06:55 | 02/12/2021 Print
|How To Get A Small Business Loan|
A business loan can help you start or grow your company, but navigating the loan process, as well as tightened lending standards, might not be easy for many people.
Many businesses, both large and small, use borrowed capital to fuel growth and fund other business initiatives. Whatever the need, a small business loan is one of the most sought-after methods of funding.
Whether you’re just launching your business venture, or you are in expansion mode, it’s highly likely that you’ll need financing to support your business objectives.
Many owners turn to small business loans as a solution for capital without losing equity or stake in their company. Small business loans enable entrepreneurs to get off the ground and remain in control of their organizations.
|Secured vs. unsecured business loans |
The difference between unsecured and secured loans comes down to one thing: collateral. Secured loans are backed by collateral where unsecured loans are not. Understanding the pros and cons of each can help you narrow down which small business loan type is right for you.
There are many different types of small business loans and for a whole host of reasons. For example, you can get a new business loan for equipment. You can get one specifically to start a business. You can even get one to purchase real estate.
A business term loan is the quintessential traditional loan type. It’s where a business borrows money, usually from a bank. The money is handed over as a lump sum to be repaid over set intervals over a designated period of time. There are several advantages to business term loans.
A term loan is a common form of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period.
Online lenders offer term loans up to $1 million and can provide faster funding than banks that offer small-business loans.
Businesses looking to expand.
Borrowers who have good credit and a strong business and who don’t want to wait long for funding.
The Small Business Administration (SBA) guarantees these loans, which are offered by banks and other lenders. Repayment periods on SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years for buying equipment and 25 years for real estate purchases.
*Businesses looking to expand or refinance existing debts.
*Strong-credit borrowers who can wait a long time for funding.
SBA helps small businesses get loans
SBA works with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.
Benefits of SBA-guaranteed loans
Competitive terms - SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans.
Counseling and education - Some loans come with continued support to help you start and run your business.
Unique benefits - Lower down payments, flexible overhead requirements, and no collateral needed for some loans.
Get $500 to $5.5 million to fund your business
Loans guaranteed by SBA range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. Some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender when requesting a loan. Your lender can match you with the right loan for your business needs.
A business line of credit provides access to funds up to your credit limit, and you pay interest only on the money you’ve drawn. It can provide more flexibility than a term loan.
*Short-term financing needs, managing cash flow or handling unexpected expenses.
Equipment loans help you buy equipment for your business, sometimes including semi truck financing. (Business auto loans are available for cars, vans, and light trucks.) An equipment loan's term typically is matched up with the expected life span of the equipment, and the equipment serves as collateral for the loan. Rates will depend on the value of the equipment and the strength of your business.
-Businesses with unpaid invoices need fast cash.
-Businesses with reliable customers on long payment terms (30, 60, or 90 days).
Invoice financing is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance.
-Businesses looking to turn unpaid invoices into fast cash.
-Businesses that want to maintain control over their invoices.
You get a lump sum of cash upfront that you can use to finance your business.
Instead of making one fixed payment each month from a bank account as you would with a term loan, you make payments on a merchant cash advance either by withholding a percentage of your credit and debit card sales daily or by fixed daily or weekly withdrawals from a bank account.
-Businesses that have high and consistent credit card sales and can handle frequent repayments.
-Businesses that can't get financing anywhere else and can't wait for capital.
It is possible to use a personal loan for business purposes. It’s an option for startups, as banks typically don't lend to businesses with no operating history.
Approval for these loans is based solely on your personal credit score, but you’ll need good credit to qualify.
-Startups and newer businesses with strong personal credit.
-Borrowers are willing to risk damaging their credit scores.
Business credit cards are revolving lines of credit. You can draw from and repay the card as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.
They are typically best used for financing ongoing expenses, such as travel, office supplies, and utilities.
-Ongoing business expenses.
Business planning is important, especially when it comes to getting a business loan. Ideally, understanding if you should get a business loan, and when and why to apply for a business loan should happen during the business planning phase.
While writing your business plan, you will also craft your business’s finance strategy. For most businesses, this means planning to borrow money at a specified time period. For some businesses, taking out a small business loan is the best path for growing a business.
Here are some tips to consider when deciding to take out a business loan:
Plan years in advance. When writing a business plan, your plan should forecast sales and where your business will be financially in five to ten years. Then, use this knowledge to decide when will be the best time to take out a business loan.
Know why you need a business loan. Will you need it for an expansion? Will you need a business loan to purchase new equipment? Will you need a business loan for hiring staff? Will you need a business loan for some other reason? Just know the reason and make sure it is in your business plan.
Learn how to build business credit. When applying for a business loan, be ready for your business credit profile and personal credit profile to be pulled. Lenders evaluate your business credit score and personal credit history to determine how likely you are to repay the business loan. Hint: Lenders hate risk. Don’t be a risk to them. Show that you have a proven track record of always paying your business debts on time—better yet early—and they are far more likely to extend a business loan to your business.
Have a contingency plan. Don’t bet the future of your business on having to have a business loan. Like in chess, you have to think moves ahead, consider every possible scenario, and be prepared for the worst-case scenario. This means knowing your other finance options and having a Plan B in place, just in case the original plan should fall through.
Finally, learn how business loans work. So you’re not caught off-guard by any part of the process, any additional fees, etc.
The following elements for each loan program and type:
Down payment – A sum of money the borrower must pay towards the project – represents a percentage of the project costs.
Loan terms – The specific conditions involved when borrowing money, including the interest rate and the repayment period.
Working capital – A type of small business loan that can be used to fund every day, operational needs.
Financial covenants – Agreement between borrower and lender with certain restrictions for the borrower while paying on the loan.
Personal guarantees – The borrower agrees, in conjunction with the business, to be 100% personally responsible for repaying the loan in full.
Choosing the right lender – Our general guidance on how to select a lender.
The business loan application and underwriting process vary by lender, but most banks and lenders follow the same general guidelines. To get a small business loan, expect to follow these general steps:
Banks prefer to offer their low-rate business loans to borrowers with credit scores above 680 at least, says Suzanne Darden, a finance specialist at the Alabama Small Business Development Center. If your credit score falls below that threshold, consider small-business loans for borrowers with bad credit or loans from a nonprofit microlender.
You need to have been in business for at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans. Many lenders require a minimum annual revenue, which can range anywhere from $50,000 to $250,000.
Look carefully at your business’s financials — especially cash flow — and evaluate how much you can afford to apply toward loan repayments each month. Some online lenders require daily repayments, so make sure to factor that in. For example, if your business’s income is $10,000 a month and you pay $7,000 in rent, payroll, and other costs, you should be able to afford a $1,000 monthly loan payment. Your income ($10,000) is 1.25 times $8,000 of expenses.
A secured loan requires business collateral, such as property or equipment, that the lender can seize if you fail to repay the loan.
Putting up collateral is risky, but it can also raise the amount lenders to let you borrow and get you a lower interest rate.
Lenders will ask why you need a small-business loan. Your answer will likely fall into one of three categories and determine which type of business loan is right for you:
You want to start a business. Lenders require cash flow to support repayment of the loan, so companies in their first year typically can't get business loans. Instead, you’ll have to rely on other types of startup financing, like business credit cards and personal loans.
You want to manage day-to-day expenses. A business line of credit could make sense. This flexible kind of funding lets you tap into the financing as needed to cover expenses such as payroll or unexpected repairs, offering a useful safety net.
You want to grow your business. Government-backed SBA loans or traditional term loans often have higher borrowing maximums — SBA loans can reach $5.5 million, for example. Many lenders also offer specific products to fit a growing company's needs, such as loans for equipment or vehicle purchases.
When shopping for a small business loan, determine whether your current bank offers small business loans that meet your needs. This can streamline the application process because the bank will already have your financial information on file. Next, research other banks, credit unions, and online lenders to compare available loan amounts, repayment terms, and rates.
Required documentation varies by lender. However, most lending institutions require a business plan, at least 12 months of personal and business bank statements, tax returns for at least two years, and details about any current and past business loans. Lenders also require copies of applicable business licenses and legal documents, details about available collateral, and a description of how loan proceeds will be used.
Once you research the best small business loans and prepare your business for due diligence, submit a formal loan application. The process varies by lender, so familiarize yourself with the application process and contact customer service with questions.
|Photo: Simply Business|
Just as certain types of loans are more appropriate for certain businesses, some lenders may be better suited to your business than others. Consider these factors to choose a small business loan:
Lender reputation. Check online reviews so you’re aware of any red flags or potential issues before you sign on the dotted line. If you plan to work with a local bank or credit union, check with other local business owners to see which institutions have the best reputation.
Qualification requirements. Most small business loans are underwritten based on the business owner’s personal credit score and are personally guaranteed. The minimum credit score required to qualify for a small business loan depends on the lender and the type of loan. So, it’s generally a good idea to check your personal credit score and then research each lender to compare minimum credit score requirements.
Available loan amounts. Loan amounts vary by lender and loan type. Before choosing a small business lender, evaluate your business’ borrowing needs and shop for a loan that fits those parameters.
Underwriting and funding speed. The amount of time it takes to process an application and receive funds varies widely by lender and loan type. In general, it can take anywhere from a couple of days (in the case of a merchant cash advance) to several months (for an SBA loan) to receive funds after submitting an application. If you need a loan quickly, choose a loan type and lender that can meet those time constraints.
Annual percentage rate. APRs also vary by loan type and lender but generally range anywhere from 5% to 99%. The most creditworthy applicants qualify for the lowest rates, but some lenders are more competitive than others.
Additional costs. Many lenders charge origination fees that cover the costs of processing applications and underwriting loans. Likewise, some lenders charge prepayment penalties for borrowers who opt to pay off their loans early, while others charge draw fees on lines of credit. However, borrowers should not be charged application fees, and any fees levied prior to loan approval are a red flag.
Stay away from blanket liens and other predatory practices. A blanket lien is essentially you agreeing that a lender can come after any and all business and personal assets under your control should you default on the business loan.
It is important to do your due diligence and find out which loan will serve your business best. Keep in mind that not all business loans are created equal. Like with personal loans, even with business loans, there are predatory lenders out there just waiting to take advantage of a small business owner who hasn’t done their homework.
A small business loan gives you access to capital so you can invest it into your business. The funds can be used for many different purposes including working capital or improvements including renovations, technology and staffing, business acquisitions, real estate purchases and more.
When a bank is assessing if you are eligible for a loan and how much debt your business can afford, they look at many different factors such as the condition of your business, the available collateral, your cash flow and your character. Depending on what type of loan product you are applying for, the requirements and terms can vary so be sure your lender explains what they will need from you in order to qualify.
|As a small business owner, you have options when it comes to finding the right financial solutions. Terms, rates and qualifications can vary by lender and loan product and every situation has advantages and challenges. Base your decision on the specific goals and needs of your small business and start the process with as much qualifying documentation as possible to help your lender identify the best fit.|
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