When to Secure a Small Business Loan
Although there are multiple scenarios in which people use money from a small business loan, the following are a few examples:
- Inventory – whether you’re opening a new business or expanding an existing one, you could use a small business loan to purchase inventory. In fact, replenishing stock, handling seasonal demands and trying new products are the most common of all reasons to take out this loan
- Equipment – the same goes for buying equipment. Especially when it comes to more expensive equipment, small business loans are an ideal solution
- Operating expenses – even if you just need help paying for day-to-day expenses to ensure your company remains operational, you could select a small business loan
- Marketing – to grow your business, marketing is essential. However, the cost of mailers, special events, paid media and so on quickly adds up. With the right small business loan, you can market your company more efficiently. In no time, your efforts will offset the amount of borrowed money
- Consolidation – if you have several outstanding bills, you might consider consolidating them into one loan. Not only does that make the monthly payments easier to manage, but you’ll also spend less in interest
Types of Small Business Loans
As mentioned, there are several different types of small business loans, all advantageous. Keep in mind that some of these business loans also work for larger and more established organizations.
- Term – with a term loan, you can purchase high-end items and pay the balance over an extended period. Typically, this type of small business loan is perfect for larger equipment and machinery, as well as construction for expanding your brick-and-mortar business
- Line of credit – in this case, a lender provides you with a revolving line of credit. If you’re struggling to meet payroll or you need to finance a project, this option solves cyclical cash flow issues
- SBA – backed by the U.S. government, you can select from different options with a low rate of interest and excellent terms
- Commercial real estate – when buying commercial property, this is the type of loan to consider
- Peer-to-peer – for general working capital, a peer-to-peer loan is ideal, especially if you can’t qualify with a traditional lender and want a lower interest rate than what most online lenders offer
- Personal – this is also a solution for general working capital. Since the qualifying criteria aren’t very stringent, it’s great for start-ups
- Invoice factoring – again, if you can’t qualify for a line of credit or more traditional loan, and if you struggle to get outstanding customer invoices paid on time, this loan helps alleviate problems with long sales cycles
Your best option is a Small Business Administration
(SBA) loan. Under this umbrella are several different types of small business loans, giving you more diversity. Although these small business loans come from lenders that partner with the SBA, the government backs them by as much as 85%. The Small Business Administration also determines where to cap the interest rate, making these loans extremely affordable for smaller companies.
Although most SBA loans are “term,” you’ll also find that some lenders offer loans specifically designed for veterans, women business owners, and real estate purchases. With government backing, there’s less risk to lenders, making qualification easier compared to a more traditional type of loan.
The three primary types of SBA loans include a 7(a), 504 CDC, and a micro-loan.
Structured similarly to a traditional term loan, you can use an SBA 7(a) for high-dollar business-related expenditures. Along with a repayment schedule between 7 and 25 years, companies can borrow up to $5 million.
504 CDC Loan
A 504 CDC (community development corporation) is for fixed assets, meaning they’re exclusively for purchasing equipment, commercial real estate, land and so on. If you need to finance any non-working capital, this loan has no maximum borrowing amount and it offers a repayment schedule between 10 and 25 years.
Although intended for smaller businesses, your company would need some history behind it before a lender will approve you for a micro-loan. However, once approved, you can borrow up to $50,000 to use for a variety of business-related expenses. This loan also has a repayment schedule of up to six years. One caveat: to qualify, you must have excellent credit.
Qualifying for a Small Business Loan
Typically, lenders of all small business loans look at personal credit history, cash reserve, debt-to-income ratio, the age of the company, annual revenue, and the quality of the business plan. However, various lenders also have qualifying criteria that are unique to them. Therefore, if you’re interested in securing a small business loan, it’s worthwhile to compare different lenders before deciding on one.
When it comes to qualifying for a small business loan, you’ll discover that going through a traditional bank or credit union is the most challenging. You could consider online lenders, which are less restrictive, but you should anticipate paying a higher interest rate along with fees.
For an SBA loan, you must operate a for-profit organization, own and
operate your company in the United States, and have equity in the business. The good news is that other than micro-loans, there aren’t any strict rules regarding revenue, the length of time you’ve had your business, or your credit score
No matter your credit score, there are companies that can help you find a loan. Some examples of these companies are OppLoans
and The Loan Exchange
. By filling out simple information, they can determine the best loan options for you.
Know the Loan Details
Whether you secure a small business loan through a bank, credit union, or the SBA, it’s imperative that you understand all your contractual obligations. Sometimes, reading the fine print becomes overwhelming. If you don’t understand something, ask. For a more significant loan, you might want a business attorney to look over the contract on your behalf.
For any loan, know the interest rate you’re required to pay. As part of that, determine if the rate remains the same throughout the life of the loan or if it will change at some point, and if so, to what. You also need to understand the terms, such as the amount of monthly payment, the payoff schedule, and if you’ll have to pay a penalty for paying off the loan before the contract specifies.
Get Financial Help When Needed
Instead of becoming a statistic of failed business, consider what a small business loan can do for you and your company. With so many positive aspects, you should start by researching the different types of SBA loans and from there, see what your bank or credit union offers.