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Every business is different so there can’t be a one size fits all loan for all businesses. It’s impractical and it just plainly wouldn’t work. Before you start sending off applications to various vendors, do your due diligence on the different types of loans for small businesses available to you.
Qualifying for a business loan can be very difficult and if you have less than stellar credit, you may be able to qualify for a loan through the Small Business Association (SBA). While the SBA does not issue loans, they underwrite a percentage of term loans & lines of credit through private banking institutions. This is to encourage lenders to offer loans they otherwise wouldn’t. These loans will typically have very competitive rates and if you’re a veteran, woman, or a minority, you’ll have a higher likelihood of being approved than the average borrower.
These are your standard loan. Much like a car loan or a mortgage, you’re approved for a lump sum which is then paid off in equal monthly installments until it’s paid in full. The length of the term (and the interest rate) will vary based on the amount borrowed. Shorter term loans will cover items like emergency and operational costs whereas long term loans will cover equipment purchases, renovations, and so on.
A line of credit is a happy hybrid between a term loan and a credit card. Like a term loan, you’re approved for a set amount over a set time. Like a credit card, you’re able to draw up to a certain amount, repay your balance, and use your balance again and again. A great side benefit to getting a line of credit is that you’re only charged interest on the amount you’ve used instead of the total loan. This type of financing is one of the most popular with business owners because of how flexible and their ease of use.
Much like your personal credit card, you’ll be approved for a set amount and you can’t draw beyond this limit. You’ll be charged interest based on the balance used and with business credit cards, the more you use them the more rewards you’ll get. You rack up points with each purchase that can be redeemed later on for a reward of your choosing. One thing to keep in mind is that credit cards will have higher interest rates than most small business loans so you’ll want to use them sparingly and pay them off immediately. They’re typically best for day to day expenses.
While the primary factors are your personal credit profile and that of your business, lenders will aggregate dozens of other data points to determine your creditworthiness. In addition to the requirements in the next section, they’ll analyze how much you’re asking to borrow, what you’re planning on using it on, the experience of the owners, whether or not your business is profitable, and much, much more.
However, to make this whole process go more smoothly, you’ll want to make sure your ducks are in a row. Be sure to gather information about the requirements below before you start shopping around for financing.
When a potential lender is determining whether or not to approve you for a business loan, they have a slew of data points and criteria to cover. These aren’t $1,000 short term loans they’re handing out. They’re lending tens, hundreds, and sometimes millions of dollars at a time. They’re going to do their due diligence to guarantee that if they fund your loan that they’ll get paid back in full with interest.
Every business lives and dies by their financials. Having up to date and accurate books is one of the most important parts of running a business. Lenders know this which is why they want to peek at your books to make sure you’re running a profitable business. Lenders will require that you give them access to your business loan / credit history, bank accounts, taxes, and other pertinent financial information.
Equally as important as your financials is how you run your business and what your long term plans are for the company. You’ll need to bring a business plan with details regarding your product / service, target market, staffing, revenue projections, and more. The idea here is to prove to potential lenders that you are operating a legitimate, successful business rather than a fly-by-night hobby or fad.
Your personal financials are just as important as your business’s. When you apply to get a loan for your small business, you’ll most likely need to provide a complete financial summary including your assets and liabilities. This information is important for potential lenders to review, but it doesn’t weigh as heavily as your business plan and business financials.
The main reason why people take out loans to finance their business is so they can secure funding without handing over an ownership percentage to an outside investor. This lets your company stay your company while gaining an influx of capital to take it to the next level. Some of the common ways small businesses use their loans are:
Chance are good that if a financial institution offers loans, they have a division dedicated to small businesses and the good news is that it’s a borrower’s market. There are a ton of lenders offering financing for businesses of all shapes and sizes so you can pick the best of the bunch. However, the types of loans offered and their approval criteria will vary from vendor to vendor so you’ll want to do your due diligence. You can find these loans offered by traditional banks & credit unions, online lenders, and the Small Business Administration (SBA) among others.