Do You Know What It Takes to Get a Small Business Loan?

Getting the funding you need for your business is crucial. However, do you know what it takes to get a small business loan? We’ll tell you how in our latest article.

It seems like small businesses have the odds stacked against them. For loans, small business owners faced with the daunting lending processes, searching for ones that will fit their businesses’ specific needs. 

Lenders are wary of small businesses because chances are they’re seeking loans because they’re just starting out, getting established and need funding to anchor their roots with working capital. Lenders see this as a risk and know that cash flow will be restricted among other obstacles particular to a small business, making them unwilling to hand out loans.

As a small business owner, getting a loan for your company can be broken down into four achievable steps.

  1. Determine the goal of your loan-to-be. What do you plan on using the funds for? Small businesses often acquire small business loans for inventory needs, payroll, equipment financing or to fulfill cash flow gaps with additional capital. Calculate how much debt your small business will be able to handle if you get a loan.

  2. Now that you’ve analyzed your company’s immediate needs, it’s time to find the right loan and the right lender to provide it. Look for factors outside of interest rates like flexible terms, a good relationship with a lender and avoid loans designed to entrap borrowers in cycles of debt. 

  3. Take a look at your credit standing to see how you will qualify against loans and with certain lenders. Higher credit scores and healthy credit reports and histories will be able to acquire lower interest rates, thus giving these small business owners an advantage in the lending arena. If you’re starting out and have a low credit score, this could limit your options. Knowing where you stand credit-wise before you apply will save you time and money.

  4. Different lenders require different documentation. Know what you’ll need for each one and gather your materials to apply. Some lenders will take weeks to get back to you, but others are quick with their loan processes. Understand where each lender stands so you know what to expect before going in.

The Nitty-Gritty of Small Business Loans:

Lenders

Small business loans don’t grow on trees, but you can obtain them from several different types of lenders. There are banks, nonprofit micro-lenders, online lenders, credit unions and more. 

It’s recommended that you seek out a bank, which is a traditional means of financing when your small business doesn’t require funding quickly and you can provide collateral. As a small business owner, you’re going to need good credit if you choose to go with a bank as your lender, too. Banks don’t like risks, and so they want their borrowers to have a trustworthy credit background guaranteed by collateral. 

It’s through banks that the U.S. Small Business Administration provides small business loans (SBA loans) through its 7(a) loan program. Small businesses have a harder time getting loans, but through the SBA, they have a fighting chance. The risk is lessened when a bank is involved with the SBA in this type of loan, and so the financial institution is encouraged to lend to small businesses. An SBA loan is a definite, viable option if you’re just starting out.  You can find out more information on their official website.

Micro-lenders are nonprofits that specialize in short-term loans. These loans are less than $35,000 and the APR is typically higher in comparison to a conventional bank loan. However, if your company is very small, this could be the lender for you.  A micro-lender may be able to overlook a history of poor credit or lack of collateral.

Online lenders also provide small business loans, lines of credit and other lending solutions, just the same as banks and financial institutions. The average APR for an online lender ranges from 7% to upwards of 100%. It depends on a variety of factors. However, the size and type of the loan, the lender, your credit history, if collateral is required for the loan and the longevity of the repayment term. The advantage with online banks is that their approval process is often much faster than that of banks, and with many virtual lenders, there’s more flexibility and less stringent requirements to obtain a loan.

Loans

Just as there are numerous types of lenders, there are also numerous types of loans. The two most popular types of small business loans are lines of credit and term loans.

There’s an SBA loan, and as previously discussed, the U.S. Small Business Association backs this loan. These loans offer low interest rates are more easily obtainable for small businesses, giving them the head start they may need to get their growing businesses off the ground.

A term loan is upfront funding paid back over a fixed period. Term lengths can vary and lenders can be flexible on how long the payback period is, allowing small businesses some leeway with their capital and finances. Term loans are best for long-term growth and they don’t cause detriment to a small business’s debt.

A line of credit is capital that’s available to a small business when it’s needed. For business owners with a poor credit history, a line of credit is still a feasible option and can be a great way to increase their credit scores. Like other loans, you may have higher rates if you are strapped with a lower credit score and a line of credit may require collateral. However, you’ll only pay interest on the funds you draw against the line of credit, using what you’ll only need.

There are other types of loans like accounts receivable financing, where you can obtain cash in exchange for your customers’ unpaid and outstanding invoices. Invoice financing keeps the cash flow uninterrupted all while taking care of unpaid invoices. If your small business has a majority of credit card or debit card sales, then a merchant cash advance could be beneficial as it is a cash advance on these sales, but be wary of high borrowing costs.

If your small business is interested in purchasing new equipment, there are equipment loans you can procure.  Equipment financing can allow a small company to buy new or used equipment upfront, paying back the lender with fixed, monthly payments at low interest rates. This is an affordable option for small companies looking to build assets and maximize their efficiency and productivity.

Qualifications

As you can see, there are a lot of different types of loans and lenders out there that cater to small businesses. Your qualifications vary with each one as the requirements differ. 

In the early stages of seeking out a loan, use tools like an online loan calculator to calculate what your company can afford in terms of a lending solution. Know your business’ revenue and run the numbers against the potential loan’s interest rate, term, and monthly payment. Learn your Debt Service Coverage Ratio to determine if you can afford to pay back a loan.

The Bottom Line

Knowing what it takes to get a small business loan is central to knowing your own company, its revenue, assets, your credit background, its cash flow and, of course, its needs. From there, it’s like shopping for a car.  It may take some time to find the right fit, but once the numbers align, your business will have wind in its sails.