One of the major challenges that many small businesses have to grapple with is getting a business loan because of the tightened lending terms by financial institutions. No matter how hard it maybe to get approved for a small business loan, outside financing is crucial to growing or keeping the business afloat. This article will outline practical advice on how to get a small business loan.
Understanding Small Business Loans
Numerous traditional and alternatives financiers give small business loans to businesses. These loans can boost the business growth plans, improve business cash flow, fund product development or even hire additional staff. So, knowing how to get a small business loan, what types of loans there are and what are the limits and amounts will help you get your business to the next level.
Limits and Amounts
Most small business loans range from $5,000 to $5 million depending on one’s profile, financial needs, and type of loan applied. Most short-term loans range from $5,000 to $250,000. Generally, banks want to make sure that your request for a loan makes business sense. For instance, if your plan is to buy expensive equipment, the lenders may grant you a long-term loan. Of course, after you prove your eligibility. You can use Bankrate’s calculator to ascertain your credit score. Basically, lenders calculate a borrower’s risk profile basing on these factors:
- Outstanding loans
- Credit score
- Financial ratios
- Business assets
- Time in business
- Owner’s equity
- The industry the business belongs to
- The purpose of the loan.
What Types of Small Business Loans are there?
On a broader scale, small business loans may be categorized as secure, line of credit, or unsecured. For secured loans, some form of collateral such as investments, real estate, or any valuable asset is needed. For a line of credit and unsecured loans, the collateral is unnecessary. Generally, the lenders charge higher interest rates for unsecured loans to compensate for the lack of collateral.
Specifically, there are several types of small business loans which include:
- Working capital loans
- Small business term loans
- SBA loans
- Equipment loans
- Professional loans
- Account receivable financing
- Start-up loans
- Small business line of credit
- Small business credit cards
How to Apply for a Small Business Loan
The main secret behind knowing how to get a small business loan is proper planning before launching the loan application. There are a few simple steps you could follow before you apply for a small business loan. First, you need to start a relationship with your lenders. Building a good relationship with prospective lenders will ease any possible tension between you and them. Secondly, identify why you need the money. There are several reasons for borrowing money, both good and bad.
The good reasons could be borrowing to:
- Start a business;
- Grow business or acquire essential business assets;
- Manage operating expenses;
- Cushion your business from shocks.
While the bad reasons could be borrowing to:
- Finance ongoing losses;
- Acquire non-essential assets.
After figuring out why you want the loan and establishing a good relationship with your lender, the process should become quite simple.
Decide on the loan
The reason for borrowing will influence the type of loan to borrow. Make sure you have worked out a reasonable budget based on current data or reasonable financial projections so as to borrow the right amount.
Find out if you qualify
Most banks prefer borrowers with a credit score of 680 and above. If your score is below this, consider borrowing from non-profit micro-lenders or other online lenders.
Review borrowing options
If you know how to get a small business loan, the number of options to choose from will amaze you. These include commercial banks, online lenders, regional specific lenders, and nonprofit micro-lenders. Pre-selected 3 – 5 lenders then analyze their terms and choose the best.
Prepare loan package
To learn how to get a small business loan, you should know the process involves filling out loan application forms and preparing other loan applications documents. The loan package is all the paperwork that you must fill and submit in order to make formal application for a loan. Depending on the lender, you might be asked to assemble the following documents:
- Projected and past financial statements – the cash flow statement, profit and loss, and the balance sheet
- Federal tax ID and Certificate of Incorporation, good standing certificate and foreign corporation filings
- A business plan detailing your strategy and owner’s profile
- List of executive officer or directors and their backgrounds
- Personal and business financial documents such as tax returns and bank statements
- Business legal documents such as leases and articles of incorporation
- Copies of general liability and key man insurance policies
- Business credit report
- Potential collateral
Note that it is normal if some lenders ask for additional documentation. In fact, some of them might check your social media profiles as part of the approval process. So, remember to review your online profiles including company website and Yelp reviews. If you are called upon to provide more clarification on anything do not hesitate to answer truthfully.
After submitting your application package, it takes between 1 – 4 weeks for lenders to respond. There are lenders who will provide an online platform to track the progress. Otherwise, you might need to check on them after a week.
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How Does Repayment Work?
The ability to repay borrowed funds must be well explained in the loan package. The major sources that bank access your repayment ability are the business cash flow and collateral, especially for secure loans. For cases of cash flow, the lender will analyze previous financial statements to have a picture of your repayment situation.
One of the most important aspects of knowing how to get a small business loan is understanding the fees and interest rates associated with the loan, and whether the loan has a variable or fixed interest rate. Sometimes, interest rates vary according to regions. Typically, business installment loans charge between 5% and 9% while a business line of credit prime interest rates ranges from 1 to 8 percent. For SBA 7a loans the interest rate range from 6.5% to 9%. Most loan range from a year to five years.
FAQs We Know You Have
Q. What are SBA Loans?
A. These are government backed loans which are offered in partnership with several commercial banks. The main aim of SBA is to increase the lending capacity for several small businesses by reducing the lenders’ risk.
Q. How are Start-up funded & how are small businesses are financed?
A. In most instances, startups rely heavily on owner’s savings, family savings, and some cases bank loans. The average capital for a new firm is about $80,000. A majority of established small businesses rely on credit from commercial lenders. Credit reliance is skewed towards newer firms which obtain about 75% of their funding through lines of credit and loans.
Q. Do I need a business plan to get a loan?
A. This is entirely dependent on the type of loan you need. For SBA loans, you need to have a business plan. Even in cases where lenders do not ask for a business plan, they will ask several questions about the business.
Despite the challenges associated with the application of small business loan, most businesses have successfully secured loans from even the strictest of lenders. There is a myriad of options to choose from. Being prepared and anticipating what lenders might be looking for or ask, you will increase your chances of obtaining these loans. Have you been successful or frustrated in getting a small business loan? Please share your experience of how you navigated through the process.