Small Business Loans 101
Acquiring a loan for your small business is an art. With plenty of business loan options available both online and offline, it could be tedious for a small business owner to get additional financing for their business.
Especially after the COVID-19 crisis, it has become very tough for small businesses to get financing from credible sources on flexible terms and conditions.
But it’s not all bad news.
Luckily, there are some well-trodden ways that you can follow to get the right type of loan fit for your needs.
What Exactly You Need for a Business Loan
The first step in acquiring a small business loan is to know your objectives. If you’re a startup, you may need financing to expand your operations.
Similarly, if you’re an established business, you can apply for a business loan to acquire new equipment, hire new staff, or settle your payrolls.
The next thing you may want to do is to find out different options, weigh their pros and cons, and determine how best to apply for that option.
It would be great if you invest your time and resources knowing about the approval rates and some basic industry statistics, including the major reasons for rejection, industries whose approval chances are greater than others, and why you must look for alternative options considering the fact that bank’s loan policies are quite demanding for small businesses.
Types of Loans for Small Business Owner
There are different types of small business loans that you can choose to finance your small business.
Term loans can either be short, mid-term, or long-term. This loan type is straightforward and comes with the least possible restrictions.
There are many factors that a lender will consider before approving a term loan for your small business.
Both online lenders and banks offer term loans to small business owners. Such loans can be used for a variety of different purposes, including emergency expenditures, business expansion needs, etc.
The term length varies depending on your individual financing needs. You may qualify for a 100K loan with a 6-month repayment period or a $500K loan with a 2-years term – it all depends on your business needs and qualifications.
SBA Loans are another prominent low-term and low-interest loans that are an ideal choice for small businesses with an excellent credit score.
The only disadvantage is that the application process can be quite lengthy compared to other available alternatives. If you need instant financing for your business, then this loan type might not be the right option for you.
Currently, SBA offers 3 products to small business owners, including:
SBA 7(a) Loan
SBA 7(a) loan is the most common SBA loan type that is ideal for refinancing debt, equipment financing, or ongoing working capital needs.
SBA 504 Loan
SBA 504 loan is generally used for purchasing property and equipment.
Microloans target startups that need some basic funding to get started. The maximum loan amount is $50K. The good thing about this type of loan is that there are no stringent qualifications required.
Business Lines of Credit
A Business Line of Credit, also known as LOC, comes with flexible terms. It works just like your credit card, meaning you’ll qualify for the maximum amount and can draw as much as you want from the pool of funds. The best part is you’ll only have to pay interest on the amount drawn. Simply pay back that money, and you can draw those funds again.
Invoice factoring is another short-term financing option where you use your invoices as collateral in exchange for payment. The biggest perk of using this type of financing is that you get instant cash for your business needs. Also, you do not have to chase clients for payments.
Equipment financing, as its name suggests, uses equipment as collateral against loan money. This loan type is best suited to businesses that want to take their business to the next level by investing in the latest tools and equipment without paying any cost upfront.
Merchant Cash Advances
Merchant cash advances enable small business owners to borrow money in exchange for debit/credit card sales. If your business mostly receives payments through debit or credit cards, then this type of financing could be your best possible bid.
Business Loan Type Eligibility Criteria
Before you apply for a small business loan, just ensure you know the answers to the below-listed questions:
- Q: What are my chances of approval?
- Q: How much money do I need for my business?
- Q: How urgently do I need the finances?
- Q: What rate of interest my small business can afford on loan?
- Q: What repayment schedule is most feasible for my business?
Apart from that, you must also determine the credit score requirements and your annual income. Lenders might also be interested in knowing about how long you’ve been in business.
Improve Your Credit Score
Ideally, you should make efforts to improve both your business as well as personal credit score. If you’re a startup, lenders can consider your personal score as a business score in an application.
There’s nothing much you can do to improve your credit ratings except for taking loans and making payments on time.
Finding a Suitable Lender
While you can check out random options as well, it would be better if you choose a lender who’s experienced in your area of expertise.
The type of industry you’re in also plays a critical role in determining the financing option that you need. For example, if you work in the travel & tourism industry, LOC can be your safest bid. Similarly, you can choose Accounts receivable financing if you work in the construction industry.
Getting a loan is important for the success of any small business. Make sure you start preparing your business now for future loan applications to increase your chances of approval.
All the best!