If your business needs a quick influx of cash, small business loans are the best option for you. From traditional to alternative lending options, there are a ton of ways you can get quick funding for your small business needs. A business loan will help you achieve the funds you need for business-related purposes, such as expanding your business, investing in new equipment, hiring additional staff, or launching a new product or service.
What Can a Small Business Loan Do for You?
A small business loan can help in numerous areas. Some notable purposes for small business loans include the following:
- Funding for new research and development opportunities
- Enter other business ventures
- Boost or improve your sales and marketing strategy.
- Pay unexpected costs.
Key Tips When Getting a Small Business Loan
Before you can get funding from a small business loan company, it’s important to know the steps to apply for a loan and what to do to get immediate approval. Here are the five key steps to consider when you are thinking about applying for a business loan.
Get to Know the Various Types of Small Business Loans
There are different types of small business loans available. Each type varies on the following factors:
Your business needs.
The length of the loan you applied for.
The terms and conditions and the policy of the loan.
To give you a general idea of what these small business loans are, here are some of the notable choices that are currently available:
Small Business Line of Credit
This type of small business loan offers the necessary funds that you need from the lender. However, unlike other types of loans, a line of credit has a hard cap on the number of funds you’ll get. For instance, you will only be granted a loan for as much as $150,000.00.
Line of credit loans are great for managing and maintaining a company’s cash flow, especially in the event of unexpected expenditures. Setting up the line of credit will require a payment fee. However, you won’t get charged with interest until you withdraw the funds.
The interest is usually a per-month payment, with the principal often amortized in a set number of years. The majority of small business line of credit loans require annual renewal, which means it will need additional fees. If the line of credit isn’t renewed, you’ll be required to pay your loan in full.
Accounts Receivable Financing
Accounts receivable financing will allow you to acquire funds depending on the state of your company’s accounts receivable (AR), as well as the interest rate being variable. The accounts receivable line is paid down as your company’s accounts receivable are paid by your customers.
Working Capital Loans
This debt-borrowing method is commonly used by companies in financing their daily business operations. Working capital loans are essential for managing sudden fluctuation in a company’s revenues and expenses. It can be due to any reason (e.g., seasonality). To be granted a working capital loan, companies with low credit scores will need to add collateral for the loan or provide a personal guarantee.
A working capital loan tends to be a shorter-term loan of either a month or one year. For small businesses, this loan typically varies from $5,000 to $150,000.
SBA Small Business Loans
Some banks offer low-interest-rate loans to small businesses or people who are looking to start a small business. These banks are backed by the United States Small Business Association (SBA). Because of this, they can offer low-interest loans and favorable repayment terms to small business owners.
In terms of the acceptable loan amounts, SBA-backed small business loan companies can offer a basic $30,000 and go as high as $5 million. The downside of SBA small business loans is the time-consuming procedure that you’ll need to go through. If you’re in dire need of quick cash, this type of loan may not be for you. For more information about this type of SB loan, visit the official website of the SBA.
Equipment Small Business Loans
If your small business is in need of an equipment upgrade, you can get the funds you need via a small business equipment loan. Also referred to as an equipment lease, this type of loan requires a 20 percent down payment of the equipment purchase price, with the loan secured by the equipment. Loan interest is paid every month, with the principal amortized over 2 to 3 years.
Some lending companies even offer up to four years. For loan amounts, an equipment loan can normally range from $5,000 to $500,000. Interests can accumulate at a fixed or variable rate.
Small Business Term Loans
Term loans are usually granted for a set dollar amount (e.g., $300,000). It’s typically used for running business operations, capital expenditures, or business expansion. Like most small business loans, the interest for a small business term loan is paid monthly. The principal, on the other hand, is usually repayable within 6 months and 3 years. It can be amortized over the term of the loan or have a balloon payment at the tail end of its repayment period.
A small business term loan can either be secured or unsecured, with the interest being fixed or variable. It’s ideal for small businesses that need quick cash flow for expansion or large, one-time expenditures.
Small Business Credit Cards
While it’s not as practical as the other types of small business loans, credit cards can also act as a short-term small business financing option. The interest rate will depend on the terms of the credit card issuer, the amount that’s directly available on the card, and the cardholder’s overall creditworthiness.
A lot of small business credit card companies require the principal owner to be co-liable with the company. Some notable small business credit card issuers include the following names:
- American Express
- Bank of America
- JPMorgan Chase Bank
- United Club
- Wyndham Rewards
Many credit cards offer attractive 0% promotional introductory rates for a short period of six to nine months. Cashback and rewards programs allow you to earn rewards from purchases on the credit card that you have or planning to get.
Research Available Lenders
With more and more small businesses in search of quick funding, there have been more lenders in the past decade than ever before. These lenders are willing to lend their money to small business owners, offering various types of loans that are immediately available once a business qualifies for it.
You can find most of these lenders online via a simple Google search. To give you an idea of which lender to go for, here are the main types of lenders you should consider:
Direct online lenders
There is a tone of online lenders that offer small business loans through a relatively easy process. Notable direct online lenders like Swift Capital provide quick and easy small business cash advances, short-term loans, and working capital loans. Amounts can range from $5,000 to $500,000. Websites such as LendingTree and Fundera offer you immediate access to multiple lenders. These websites act as a lead generation service for lenders, which is ideal if you’re in search of credible lending companies online.
Local community banks
Many community banks are also offering small business loans to help start-ups and newly established businesses take the next leap sooner than later. However, keep in mind that your business needs to be local; otherwise, the local community bank won’t approve your small business loan.
SBA-backed bank lenders
Several bank lenders issue loans that are supported and guaranteed by the U.S. Small Business Association. As noted above, this backing will allow lenders to offer more attractive terms than favor small businesses.
Peer-to-peer lending websites
There are a number of sites that function as the middlemen between individual/institutional lenders and small business borrowers. These sites will help you find the ideal lender that offers favorable terms for you. Notable sites include FundingCircle, LendingClub, and Prosper. Online lenders can make quick decisions, that way you can move on to the next if the one you chose doesn’t meet your expectations.
Predict How the Lender Views Your Credit and Risk Profile
While there are a ton of lending options available, keep in mind that the chances of you getting a grant will depend on your credit and risk profile. Lenders will make their decision by looking at the following factors:
- Credit score/credit report – lenders will investigate your past and recent credit report, credit score, and record of timely payments under loans, credit cards, and vendor contracts. Make sure you review your credit report first and fix any blemishes that you can find.
- Cash flow and outstanding loans – some lenders won’t grant you a loan if you still have an active one that needs settling. They will review your outstanding loans and debts to determine if your cash flow will be sufficient to pay the existing ones, as well as the new loan you are applying for.
- Business Assets – lenders will also review the assets in the business to see if there’s a good asset base to go after in case of loan default. These assets include current ones such as accounts receivable and on-hand cash.
- Length of Business – lenders will favor businesses that have been operating for several years as opposed to newly established ones.
- Company Investors – lenders will view the company as favorable for a loan if it has professional venture capital investors, prominent angel investors, or strategic investors.
- Financial Statements – finally, lenders will also view and scrutinize your financials.
Organize Your Financial Statements
As was just stated, your financial statement will also have an impact on you getting loan approval from your chosen lender. Depending on the amount that you’re going to loan, your financial statement and accounts records will be reviewed carefully. Make sure these areas are complete, accurate, and thorough. Review your balance sheets, income and loss statements, and cash flow statements.
The lender will analyze your cash flow, debt-to-equity ratio, gross margin, accounts payable and accounts receivable, and earnings before interest, taxes, depreciation, and amortization (EBITDA). Be prepared to answer questions related to these topics. Have your accountant (if you have one) look over your financial statements and anticipate potential issues that the lender may raise.
The majority of lenders prefer CPA-audited financial statements. As a small business owner, you might not want to incur audit costs from certified public accounting. One alternative option you can have is to have your financial statement reviewed by a CPA. It’s cheaper and faster than getting a full audit. However, keep in mind that some lending companies may not require either audited or reviewed statements; so, keep an eye on these types of lenders.
Gather Detailed Information for Your SB Loan Application
If you want a successful small business loan application, make sure you prepare to provide detailed information and documents detailing your business. It’s important to be prepared, thorough and organized when applying for a small business loan. Here’s a list of the type of information that’s often required when applying for a loan:
- Business name (trade name; including any DBAs)
- Federal Tax Identification
- List of executive officers and their individual background
- Legal structure (e.g., LLC, or S- or C-Corporation)
- Financial statements for the past two to three years, including year-to-date financials for the current year (income and loss statements, balance sheets, shareholder equity, cash flow statements, etc.)
- Projected financial statements (important if the lender wants to get an idea of your expected future operations and cash flow).
- State filings for the company (e.g., Certificate of Incorporation, good standing certificates, and foreign corporation filings).
- Amount of loan requested
- Copies of key man and general liability insurance policies.
- Business credit report from a credit-reporting agency.
- Potential collateral available for the loan.
- Business plan, Executive Summary, Deck of the company, or Investor Pitch Deck of the company.
- Financial statements of the owner of the business (principal shareholder); (these documents are necessary in the even where a personal guarantee is required.
- Business bank statements
- Company tax returns for the past 2-3 years (signed copies with exhibits and attachments).
There are a ton of steps and procedures that you’ll need to go through to get a small business loan approval. By following these top five tips, you will get the highest chance of getting approval from your chosen lender. Before you even think of getting a small business loan, make sure you do thorough research and understand the perks and consequences that come with it.
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