Small business loans give companies the opportunity to expand, maintain day-to-day operations, and take advantage of ventures that will lead to future growth. Getting a loan for your small business has never been easier as there is an option that fits virtually every financial need. It’s important, however, to understand the purpose the small business loan is going to serve so that you can choose the best option.
Taking the time to consider whether a long-term or a short-term option best fits your need will help you narrow down the type of business loan to take out. If you’re seeking funds to take advantage of a customer’s request to purchase a large quantity of your product, but don’t have enough supplies to cover the demand, a short-term loan would be the best option because you can pay the loan back as soon as you get paid from the transaction. If you’re seeking funds to expand your business by purchasing another building or retrofitting an existing building to accommodate your growth, a long-term loan would be a better option.
Take the time to research the various options before applying for a small business loan.
Short term loans provide business owners with extra capital, typically with terms of 18 months or less. Having extra cash on-hand better equips business owners to handle day-to-day expenses or take care of an emergency. Interest rates tend to be much higher on short term loans than on other types of business loans, and payments can be required daily. The advantage, though, is that businesses can use the money for anything and the debt is paid off quickly.
A term loan is a basic business loan-it has a set amount borrowed, a set repayment schedule and a fixed or variable interest rate. Long term loans can be provided by traditional banks and non-bank lenders, such as online lenders.
If you need equipment for your business, you can take out a loan to finance it instead of purchasing it yourself. You can finance computers, manufacturing machinery, vehicles, and more
Businesses with accounts receivables can use those assets as collateral to secure a loan. It allows companies to access capital that has not yet been paid by their customers. The lender will pay up to 85 percent of the business’s invoices upfront and pay the remaining 15 percent once the customers pay their invoices.
An SBA loan is a loan that is backed by the Small Business Administration but administered through participating banks and lenders. The maximum amount a business can borrow is $5 million and there is no minimum.
Working capital loans were put in place to help businesses fund their everyday expenses, such as advertising or wages. These loans are not intended to use for purchasing assets or for investing, but rather to help cover your day-to-day expenses.
A business line of credit is similar to a credit card in that the bank or lender provides the business money on a revolving basis. The business can spend the money as it pleases and is not charged interest until the line of credit is used. Payments are also not due until a purchase is made.
Lending companies like to see that you have a steady history of paying your debt. This often translates directly to your personal credit score. A good credit score typically indicates that borrowers pay their credit cards, mortgages, or other debts on time, while a bad credit score can imply bad financial habits. New businesses looking to take out small business loans can expect lending companies to pay close attention to their personal credit scores as a qualification. If you run an established business, you can expect your personal credit score to be assessed as a character evaluation. Again, if you have a good history of paying your personal debts on time, lending companies will feel more comfortable giving you a small business loan.
Established business owners can also expect their business credit to be checked. Business credit scores range on a scale of 0 to 100. Businesses that have a score of 75 or higher are considered to have excellent credit. These scores indicate how well the business manages their debt. Having a higher score shows lending companies that your business is dependable and capable of taking on small business loans.
While your personal and business credit scores are important, they aren’t the only deciding components that go into evaluating your chances of getting a small business loan.
Most traditional lenders, and some alternative lending companies, that offer small business loans will request a well-documented business plan. If done correctly, this document should give lending companies a good idea on how you manage and make business decisions, what the business does, why the business needs a loan, and how you plan on using the funds to increase revenue. The business plan should also include financial projections, your revenue model, operations and marketing initiatives, and a description of your management team.
A strong business plan tells lending companies that you’re a good candidate to lend small business loans to because you have a projected plan that outlines your ability to repay the loan. It can also act as a character assessment as it provides an effective evaluation of who you are as an owner/operator of your small business. Lending companies may lean towards giving you a small business loan because your plan led them to believe in you and your business.
If you choose to get a small business loan through an online lender, you may be asked to provide additional documents regarding your social media activities, statistics within your industry, and a statement about why you believe your business is unique amongst your competitors. Some may ask you to provide these documents in place of your business plan, but it’s still a good idea to have a well-documented plan.
If you’ve put together a business plan, chances are that you’ve collected your business’ financial statements. These are extremely important as they’ll not only help you qualify as a candidate, but they’re also part of the list of business loan requirements. This means that your financial statements will need to be submitted with your application. While this can be time-consuming, it’s worth taking your time to properly compile the necessary information. As with most factors, lending companies not only look at the figures from a financial perspective but also from a management perspective. If you rush to put your statements together, they will assume that you are unprepared and disorganized, and run your business in the same manner.
Lending companies will want to see your profit and loss statements, current cash flow (if you’re an established business) or projected cash flow (if you’re a new business), and a balance sheet. When it comes to qualifying for small business loans, lending companies will look for reliable finances that prove that you have enough cash flow, or anticipate having enough cash flow, to cover the debt of the loan. If the lending company feels like you won’t have enough funds to cover the debt, they’ll consider you a high-risk candidate and will either decline your application or increase rates and fees to protect themselves from you defaulting on the loan.
Be careful not to manipulate your financials in the hopes of increasing your chances of getting approved. If a lending company finds out that you’ve worked the numbers, you can consider yourself an unlikely candidate for any future financing. Having a stellar financial report is an important factor, but if your financials are lacking, it doesn’t automatically mean that you’ll be rejected. Remember, lending companies want to make sure they get their money back, not lose it. So, if you can provide an asset for them to hold on to, they may still consider you a candidate.
Collateral is an asset that lending companies can confiscate if you default on your small business loan. Assets can be anything from equipment, accounts receivables, the company’s building, and even personal assets such as your home. Not all lending companies require collateral when applying for small business loans, but if they consider you to be a high-risk candidate, they may ask you to either put down collateral or sign a personal guarantee – which means that your personal credit is on the line. Whether or not a lending company asks you to provide collateral, it’s a good idea to take account of your assets so that you have something to provide if needed.
As was mentioned earlier, it’s important that you go into the application process with your ideal small business loan in mind. Know which one you want, the amount you need, and the length of the business loan. Lending companies like to see that business owners have done their due diligence before applying for the loan as it shows how serious you are about growing your company. It also helps to have these numbers with you throughout the application process so that you, and your lending company, know exactly what you want when it comes time to review the terms of the loan. Having all of these facts and figures about your business will be a strong character reference when it comes time to assess your risk as a candidate for small business loans.
Once you’ve determined your reason for taking out a loan and decided which of the small business loans fit your financial need, it’s time to start looking for a small business funding partner. You can either choose to work with a lender from a big bank or compare various online lending companies. There are some pros and cons when it comes to the type of lender, or lending company, you choose to work with. Traditional lenders, like big banks, will typically offer lower interest rates on small business loans but tend to have strict requirements and a long underwriting process. Online lenders, or alternative lending companies, normally have fast processes, relaxed requirements, and provide funding quickly, but have a hard time competing with the low interest rates that big banks can offer.
The best approach to take when it comes to finding a lending company to work with is by requesting quotes from several companies, comparing each against the other, and choosing the option with the best terms.
After choosing your lending company, you’ll want to start gathering all pertinent documents that will be needed for the application. Keep in mind that each lending company has their own set of requirements and may ask for documents that other lenders do not require. Paperwork will also vary between the different types of small business loans that are available. It is best to be prepared with as much information about you and your business as possible in order to avoid any potential delays.
Keep in mind that alternative lending companies may exclude or request more documents. Online lending companies, for instance, may ask you to include documentation of your social media presence. Other alternative lending companies may ask for a market analysis of your competitors and how you plan to distinguish your business among the competitive landscape. Either way, once you choose a lending company to work with, you’ll know which documents to prepare.