No matter what your small business does, you’re going to need financing to make it happen.
Cue small business loans!
Small business loans are designed to give individuals the funding they need to maintain and grow their small businesses.
The idea of taking out a loan may be anxiety-inducing for many people, but it doesn’t have to be. Taking the time to understand everything there is to know about small business loans before reaching for an application will make the process much less ominous.
The first step is determining what kind of business loan fits best with your needs. If you are looking for a loan to help run your business’s daily expenses, like paying your employees, paying rent, and maintenance costs, a business line of credit is probably the type of business loan for you. If you are looking for funds to expand your business a traditional lump sum loan might be a better option.
Keep in mind, if you are just getting started and looking for a loan to get your startup off the ground, the process of taking out a business loan might be slightly different than in other cases. Businesses, like people, need to qualify for loans and if your business hasn’t been around for very long it can be more difficult to take out a traditional business loan.
This brings us to the application process. Depending on which business loan you have settled on, the application process will vary slightly. That said, you will generally need to submit at least the following:
- Cash flow statement
- Balance sheets
- Profit and loss statement
- Your business plan
- Personal taxes and credit score
You want to be able to prove to the lender that your business can handle taking on the responsibility of a loan. By looking at the documents we mentioned above, the lender will assess a number of factors to determine the overall risk of taking your business on as a borrower.
Some of the main things lenders consider when reviewing loan applications are:
- How long you’ve been in the biz. Generally, the longer a business has been around, the more stable. This also gives lenders a chance to look at your revenue flow over an extended period of time.
- Your credit score is important for obvious reasons. Depending on the lender, anyone with a credit score below 500 or 600 may be denied.
- Collateral is everything a lender can take from the borrower in case they do not repay the loan. This can be both physical property or personal finances and acts as a layer of security for the lender.
- How much debt your business already has measured against its equity will help lenders understand whether or not your business is equipped to take on more debt.
- Cash flow or working capital is the amount of money your business has after subtracting the business debt liabilities it owes for the next year.
Who lends to small businesses?
While your small business loan application will be vetted by the lender, you should also be vetting lenders to find the loan with the best terms. If you need cash fast, you may be looking for a lender who can approve your loan ASAP. Either way, it is important to understand who small business lenders are and what they can offer your business.
Traditional business loans and banks are two peas in a pod. Banks usually provide long term, fixed rate loans, lines of business credit, and property loans to small businesses. Banks also work with the U.S. Small Business Administration (SBA) on programs that guarantee loans to small businesses for things like purchasing real estate and equipment.
Banks are a great option for small businesses because they usually offer the lowest interest rates, also known as the annual percentage rate (ARP).
However, getting funding from banks isn’t always a piece of cake. For one, bank loans tend to take time, so if waiting patiently is not an option for your business when it comes to a loan this might not be the lender for you.
Something else to consider when it comes to bank loans is that businesses younger than two years old tend to have difficulty proving enough of a steady flow of revenue to qualify for bank loans. Combine newborn businesses with bad personal credit or a lack of collateral and your business may as well kiss a bank loan goodbye.
If your business doesn’t qualify for a bank loan, or you decide you don’t want to borrow from a bank for whatever reason, don’t fret. Business loans are not a one size fits all situation, which is why there is more than one option when it comes to lenders.
Online lenders are a great option for small businesses that might not meet the criteria for bank loans. In other words, unlike banks, online lenders generally don’t have an issue lending to businesses that are younger than two years old and don’t always require collateral. Because of this flexibility, online lenders approve more business loans than banks do.
Online lenders will still check your credit score to determine the ARP, and while online lenders have a lot of pros, the biggest con is probably the high interest rates. Make sure that whatever ARP your lender comes up with, the terms are manageable for your business.
Borrowing from online lenders is also a much quicker process than obtaining a bank loan. So if your business needs money ASAP online lenders are probably the better choice.
There are what feels like a million different online lenders out there. It might be tempting to choose to go with the first online lender you find on Google, but we highly recommend doing some research before making your choice.
Depending on why you need a business loan, there is likely an online lender that specializes in that department. We have provided a few examples of online lenders and what they dabble in.
If your business needs a loan fast, Fundbox is the online lender for you. Fundbox approves loans fast, and when we say fast we’re talking lightning speed. Same day and next day loans would be impossible with banks but not Fundbox. You also only need to be in business for six months to qualify.
However, your business must make at least $100,000 annually and have a business checking account to be considered. You can also expect short repayment times. Let’s be honest, nothing comes without a cost!
We mentioned earlier that it can be difficult for startups to get bank loans since they are baby businesses. Fora Financial specializes in business loans for startups by considering businesses as young as six months and do not require collateral.
To qualify for a loan with Fora Financial, your business must have $12,000 or more in gross sales and you can’t have any open bankruptcies.
If your business is a little bit more established, but you don’t want to go through the daunting process of borrowing from SBA lenders via banks, look no further than SmartBiz. SmartBiz shortens the SBA funding process, which through a bank can take months, to around a week.
To qualify, your business must be at least two years old and you’ll have to pay a down payment. But SBA loans offer great terms making them the preferred choice for many small businesses.
Microlenders are slightly different from typical online lenders in that they are usually reserved for businesses with bad credit or don’t qualify for any other type of business loan. These loans are usually short term and for a relatively small amount of money compared to other business loans.
Don’t be fooled though, while the loan is short-term the application process isn’t. Since there is more of a risk for the lender when there is no credit to back up the business, the lender will usually request other documents like financial statements and detailed business plans before considering a business.
Believe it or not, there are also some nonprofit microlenders out there doing amazing work! Take Accion Opportunity Fund for example. AOF is committed to supporting small businesses that advance racial, gender, and economic justice.
Now that you are well versed in where to get a business loan, time to get to work. Compare different lenders until you find the right one for you, and then apply. Happy hunting!
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