For many small businesses, gaining access to capital is vital to their success. Getting a small business loan will allow you to get the money you need to keep your business running. There are many types of loans available, and understanding how small business loans work will help you to secure the best one for your business.
Securing a Small Business Loan is No Easy Feat
Small business loans are some of the hardest forms of credit to obtain. This is because lenders know there are myriad factors that can affect your business, and any one of those factors could mean that you are unable to repay the loan. If your business is new, it has not been tested in the industry, and the lender has no history to use for comparison.
If you are looking for a small business loan, the lender may ask for you to use collateral to secure the loan. Some business owners use their delivery trucks, screen printing machines or heavy equipment as collateral. This may also mean using your personal finances, home or other sources of credit to get approved.
Types of Small Business Loans
Small Business Administration Loans (SBA)
SBA loans are backed by the government, and are designed to provide capital to business that otherwise not have access to funds through traditional lenders. The SBA does not loan directly to the business. Instead they provide security to lending partners that want to work with small businesses. The SBA guarantees payment to the lender, by assuring that it will pay 75-90 percent of the loan if the borrower defaults.
This makes it more likely that a lender will grant the loan because of the reduced risk. The downside of the SBA loan is that the process for getting approved can be cumbersome. There is a lengthy application, and it can take weeks for an approval. The SBA loan is not recommended for businesses that need an immediate cash infusion for emergencies or fleeting opportunities. There are also additional fees associated with SBA loans that make them slightly less attractive to borrowers.
Most business owners who apply for funds simply go to a bank and request a loan. Conventional bank loans differ from SBA loans in that they are not backed by a government guaranty. The benefit of conventional loans, however, is that businesses have more leeway in deciding how they can use the funds. Conventional lenders offer a quick approval process that allows you to have cash in hand in days instead of weeks.
The major downside of conventional loans is that they are difficult to get. Conventional lenders reject more than 80 percent of applicants, and usually only approve borrowers with stellar credit, high value assets and a strong history of sales. These loans tend to have shorter repayment terms than SBA loans as well.
Alternative Business Loans
Alternative loans are excellent for businesses that don’t have a proven history of sales, have less than perfect credit, and want cash for a variety of reasons. They have less stringent restrictions on how the money can be used, and business owners can ask for small amounts of cash. Alternative lenders often offer short online applications, and approval can take a matter of minutes or hours instead of days or weeks.
Alternative loans often carry high interest rates, as lenders are working with borrowers who may not have the ability to repay the loans. Alternative lenders often charge interest rates that are more than double that of conventional loans. In some states, there is no cap on the interest rates that alternative lenders can charge borrowers for a small business loan.
Specific Intent Loans
Some borrowers seek loans for general use, while others seek them for specific purposes. There are equipment loans, working capital loans, franchise loans and professional practice loans. Borrowers will find that small business loans for specific purposes are often easier to obtain and have flexible repayment terms that make them attractive to small business owners.
Maximizing Your Chances of Approval
If you can think like a lender, you’re more likely to get approved for your small business loan. You will need to do a bit of work to convince the lender that he should take the risk of lending to you. This means having an application that makes your company look creditworthy. List your sources of collateral, show positive cash flow and a thriving business. The best way to get the money is to appear as though you don’t need it. If lenders see that your business is struggling to stay afloat, they will be less likely to extend credit to you.
Figure out exactly how much you need for your small business loan and avoid asking for too much. The more you ask for, the less likely you are to get approved.
Understand what questions lenders may ask before making a decision. They may ask:
- “How much do you need to cover your expenses each month?”
- “What sources of funding have you used in the past?”
- “Do you have any business equipment or assets that you can liquidate quickly?”
- “How do you find your customers?”
- “Why do they buy from you and not your competitor?”
- “What are your marketing strategies?”
- “How many new customers do you hope to obtain through this loan?”
It helps to know what information the lender will ask for when considering granting a loan. They may ask for:
- Financial statements;
- Personal information about the business owner;
- Profit and loss statements;
- Financial projections;
- Business licenses;
- Tax statements;
- Property leases or deeds;
- Business history;
- Marketing plans.
Getting a small business loan can make it easier for you to grow your enterprise and enjoy higher profits for your company. Understanding what loans are available to your business and how they work is the first step in securing the capital you need. Different loans serve different business needs, so take a hard look at each source to find the right capital for your enterprise.
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