Accounting

4 Types of Business Loans for Therapists

Headshot of Bryce Warnes
August 18, 2022
Bryce Warnes
Content Writer
A young Black man going over his finances at home

You can put a business loan for your therapy practice to different uses, from furnishing a new office to expanding your solo practice into a group practice.

In general, there are many types of loans available to businesses, but four of them are most relevant to what a typical therapy practice does.

Here are the four main types of business loans for therapy practices and what you need to qualify.

What is a business loan for therapists?

There are a variety of financing options for businesses, most of which are likely not relevant to your therapy practice, such as:

  • Invoice factoring: for businesses (typically vendors) that invoice customers
  • Equipment loans: for purchasing expensive equipment
  • Merchant cash advances: which rely on a large volume of credit and debit card transactions
  • Commercial real estate loans: for businesses investing in real estate

This article doesn’t dwell on those. Instead, you’ll learn about four types of loans relevant to most therapy practices:

  • Working capital loans: for relatively small amounts of cash to help you bridge cash flow gaps
  • Business term loans: for larger amounts of cash, and longer repayment terms
  • SBA (7)a loans: business loans partially guaranteed by the federal government
  • Business lines of credit: which charge you interest on only the amount of cash you spend

Working capital loans for therapists

A working capital loan for your therapy practice gives you the cash you need to cover day-to-day expenses, as well as possibly expand or upgrade how your business operates. The money arrives as a lump sum in your bank account, and you pay it back according to a set term.

Working capital loan amounts

Working capital loans are meant to cover short-term gaps in cash flow, or fund small scale projects—like a local advertising campaign for your practice, or new furniture for your office. The amount you’re able to get from a bank or online lender will depend on your income level. 

Providers of working capital loans

You can apply to get working capital loans from a bank or from an online lender. Online lenders may have faster application and approval processes—this is one of their main selling points—but they typically balance this out with higher interest rates.

If you’re considering a working capital loan, your first stop should be the bank you already do business with. Whichever bank handles your business checking account already has information about your financials on hand. It’s easier to apply for a working capital loan from them than from a totally new lender. You may also receive favorable terms since you’re already a customer.

If you’re turned down for a loan from an existing bank, then it’s time to consider other options. Just be sure to carefully consider the terms of any working capital loan you apply for, particularly if it’s from an online lender with whom you’re unfamiliar.

Repayment terms for a working capital loan

You typically repay a working capital loan over the course of eighteen months to three years. 

Interest rates vary widely—from the bank you already do business with (usually the lowest) to “Get cash in X days!” online lenders (typically the highest).

To get a working capital loan, you don’t need to provide collateral. Rather, the lender makes their decision depending on how capable they think you are of paying back the loan in a timely manner. 

Regardless of your business structure, you may be required to provide a personal guarantee, a legally binding agreement that makes you personally responsible for repaying the loan.

How to qualify for a working capital loan

Your loan provider will have thresholds your therapy practice must meet in order to qualify for a loan. These thresholds take into account:

  • Your time in business so far
  • How much revenue you earn
  • Your credit score

As an example, one fairly typical online lender, Fora Financial, requires you to be in business for at least six months, have a good credit score, and record at least $12,000 per month in sales in order to qualify.

Business term loans for therapists

A business term loan is a longer-term loan than a working capital loan. You use it to cover major upgrades or expansions. 

For a typical solo therapy practice, there aren’t as many uses for a business term loan compared to a working capital loan. 

Business term loan amounts

A business term loan can range into the millions—but keep in mind that the amount you are able to borrow will depend on the size of your business. For most small businesses, a business term loan is able to provide $25,000 to $500,000 in cash.

Providers of business term loans

Both banks and online lenders provide business term loans. As with working capital loans, you’re most likely to have success and quick turnaround if you apply for a loan from the bank where you already do business. 

Repayment terms for business term loans

The interest on a business term loan can range from 7% to 30%, depending on your provider. Loan terms typically range from 3 to 10 years.

How to qualify for a business term loan

Business term loans are typically secured—meaning, you need to provide collateral to get them. That’s in addition to having a good credit score (600+) and proof of income.

Collateral requirements vary, but it’s not unusual for a business to post collateral equal to around 30% the amount being borrowed. Collateral can take the form of business equipment or real estate, but in the case of therapy practices, it’s most likely to take the form of a cash down payment.

SBA 7(a) loans for therapists

The Small Business Administration (SBA) facilitates loans for small businesses by providing a portion of the collateral. It does this by partnering with banks and other financial institutions. The SBA guarantees a portion of the money being lent—up to 85%. That reduces the lender’s risk, resulting in better terms for the borrower.

To be clear: the SBA itself will not lend your business money. Rather, one of the banks it partners with will. The bank will consider your loan application, and lend you the funds if you qualify, but it will do so within limits set by the SBA.

SBA 7(a) loans offer some of the most attractive terms available for small businesses.

SBA 7(a) loan amounts

The maximum amount to borrow with an SBA 7(a) loan is $5 million.

Providers of SBA 7(a) loans

Many financial institutions work with the SBA to provide loans. For starters, you can check out this list of the 100 most active SBA 7(a) lenders.

Repayment terms for SBA 7(a) loans

You pay back an SBA 7(a) loan over 7 to 25 years. For working capital, the term is up to 7 years.

The maximum interest rate for an SBA loan ranges from 5.5% to 8%. In addition to interest, the lender may charge an origination fee or a loan packaging fee.

How to qualify for an SBA 7(a) loan

Requirements for an SBA 7(a) loan are stringent. 

To qualify for an SBA 7(a) loan, your therapy practice needs:

  • At least 2 years in business
  • A credit rating of 650+
  • Annual gross revenue of $100,000 or more

Recent foreclosures, bankruptcies, or tax liens can all disqualify you for an SBA loan.

SBA 7(a) loans typically require a downpayment of 10%.

Business line of credit for therapists

A line of credit for your small business offers several advantages over a loan. 

When you’re approved for a line of credit, you’re able transfer funds to your checking account when you need them. Rather than receiving a lump sum on which you pay interest, you have a borrowing limit, and you only pay interest for the money you take out.

Plus, a line of credit is unsecured—meaning you don’t have to post collateral or make a downpayment.

At the same time, a line of credit offers some limitations: You aren’t able to borrow as much cash as you would be able to with a traditional business loan, and the interest rate may be higher. 

Business line of credit amounts

Credit limits vary, but as a guideline, you can expect the limit on a business line of credit to range from $10,000 to $100,000. 

The more capable your business is of paying off its debt—that is, the higher your revenue and the better your credit score—the more you will be approved for.

Providers of business lines of credit

Banks and online lenders both provide business lines of credit. Before applying elsewhere, talk to the bank that administers your business checking account. 

Not only will the application process be faster, but if you’re approved, having your line of credit and business checking account all accessible within the same online banking portal makes it simpler to transfer funds and make payments.

Repayment terms for business lines of credit

If you have a business line of credit, it’s split into two periods: the draw period, and the repayment period.

The draw period is the time during which you can withdraw funds. The repayment period is the time during which you pay off the amount you borrowed with set monthly payments.

Be aware, however, that even during your draw period, you will be required to make minimum monthly payments (although they will be considerably smaller than the ones you make to pay down your debt later).

Interest rates on a business line of credit can range from a few percentage points to as much as 20%. Your rate will depend on your attractiveness as a borrower—amount of revenue, credit rating, and time in business—as well as the Fed’s rate.

Most business lines of credit are unsecured, but for larger amounts you may be required to post collateral in the form of a bank lien on your business.

How to qualify for a business line of credit

Qualification requirements for a business line of credit vary depending on the lender. However, the factors taken into account almost always include:

  • How long you’ve been in business
  • Your monthly or annual revenue
  • Your credit rating

A line of credit may come with an origination or setup fee. Be sure to carefully read the terms of a line of credit before agreeing to it, so you fully understand how much you’ll be paying, and what for.

Loan repayments are a regular expense, and one you should factor into any therapy practice budget.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

Bryce Warnes is a West Coast writer specializing in small business finances.

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