Small business loans may be borrowed in order to help manage small business expenses in an efficient and purposeful way. Financing a small business can often require a small business loan since many small business owners simply can’t fund their own business right from the beginning.
These types of loans are becoming more and more popular as small business ventures become more common among everyday persons. Many lending institutions have special programs that offer favorable small business loan arrangements plans.
How Are Small Business Loans used?
Small business expenditures can often be very tricky to calculate accurately. This is especially true for start-up expenditures because expenses can fluctuate so much in the first few years of a business’s existence. Small business loans are often used to address business needs such as:
- Down payments on business/office spaces
- Helping pay for business equipment and supplies
- Funding initial advertising campaigns
- Paying off the debt that has accumulated over the years
- Repairs of business property
- Specific transportation and traveling expenses
- Long-term business expansion efforts
Basically, small business loans should be viewed as investments that will lead to the company’s growth. The main goal is to ensure that the loan helps stimulate profit rather than create additional debt for the organization. This requires careful planning and foresight from a business perspective.
What Are Some Tips When Considering Small Business Loans?
When considering whether or not to obtain a business loan, you should consider the following tips:
- Shop around: You may be able to obtain a loan at a better rate if you do some research and negotiate with lenders if possible.
- Look ahead: Your financial planning should look as far ahead into the future as possible. You should be able to envision how you will repay the small business loan once you are approved.
- Be realistic: The main pitfall for many small business owners is overspending. Just because you obtain a loan doesn’t mean that it can be spent unwisely on unnecessary expenses.
- Research the laws: Some states have financial laws that are very beneficial for small businesses. These can often affect loan rates and lending practices in your area.
How Do I Evaluate What Kind of Loan I Need?
Getting a business loan is more challenging for startup companies than for established businesses, but it is still possible. New business owners can improve their odds of being approved for a small business loan by selecting the right type of financing, familiarizing themselves with their credit scores, and choosing the most competitive lending options available to them.
Many small business owners obtain financing through banks and credit unions. However, other types of business financing can help startup companies get off the ground. Common types of startup business loans are:
- Online term loans: Term loans are generally issued online by traditional lenders. They involve a bank extending a lump sum of cash to be repaid over a set period of time at a set interest rate. Annual percentage rates on the best small business loans typically start around 9%. Maximum limits typically range from $250,000 to $500,000. However, startup owners may not qualify for the highest loan amounts or the most competitive interest rates.
- Business lines of credit: When business owners obtain a business line of credit, a lender extends funds up to a certain amount. The business owner can then access the financing on an as-needed basis. Interest only accrues on the portion of the line of credit accessed on a monthly basis. The borrower can repeatedly access funds after making payments during the draw period.
- SBA 7(a) loans: The 7(a) loan program is offered by the U.S. Small Business Administration (SBA). The SBA extends business loans to eligible applicants for up to $5 million. The money can be used to cover working capital, equipment purchase, and business expansion expenses. Interest ranges on SBA 7(a) loans may range from 2.25% to 4.75%, plus a base rate.
- SBA Microloans: SBA Microloans are available to qualified business owners for up to $50,000. These types of loans are typically offered to startup companies in disadvantaged areas and to businesses owned by minorities and women. Terms of repayment may be as long as six years, with interest rates ranging from 8% to 13%, although interest rates depend on the lender.
- Asset-based financing: Asset-based financing is a form of secured business financing that lets startup owners borrow against valuable assets like machinery, equipment, inventory, accounts receivable, and real estate. Asset-based financing is typically less risky for lenders, so the financing terms are often more competitive than other loans. However, secured financing means the bank can repossess the collateral if the borrower defaults on the loan.
Should I Check My Business and Personal Credit Scores?
Yes. Lenders evaluate an applicant’s credit score to gauge the amount of risk the applicant poses. Applicants with higher credit scores are more likely to make payments on time, and therefore have higher odds of being approved. Business credit scores are typically not available until after six months to one year of operations, so new businesses may not have one, especially if the startup company is brand new.
Loans are usually personally guaranteed, meaning the borrower legally agrees to repay the debt with their personal funds if the business cannot repay it. For this reason, lenders also look at the applicant’s personal credit score.
To prepare for the application process and gauge your odds of approval, request copies of your business credit reports and check your personal credit score before you apply for a loan.
What Documents Do I Need to Gather?
Different lenders may require different documents to get a business loan. However, there are some documents that almost all lenders use to assess and verify an applicant’s identity and the business’s existence.
Lenders usually request tax returns going back at least two years. Lenders also request financial records, such as bank statements, accounts receivable, credit card history, and outstanding invoices from the past four months.
As a startup business, you can improve your odds of being approved for a loan by drafting a business plan. A business plan demonstrates to lenders that your business will be financially stable enough to repay debts based on future revenue and expense projections. Lenders may request copies of your business license and registrations, as well as banking information for direct deposits.
What is Crowdfunding?
Crowdfunding is a way that startups raise funds for their businesses without borrowing from financial institutions, friends, or family. Business owners can start crowdfunding campaigns by using online fundraising platforms like Kickstarter or Indiegogo.
Once crowdfunding campaigns are set up, users can donate funds to the business. The business owner doesn’t need to meet any traditional lending requirements, and donors don’t receive any business equity in exchange for their donation.
I’m Interested in Obtaining a Small Business Loan. Do I Need a Lawyer?
Small business loans require much planning and a basic understanding of local and state business laws. It’s in your best interests to hire a qualified small business lawyer if you need assistance with any small business matters. Your attorney can represent you in court if you need to file any legal claims involving business loans or if you have a legal dispute that you need to settle.
