external funding.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Why write a business plan?

A business plan keeps you organized and focused when you’re growing your company. The process allows you to set goals and milestones, along with providing plans for actually reaching them. It’s also an essential part of any type of small business financing application, which can help build your business credit.

What should you include in a 3-year business plan?

There are five core components to include in your 3-year business plan: business description; goals; market analysis; marketing strategy; and cost and revenue estimate.

How do I describe my business?

Start by defining what your business plans to sell, whether it’s a product or a service. Also directly state what makes your business stand out from the competition.

How do I write an executive summary?

An executive summary is the description of your company and your products and services. It also includes high-level information on your target audience and financials. Positioned at the beginning of your three-year business plan, your executive summary is meant to encourage the reader to learn more and keep reading about your business.

Photo credit: iStock/cagkansayin

SOSB-Q224-1858517-V1

Jul

2024

What Are the Fees Associated With Business Loans?

By Lauren Ward | SMB | Comments Off

When you take out a small business loan, you need to pay back the principal (the amount borrowed) plus interest, as well as fees, such as application, origination, and closing fees.

Typically, lenders will charge fees to cover the different costs associated with making and servicing your loan. Which fees may get added to your loan will depend on the lender and the type of loan you’re looking for.

Below, you’ll learn about some of the most common small business loan fees, plus tips on how to compare loans so you can make the best borrowing decision for your business.

19 Common Types of Business Loan Fees

Because fees can inflate the total cost of your loan, it’s important to find out what extras may get added before you apply for a small business loan. Lenders also need to be transparent about what each fee covers and explain any that you don’t understand.

Below are some common fees associated with business loans. Some are universal, while others are specific to certain types of business loans or situations and may not apply to your particular loan product.

1. Origination Fees

Business loan origination fees cover the costs associated with processing your small business loan application. It may be a flat fee or a percentage of the loan amount. In some cases, this fee is tacked onto the loan amount, which means you’ll pay interest on the fee.

2. Application Fees

Lenders sometimes charge a fee for processing your loan application, which means you are getting charged just to apply. This fee is owed whether or not you are approved for the loan or decide to work with that particular lender.

Fortunately, many business lenders (such as banks and online lenders) do not charge application fees. You may also be able to avoid application fees by using a loan broker.

3. Credit Report Fees

If the lender is charged a fee to pull a credit report on a borrower, they often pass that fee on to the borrower. The fee amount varies, but usually runs between $10 and $20.

4. Appraisal Fees

If you are putting up an asset as collateral, the lender will likely require an appraisal. An appraisal fee is the cost of getting a professional opinion on the value of the asset, whether it’s equipment or property. Even if what you’re purchasing with the loan is acting as collateral, it must be appraised. Banks often prefer to work with their own appraisers and will likely charge you a fee for their services.

5. Closing Fees

Most often seen with commercial mortgages, closing fees (or costs) generally refer to all the various charges for processing your loan, from origination fees to processing fees. Rather than listing them separately, some lenders may just lump them together under one fee labeled “closing costs.” To see a full breakdown of all costs, you can request an itemized list.

6. Draw Fees

A draw fee is similar to an origination fee but only applies to business lines of credit. This fee is often expressed as a percentage of any amount borrowed and only gets deducted when you’ve requested funds from your line of credit.

7. Invoice Factoring Fees

Invoice factoring is a financing method that allows businesses to sell unpaid customer invoices in their accounts. The lender pays the business a portion of each invoice, giving the business a quick infusion of cash. When the lender receives payment from the customers for the invoices, it pays the business the balance of the invoice minus their “invoice factoring fee.” This may be charged on a percentage basis, or it could be a flat fee. This is how the lender makes money on the loan.

8. Referral Fees

Loan brokers and lending platforms refer your application to multiple lenders who then compete for your business. In some cases, they might charge you a referral fee for this service. This upfront cost is not associated with the actual lender.

9. Packaging Fees

The process of putting a loan application together and making sure it is complete can be time consuming. Some brokers and lending platforms may charge you a “packaging fee” for doing this on your behalf.

10. Underwriting Fees

Business loan underwriting is a review process in which all the information submitted in a loan application is verified. An underwriter will also evaluate the loan’s potential profitability and risk on behalf of the lender. The underwriting fee pays for the underwriter’s services. Borrowers may be charged a flat fee or a percentage of the loan amount.

11. Unsuccessful Payment Fees

If you make a payment on your loan, but it bounces due to insufficient funds in your account, you may get hit with an “unsuccessful payment” or “non-sufficient funds” (or NSF) fee. Amounts vary with each lender.

While you likely don’t plan on bouncing any checks or automatic withdrawals, if one lender charges a substantially higher NSF fee than another, you may want to take it into consideration when deciding who to work with.

12. Wire Transfer Fees

When you receive a loan, the lender will typically send the money to your bank account via Automated Clearing House (ACH), which can take one to three days. The lender might, however, give you the option of wiring your funds via a bank wire transfer, which is faster. This method is also more expensive, and you will likely be required to pick up the cost.

13. Check Fees

Making loan payments by check can result in a “check processing fee.” That’s because it usually costs banks more to process check payments than automatic withdrawals. You can avoid this fee by setting up automatic payments through your checking account.

14. SBA 7(a) Loan Guarantee Fees

The Small Business Administration (SBA) promises lenders who provide SBA-backed loans that they will get 75% to 85% of the loan back, even if the borrower defaults on the loan. The SBA typically charges borrowers a 2% to 3.75% fee for offering this guarantee.

15. Monthly Administrative Fees

Some lenders charge a monthly administration or processing fee for managing the loan. Service fees are often billed monthly or according to the loan repayment schedule, and may be charged as a percentage of the payment. Some lenders, however, may charge a one-time service fee, which would be a percentage of the total loan amount.

16. Annual Fees

This fee is often associated with a business line of credit. Some lenders charge an annual fee to keep your line of credit open and active.

17. Late Payment Fees

Late payment fees are practically universal in the lending world. Some lenders charge a flat fee, while others charge a percentage of the late payment. You can avoid this fee, however, by making your payments on or before the payment due date.

18. Prepayment Fees

Lenders make their money on loans by charging interest. So, if you pay your loan off ahead of schedule, it means the lender won’t make as much in interest. To help compensate, some lenders charge a prepayment fee or penalty. Many lenders, however, do not charge prepayment fees.

19. Other Possible Fees

Below are some other possible fees you may encounter:

• Unused line fees This could be charged if you have a line of credit available to you but don’t use it each month. It’s designed to encourage account holders to use the credit line the following month.

• Lockbox fees This can come up if an account holder makes a payment by depositing a check into a lockbox that is provided to them by their lender.

• Collection and overdue fees If you’re very late with a payment (called defaulting on your loan), you may see “collection and overdue fee” on top of a late payment fee. This fee pays for any additional steps the lender has to take to acquire payment.

Recommended: Hispanic Small Business Loans

Why Are All of These Fees Charged?

Lenders charge fees for a variety of reasons. In some cases, they use fees to encourage borrowers to make payments a certain way (meaning on time and/or online). In other cases, they use fees to help them recoup any amounts charged to them by other parties (such as “wire transfer fees”).

Lenders also charge fees in order to pay in-house employees for their services (such as underwriters) and to make sure a loan is profitable (as with “prepayment fees”).

Which Fees Can Be Avoided?

You can avoid late payment fees by making all of your payments on time. You can also avoid unsuccessful payment (or NSF) fees by ensuring you have the right amount of money in your bank account before making each payment.

Another way to avoid extra fees is to make your loan payments in the method preferred by your lender, such as through autopay.

Many other fees can be avoided simply by shopping around and comparing fees when you’re looking for a small business loan.

Recommended: A Guide to Liquor Store Loans

Why Paying Attention to Fees Is Important

Fees can add a significant additional cost to your loan, so it’s important to know exactly what you will be paying on top of interest in order to get the true cost of a loan. This also enables you to compare loans apple-to-apples.

Fortunately, lenders will typically provide an annual percentage rate (APR) for their loans. The APR provides a complete picture of the annual cost of the loan to the borrower, including interest rate and fees (like origination fees and packaging fees).

A loan’s APR won’t include fees that only activate in certain circumstances (such as a late payment fee or prepayment penalty), however. Since these fees can also impact the cost of your loan and make one borrower stand out from another, it can be a good idea to ask lenders about potential additional fees up front.

Recommended: How Much Does It Cost to Start a Business

The Takeaway

If you’re thinking about getting a small business loan to launch or expand your business, it’s important to understand all the costs involved. On top of what you borrow (the principal amount), lenders charge interest, as well as fees.

Depending on the lender, the terms of the loan, and your qualifications, each loan you apply for may have a different set of fees. To make sure you’re comparing loans apples-to-apples, it’s a good idea to take a look at the APR for each loan. In addition, you may want to ask lenders when and how you will be charged additional fees not included in the APR.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Which business loan fees are most common?

It’s fairly common for lenders to charge a loan origination fee, underwriting fee, appraisal fee, late payment fee, prepayment fee, and on-sufficient funds fee.

Do business loan fee amounts depend on loan amount?

In many cases, yes. For example, loan origination fees, SBA Guarantee fees, administrative fees, and referral fees are often charged as a percentage of the loan amount.

Do business loans have closing costs?

Commercial mortgages, and sometimes other types of small business loans, will come with closing costs. These can include things like appraisal fees, attorney fees, and credit report fees.

What happens if you don’t keep track of business loan fees?

If you don’t keep track of business loan fees, it’s very easy to end up paying more for a loan product than you were originally prepared for.

Are business loan fees tax-deductible?

Loan fees are not tax-deductible. However, the interest you pay on a small business loan typically is tax-deductible.

Photo credit: iStock/damircudic

SOSB-Q224-1869599-V1

Jul

2024

18 Business Loans and Grants for Hispanic-Owned Businesses

By Susan Guillory | SMB | Comments Off

There are nearly 5 million Hispanic-owned businesses in the U.S., making this the fastest-growing segment of U.S. small businesses, according to the U.S. Small Business Administration (SBA). Yet, despite these big numbers, Hispanic and Latinx business owners frequently face challenges accessing capital and, as a result, often can’t successfully scale their businesses.

Fortunately, a number of organizations and government agencies in the U.S. are stepping up to address this unmet need, offering loans, grants, and other financing options to Hispanic and other minority entrepreneurs. These minority business loans may have lower interest rates and be easier to qualify for than some traditional loans. Here are 18 financing options that are worth checking out.

What Qualifies as a Hispanic-Owned Business?

To qualify as a Hispanic-owned business, at least 51% of the company must be owned by people of Mexican, Puerto Rican, Cuban, or other Hispanic origin. Currently, nearly one in four new businesses are Hispanic-owned.

What Is a Minority Business Loan?

A minority business loan is a small business loan designed to provide financing options for underserved communities. While minorities are free to apply for any business loan, minority business loans may offer more competitive rates and have less stringent qualification requirements.

Groups that are considered minorities in the U.S. include African Americans, Asian Americans, Hispanic Americans, and Native Americans. Women are also considered minorities for many types of loans, as well.

Recommended: Loans for Farm Businesses

Alternative Business Loan Options for Hispanic Business Owners

The following lenders offer different types of small business loans to Hispanic and minority entrepreneurs and were chosen based on our analysis of search volume.

1. Accion

Accion is a nonprofit financial institution that invests in underserved communities and offers low-cost lending opportunities to Hispanic- and minority-owned businesses. The Accion Opportunity Fund provides loan amounts from $5,000 to $250,000 and is quick and easy to apply for online.

Accion’s offerings include working capital and equipment financing loans, open to all minority-owned businesses and women entrepreneurs.

Accion also offers online resources, events, and networking opportunities (in Spanish and English) to help minority business owners learn and grow their companies.

2. CDFI

The Community Development Financial Institutions Fund (CDFI Fund), which is part of the U.S. Treasury, gives funds to companies and organizations that help underserved people and communities. Minority business owners can reach out to local banks and nonprofit groups that have received CDFI funds to discuss and apply for low-cost business loans.

3. Camino Financial

The owners of Camino Financial were inspired to start their lending business in order to help people like their mother, who lost her Mexican restaurant business when they were children. To that end, they offer simple and affordable loans to small businesses who find it difficult to borrow through banks. Now merged with Fundation, they offer bad credit loans, secured and unsecured loans, microloans, and working capital loans up to $50,000.

4. SBA

The U.S. Small Business Administration (SBA) offers several financing programs that can help minority-owned businesses get access to the funding they need. Here are two programs you may want to check out to find a Hispanic small business loan:

Microloans

The SBA microloan program is administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks. Through these lenders, the SBA aims to reach lower-income communities and minority-owned businesses that are often overlooked by traditional lenders. These loans come with low interest rates, six-year terms. and loan amounts up to $50,000.

Community Advantage Loans

The SBA’s Community Advantage loan program provides up to $350,000 in capital and is specifically designed to meet the needs of business owners in underserved communities. To qualify for an SBA community advantage loan, business owners need to have good credit and a strong business plan. However, the business’s balance sheet and amount of collateral will not affect eligibility.

5. Kiva

By offering crowdfunded loans with 0% interest, nonprofit Kiva is working to lift barriers to capital often faced by entrepreneurs from underserved communities. To apply, you need to market your Hispanic business to the community of 2.2 million individual lenders. These lenders can then choose to lend your company and you’ll have a specific period of time in which to repay them.

6. CDC Small Business Finance

CDC Small Business Finance is a nonprofit whose mission is to provide access to affordable and responsible capital to underserved entrepreneurs, including minority, veteran, and Hispanic business owners. CDC offers loan amounts up to $250,000.

If you are looking for advice to rebuild your credit, develop your business strategy, or manage financial reports, you’ll appreciate having access to small business advisors through CDC.

7. Grameen America

Grameen America strives to achieve racial and gender equity by providing microloans of up to $2,500 to female and minority business owners. As part of their program, borrowers can open free savings accounts with commercial banks and build personal credit as they pay off their microloans. Grameen also offers training and support to women who want to start businesses and rise out of poverty.

8. LEDC

The Latino Economic Development Center (LEDC) offers Hispanic small business loans of $1,000 to $250,000 that can be used to purchase equipment, expand a business, hire staff, or purchase inventory.

The three types of loans offered by the LEDC are as follows:

• LEDC Growth Loan: Loan amounts up to $250,000 for established small businesses that have been in operation for a minimum of two years.

• LEDC Startup Loan: Loan amounts up to $20,000 for new businesses with less than two years of business history.

• LEDC Seed Loan: Loan amounts up to $5,000 for businesses with less than one year of experience and with plans to launch a company within three months of funding.

LEDC also offers free business advice and credit-building services, as well as a directory of latino-owned small businesses.

9. NALCAB

The National Association of Latino and Community Asset Builders (NALCAB) provides funding to a network of over 200 nonprofit organizations that serve diverse Latino communities throughout the U.S. With NALCAB support, these partner organizations offer Hispanic loans, grants, professional training, and support.

Grants for Hispanic and Latino Business Owners

Hispanic small business loans aren’t the only way for your business to get funding. There are also minority business grants that can provide capital that you don’t have to repay. These grants are offered by federal and local government agencies, corporations, and nonprofits.

10. Grants.gov

Grants.gov is the largest database of federal grant opportunities. While most grants are not specifically targeted to Hispanic small business owners, awards are available for all types of entrepreneurs, especially those focused on healthcare, U.S. defense, and environmental protection.

11. digitalundivided

digitalundivided’s BREAKTHROUGH Program (powered by JPMorgan Chase’s Advancing Black Pathways) offers $5,000 grants to Black and Hispanic women in specific areas, such as Detroit. digitalundivided also provides training and resources to help businesses understand their customers, find financing, and choose the right business model.

12. NASE

The National Association of the Self-Employed (NASE) works to provide resources for all self-employed individuals, including Hispanic business owners. They offer Growth Grants of $4,000, which can be used for a variety of business expenses, including marketing, advertising, hiring employees, and expanding facilities.

Besides access to grants, becoming a NASE member allows you to connect with experts who can advise you on subjects like finance, healthcare, strategy, law, and marketing. NASE membership also gives you access to discounts on healthcare, software, tax filing, and business travel.

13. USDA Rural Development Grants

Hispanic businesses located in rural areas that have fewer than 50 employees and less than $1 million in gross revenue may want to consider applying for a Rural Development Grant from the USDA.

Grants vary in size and can be used for a variety of projects that aid business development in rural areas, including training, technical assistance, acquisition or development of land, building construction or renovations, equipment purchases, and pollution control.

14. SBIR and STTR

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are government grants from five different federal government agencies. These competitive grants are focused around tech and science and offer up to $2 million in capital (divided into two phases, though, so check the annual figures) to qualified small businesses.

15. Candid.org

You may be able to find funding for your Hispanic small business through Candid.org’s Foundation Directory Online, which contains information on over 299,000 grantmakers in the U.S. Access to the directory requires buying a monthly subscription, but you can cancel at any time.

16. Comcast RISE

Comcast RISE, which stands for Representation, Investment, Strength, and Empowerment, was a grant designed for businesses that were hit hardest by COVID-19 and now continues to work towards small business transition and growth. The grant is worth $5,000 and is given to small business owners hoping to expand and recover from the effects of the pandemic. Awards go to those looking to uplift their communities with a focus on diversity, inclusion, and community investment.

17. Entrepreneurial Spirit Fund by SIA Scotch

The Entrepreneurial Spirit Fund by SIA Scotch Whiskey awards $10,000 in grants to small businesses owned by people of color in the food and beverage industry. Created by Hispanic entrepreneur Carin Luna-Ostaseskis, one of SIA’s goals is to provide funding, mentorship, and community to small businesses.

18. Amber Grant

If you’re a woman entrepreneur, consider applying for the Amber Grant, named after Amber Wigdahl, who passed at the age of 19 and never got to fulfill her business dreams. Each month, at least $30,000 is given in Amber Grant money. Applying takes just a few minutes and winners are announced by the 23rd of the following month.

Recommended: What Are Hotel and Motel Loans?

Other Resources

In addition to the grants and loans, there are organizations that can provide technical assistance, training, workshops, and networking opportunities to Hispanic businesses. Below are some you may want to check out.

digitalundivided

With a focus on assisting Black female and Latinx business owners, digitalundivided offers virtual training and a fellowship program for entrepreneurs. It also offers a pre-accelerator program for tech-enabled startup founders who have already begun to build their startup, are pre-revenue, and need assistance in developing their business model, marketing, and strategy.

Minority Business Development Agency

The Minority Business Development Agency is an advocate for Hispanic and other minority-owned businesses, and offers research, conferences, and resources to help entrepreneurs. Its Enterprising Women of Color Initiative is aimed to help minority women succeed in business through various offerings.

USHCC

The United States Hispanic Chamber of Commerce actively promotes the economic growth, development, and interests of Hispanic-owned businesses. Members have access to events and business resources to support them in their growth. In addition, members get listed in the Chamber’s online Hispanic business directory.

SCORE

SCORE is a national organization that connects business owners to free mentors to help them learn and grow their companies. SCORE also offers free workshops and a robust online database of useful business content.

Tips for Getting a Business Loan

Looking for — and applying for — a business loan can feel like an overwhelming task. Here are some ways to simplify the process.

Consider Your Options

Before applying for a small business loan, it’s a good idea to take a look at your credit profile and business financials, as this will give you an idea of what type of loan you might qualify for.

If you have excellent credit, solid revenue, and have been in business at least two years, you may be able to qualify for a long-term, low-interest loan from a bank or SBA lender. If not, you may want to look into financing offered by lenders and grantmakers listed above, as well as online lenders (who often have less strict qualification requirements for loans).

Determine How Much Money You Need

To figure out how much of a loan you need to start or grow your Hispanic business, consider how you would like to use the funds from a loan, then create a detailed budget for your project, adding in some padding to account for unexpected expenses.

Recommended: Down Payment for Business Loan

Consider the Best Location for Your Business

If you haven’t yet launched your business, consider what might be the best environment for doing so. You may want to explore the best metros for minority businesses, since they may have established communities of hispanic business owners and resources to help you.

Gather All Your Paperwork

Whatever type of funding you decide to pursue, you will likely need to supply an extensive amount of information about your business in order to apply. This often includes:

• Business EIN

• Industry

• Entity type

• Business license and permits

• Annual business revenue and profit

• Bank account statements (personal and business)

• Personal and business tax returns

• Balance sheet

• Proof of collateral

• Accounts receivable and payable reports

• Existing debt

• Commercial lease

• Purpose of the loan/grant

• Business plan

The Takeaway

Whether you’re looking for a Hispanic small business loan, business line of credit, SBA loan, or equipment financing, you’ve got options.

Get personalized small business financing quotes with SoFi's marketplace.

FAQ

How do I qualify for a minority business loan?

To qualify for a minority business loan, your business needs to be at least 51% minority-owned. The lender is going to look at your credit profile, your income, and how long you’ve been in business. Qualifications aren’t always as strict as with other types of business loans, but lenders will still want to see good to excellent credit scores and a solid cash flow to qualify for the best rates.

Can immigrants get small business loans?

Yes, more often than not, immigrants can get a small business loan. If you hold a green card, you’ll usually qualify for a loan from the Small Business Administration. You’ll also need to have been in operation for at least one year in order to qualify.

What kind of financing can I get as a minority business owner?

Minority business owners can get the same type of financing that non-minority business owners can receive, in addition to loans and grants targeted specifically to minorities. Small business loan options include term loans, business lines of credit, equipment financing, merchant cash advances, commercial loans, SBA loans, and more.

Do Hispanic business grants have to be repaid?

No, business grants — including Hispanic business grants — do not have to be repaid. Small business loans, on the other hand, do need to be repaid in monthly installments.

Photo credit: iStock/svetikd

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSB-Q224-1869679-V1