How To Get A Small Business Loan
How To Get A Small Business Loan
Table of Contents

A business loan can help you launch or expand your enterprise, but for many people, navigating the loan application and approval processes, as well as tightened lending standards, may not be simple.

Both big and small businesses frequently borrow money to finance expansion and other business goals. A small business loan is one of the most popular sources of funding, regardless of the requirement.

We will describe what a business loan is in the article below, as well as the simplest ways to apply for one.

What Is A Small Business Loan?

It's very likely that you will require financing to support your business goals, regardless of whether you are just starting out or actively expanding.

Many business owners use small business loans as a way to raise money without giving up equity or ownership in their company. Small business loans help business owners launch their enterprises while maintaining ownership over them.

Secured vs. unsecured business loans

Collateral is the key distinction between unsecured and secured loans. Unlike unsecured loans, secured loans are supported by collateral. Selecting the best small business loan type for you can be made easier by being aware of the benefits and drawbacks of each.

Types of Business Loans

Small business loans come in a wide variety of forms and are used for a variety of purposes. For equipment, for instance, you could obtain a new business loan. One can be purchased specifically for business startup. You could even use one to buy a house.

1. Business Term loans

The classic traditional loan is a business term loan. It is the place where a company borrows money, typically from a bank. The sum of money is given out in one lump sum to be paid back over predetermined intervals over a predetermined period of time. Term loans for businesses come with a number of benefits.

A typical type of business financing is a term loan. You receive a lump sum of money up front that you pay back over a specified period of time with interest.

Online lenders can offer funding more quickly than banks that offer small-business loans because they offer term loans up to $1 million.

Best for:

Businesses looking to expand.

Borrowers who have good credit and a strong business and who don’t want to wait long for funding.

2. SBA loans

These loans are provided by banks and other lenders, with protection from default provided by the Small Business Administration (SBA). Depending on how you intend to use the funds, SBA loan repayment schedules may vary. For working capital, they range from seven years to ten years to buy equipment, and from 25 years to buy real estate.

Best for:

*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

Small business loans are offered by the SBA in collaboration with lenders. The organization does not give small business owners direct loans. Instead, it establishes rules for loans made by its associate lenders, nonprofits dedicated to community development, and microlending institutions. The SBA lowers risk for lenders and facilitates their access to capital. Small businesses can now obtain loans more easily thanks to this.

Benefits of SBA-guaranteed loans

Competitive terms: Rates and fees on SBA-guaranteed loans are typically on par with those on non-guaranteed loans.

Counseling and training - Some loans include ongoing assistance to help you launch and manage your business.

Benefits that are unique: Lower down payments, flexible overhead specifications, and no collateral needed for some loans.

Get $500 to $5.5 million to fund your business

Small to large loans with SBA guarantees are available for a variety of business needs, including long-term fixed assets and working capital. When applying for a loan, make sure to check with an SBA-approved lender because some loan programs have restrictions on how you can use the money. Your lender can help you find the best loan to meet your needs as a business owner.

3. Business lines of credit

With a business line of credit, you can draw money up to your credit limit, and you only pay interest on that money. In comparison to a term loan, it may offer more flexibility.

Best for:

*Short-term financing needs, managing cash flow or handling unexpected expenses.

*Seasonal businesses.

4. Equipment loans

Equipment loans, which occasionally include financing for semi trucks, assist you in purchasing equipment for your company. Cars, vans, and light trucks are eligible for business auto loans. The term of an equipment loan is frequently matched to the equipment's anticipated lifespan, and the equipment is used as collateral for the loan. The cost of the equipment and the viability of your business will affect the rates.

Best for:

-Businesses with unpaid invoices need fast cash.

-Businesses with reliable customers on long payment terms (30, 60, or 90 days).

5. Invoice financing

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.

Best for:

-Businesses looking to turn unpaid invoices into fast cash.

-Businesses that want to maintain control over their invoices.

6. Merchant cash advances

You receive a one-time lump sum of money to use as business financing.

As opposed to making a single fixed payment from a bank account every month as you would with a term loan, payments on a merchant cash advance are made either by deducting a set percentage of your daily credit and debit card sales or by making set withdrawals from a bank account every day or every week.

Best for:

-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.

7. Personal loans

A personal loan can be used for business purposes. Banks typically don't lend to companies with no operating history, so it's a possibility for startups.

You must have good credit to be eligible for these loans because approval is solely based on your own credit score.

Best for:

-Startups and newer businesses with strong personal credit.

-Borrowers are willing to risk damaging their credit scores.

8. Business credit cards

Revolving credit lines are business credit cards. As long as you make the required minimum monthly payments and don't go over the credit limit, you can use and repay the card as necessary.

They work best when used to pay for recurring costs like transportation, office supplies, and utilities.

Best for:

-Ongoing business expenses.

Read More: How To Start A Small Business From Best Ideas to Plan

Know Why and When You Need a Business Loan

Photo:  OnDeck
Photo: OnDeck

Planning your business is crucial, especially when applying for a loan. Understanding whether you should apply for a business loan as well as when and why to do so should ideally occur during the business planning stage.

You will develop your company's financial strategy as you write your business plan. This entails making plans to borrow money at a predetermined time for the majority of businesses. For some companies, obtaining a small business loan is the best course for business expansion.

Consider the following advice before applying for a business loan:

Make plans well in advance. When drafting a business plan, you should project sales and the financial state of your company in the next five to ten years. After that, use this information to determine when it would be best to obtain a business loan.

Be aware of your business loan needs. Will you require it if you expand? Will you require a business loan to buy new machinery? Will you require a business loan to hire employees? Do you anticipate having another need for a business loan? Simply be aware of it and include it in your business plan.

Discover how to establish business credit. Be prepared for both your personal and business credit profiles to be pulled when you apply for a business loan. In order to assess your likelihood of repaying the business loan, lenders look at both your personal credit history and business credit score. A tip: Lenders despise risk. Don't expose them to risk. They are much more likely to offer your company a business loan if you can demonstrate that you consistently pay your business debts on time—better yet, early.

Create a backup plan. Don't stake your company's future on needing a loan for operations. Like in chess, you must plan your moves in advance, take all potential outcomes into account, and be ready for the worst-case scenario. This entails being aware of your alternative financial options and having a backup plan ready in case the primary one should fail.

Find out how business loans function, and then. So nothing about the procedure, any extra costs, etc., comes as a surprise to you.

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.

How to Get a Small Business Loan

Photo: Dreamstime
Photo: Dreamstime

Although the application and underwriting procedures for business loans differ depending on the lender, most banks and lenders adhere to the same general principles. Expect to go through the following steps in order to obtain a small business loan:

1. Determine if you qualify for a business loan

According to Suzanne Darden, a finance specialist at the Alabama Small Business Development Center, banks prefer to offer their low-rate business loans to borrowers with credit scores at least 680 points higher. Consider small business loans for borrowers with bad credit or loans from nonprofit microlenders if your credit score is below that cutoff.

The majority of small business loans available online require a minimum of one year of operation, and the majority of bank loans require a minimum of two years. Many lenders have minimum annual income requirements, which can be $50,000 to $250,000.

2. Determine what payments you can afford

Examine the financials of your company, particularly the cash flow, and determine how much you can afford to put toward loan repayments each month. Consider the fact that some online lenders require daily repayments. You should be able to afford a $1,000 monthly loan payment, for instance, if your company makes $10,000 per month in revenue and you spend $7,000 on rent, payroll, and other expenses. Your expenses ($8,000) are 1.25 times your income ($10,000).

3. Decide whether and how you want to collateralize the loan

A secured loan calls for company collateral, such as real estate or machinery that the lender can seize if you don't pay back the loan.

Risky as it is, putting up collateral can increase the amount of money you can borrow from lenders and lower your interest rate.

4. Decide what type of loan you need to fund your business

The need for a small business loan will be questioned by lenders. Your response will probably fit into one of three categories, which will help you choose the best kind of business loan:

You want to launch a company. Companies in their first year typically cannot obtain business loans because lenders require cash flow to support loan repayment. As an alternative, you'll need to rely on personal loans and business credit cards for startup financing.

You want to control your daily spending. A business credit line might be sensible. This adaptable form of funding provides a helpful safety net by allowing you to access the money as needed to pay for costs like payroll or unforeseen repairs.

You want to expand your company. Borrowing caps on traditional term loans or SBA loans backed by the government are frequently higher; SBA loans, for instance, have a cap of $5.5 million. Many lenders also provide specialized products, like loans for equipment or vehicle purchases, to meet the needs of a developing business.

5. Research lenders

Find out if your current bank has small business loans that suit your needs before looking elsewhere for a small business loan. Given that the bank will already have your financial information on file, this can speed up the application process. Next, compare the loan amounts, terms, and rates offered by various banks, credit unions, and online lenders.

6. Gather required documentation

Each lender has different requirements for supporting documents. However, the majority of lending organizations demand a business plan, at least 12 months' worth of personal and business bank statements, at least two years' worth of tax returns, and specifics regarding any active and previous business loans. A description of how the loan proceeds will be used is also necessary, as are copies of any necessary business licenses and legal documents.

7. Submit a formal loan application

You should submit a formal loan application after doing some research on the best small business loans and preparing your company for due diligence. Every lender has a different application procedure, so familiarize yourself with it and ask any questions to customer service.

How to Choose a Small Business Loan

Some lenders might be more suited to your business than others, just as certain loan types are more suitable for specific businesses. When selecting a small business loan, take into account the following:

Lender standing. Before you put pen to paper, read online reviews to be aware of any warning signs or potential problems. Consult other local business owners to find out which banks and credit unions have the best reputations if you intend to work with a local institution.

qualifications needed. The majority of small business loans are personally guaranteed and are underwritten based on the business owner's personal credit score. Depending on the lender and the type of loan, a small business loan's minimum credit score requirement may vary. As a result, it's usually a good idea to check your own credit score before researching each lender to compare their minimum credit score requirements.

obtainable loan amounts. By lender and loan type, loan amounts can differ. Consider your company's borrowing requirements before selecting a small business lender, then look for a loan that fits those specifications.

speed of underwriting and funding. Depending on the lender and type of loan, processing applications and getting money can take a very long time. In general, the time it takes to get money after applying can range from a few days (for a merchant cash advance) to several months (for an SBA loan). Select a loan type and lender that can meet your time requirements if you need a loan quickly.

percentage over a year. APRs differ depending on the loan type and lender but typically run from 5% to 99%. The lowest rates are available to those with the best credit, but some lenders are more affordable than others.

Added expenses. To cover the costs of processing applications and reviewing loans, many lenders levy origination fees. Similar to prepayment penalties, some lenders charge draw fees on credit lines while others impose prepayment penalties on borrowers who choose to pay off their loans early. However, application fees should not be assessed to borrowers, and any fees assessed before a loan is approved should raise a red flag.

How To Avoid Predatory Business Loans

Avoid blanket liens and other unfair business practices. A blanket lien is essentially your consent for a lender to seize all of your assets, both business and personal, if you fail to make payments on a business loan.

It's crucial to conduct your research and determine which loan will benefit your company the most. It's important to remember that not all business loans are created equally. There are predatory lenders out there waiting to take advantage of a small business owner who hasn't done their research, just like there are with personal loans.

How Do Small Business Loans Work?

You can access capital through a small business loan and use it to expand your company. The money can be used for a variety of things, such as working capital or improvements like remodeling, hiring staff, investing in technology, expanding the business, buying real estate, and more.

A bank considers a variety of factors when determining whether you qualify for a loan and how much debt your company can handle, including the state of your company, the available collateral, your cash flow, and your character. Be sure your lender explains what they will need from you in order to qualify because the requirements and terms can vary depending on the type of loan product you are applying for.

You have choices as a small business owner when it comes to locating the ideal financial solutions. Every situation has benefits and drawbacks, and terms, rates, and qualifications can vary depending on the lender and loan product. Based on your small business's unique objectives and requirements, make your choice. To assist your lender in finding the best option, start the process with as much qualifying documentation as you can.
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