Whether you are launching a new business venture or want to expand the existing one, you need financing to fund your growth. Small business loans can provide you with cash your company needs to succeed. Many owners turn to these small business loans as a solution for capital that too without losing the equity in the company. These loans help businesses get off the ground. Companies succeed in obtaining these small business loans near me on a predefined set of terms. If you are planning to obtain a small business loan, first, you should know what it is and how it works.
What is a small business loan?
Small businesses often need financial help to turn their entrepreneurial dream into reality. Existing companies need funds to keep their business running. Not every entrepreneur has sufficient funds to start up a business. So, small business loans help businesses to purchase equipment, fund their marketing campaigns, etc.
In simple words, small business loans are a type of financing provided to current or aspiring businesses to start a new small business or bring money into an existing business. The local banks are a viable option for businesses to obtain small business finances. As a matter of fact, there are more small business loan options available today than ever before.
Types of small business loans:
If you are planning to launch a new venture or want to bring funds into the existing business, you may need a small business loan. But before applying for the loan, you should be aware of the types of small business loans available.
- The small business line of credit:
The first type we are going to discuss here is the small business line of credit. It is similar to a credit card. You can borrow money up to a certain limit. You pay an amount of interest on the money you have borrowed. Within the predefined limit, you can withdraw funds and repay them as often as you need.
- Working capital loans:
The companies, to finance their everyday operations, obtain working capital loans. These loans are not acquired to purchase equipment or make an investment; in fact, these loans are used to pay rent, debt payments, payroll, etc. Since these loans are short term loans, they feature lower amounts. Sometimes these loans are linked to your personal credit, so it is highly important to repay them on time.
- Account receivable financing:
It involves selling your outstanding invoices to a lender in order to get some cash. The lender takes a risk on your receivables and provides you with cash. In factoring, the lender provides you with cash in exchange for a fee.
- Equipment loans:
As the name signifies, the equipment loan enables companies to purchase new equipment or replace the existing one. The advantage of an equipment loan is that you receive cash quickly compared to other types of small business loans. Also, there is less documentation required.
- SBA small business loans:
SBA stands for small business administration, which is a federal agency that helps businesses grow. The US Small Business Administration guarantees SBA small business loans. These loans are guaranteed, which means if you are unable to repay the loan amount, SBA will pay out the guaranteed amount. Since the SBA loans are guaranteed, it is not easy to obtain them.
How do small business loans work?
As an entrepreneur, you understand that the businesses do not always have the cash to run operations. To run a business smoothly, you need funds, and small business loans provide businesses with cash to run their operations. Moreover, if you are planning to grow your current business or start a new venture, these loans provide you with funds to invest in your business. You can use these funds for different purposes. You can use these funds as working capital or purchase a new asset. Also, you can use these funds for renovation, real estate purchases, and business acquisitions.
When you apply for a small business loan, the lender assesses your business eligibility. For this, he takes into account various factors such as:
- The available collateral
- Your character
- Cash flow
- Condition of the business
It is highly important to repay the borrowed amount within the specified period. There are different types of small business loans available as described above; you should choose one according to your business needs.
Who is eligible for the loan?
Anyone can apply for a small business loan but bear in mind that the approval depends on many factors. The lender is lending you money, so he has the right to determine if you will be able to pay it back. Requirements to apply for a loan may vary depending on the lender. However, the following are a few general guidelines you must meet to become eligible to apply for the loan:
- You must own a small business, or you must have a plan to launch a new business.
- You should be 18 years old or above at the time of applying for the loan.
- Your business must be in an approved industry. There should be nothing illegal.
- You should have the verification that your company exists.
- If you are about to start a new company, you should have verification that it is in the launching process.
- You should be able to meet the credit requirements.
- Your business must have eligibility to generate profits.
How to qualify for a business loan?
You are in dire need of cash to run your business. Well, there are several financing options for small businesses, such as small business loans. But you would not be able to get money immediately after applying for a loan. The process of qualifying for a small business loan involves a few steps that are discussed below:
- Build credit scores:
The lender is giving you his money, so he has to determine whether you would be able to pay it back in time or not. He will take a look at your personal credit score to decide whether or not he should lend you money or not. Your personal credit score shows your ability to repay your personal debts. If you want to obtain a loan, you need to build your personal and business credit scores. The higher your credit score is, the less risky you are in the eyes of the lender, which means you will have more chances to get a loan.
- Know the requirements:
To increase the chances of getting the loan approved, you should understand the lender’s minimum requirements and qualifications. It is not easy to qualify for a bank or SBA approved loan, so you must be aware of the requirements to meet. Some lenders may be flexible, but most of them require buyers to meet a minimum credit score, and annual revenue. However, the requirements are less stringent if you get a loan from a direct online lender.
- Develop a business plan:
You can obtain a small business loan only when you are already running a business or planning to start a new venture. You must have a business plan. You need to tell the lender how you plan to use your money. He is interested to know what the purpose of the loan is and how it will help you become more profitable. So, develop a business plan and don’t forget to include the following information in it:
- Business description
- Product/service description
- Management team
- Market analysis
- Sales and marketing strategy
- Financial plan
Your business plan must be strong enough to convince the lender to lend you money.
- Provide collateral:
Some lenders may ask you to provide an asset to take out a small business loan. It reduces the lender’s risk and gives him the right to seize or sell the property if your business struggles, and you are unable to repay the borrowed money.
If you are unable to provide collateral or do not want to, then an unsecured business loan is the right option. In an unsecured business loan, you do not need to provide any collateral, and you get money with less favorable terms.
- Know your options:
Obtaining a small business loan can help you run your business smoothly. But it can only benefit your business when you do some research and know everything about the loans before applying for it. You should know all the options available to you and what type of loan will be suitable for your business.
How long it takes to get a loan approved?
Small business loans provide entrepreneurs an opportunity to turn their dreams into reality. You have prepared all the documents required to apply for a loan, but how long it takes to get the loan approved. Well, it can take just a few weeks or a few months, depending on the lender and the type of small business loan. If you obtain a small business loan from a bank, it can be approved in two weeks. SBA loans can take up to 90 days to approve.
What if you need cash early? If you need cash immediately to keep the business running, then you should consider the other options, such as merchant cash advance or invoice factoring etc. These options provide you funding in 24 hours, so they are much more expensive than small business loans.
What are the repayment terms for small business loans?
Small business loans are a great opportunity for businesses to expand. But they should know the terms of repayment. The lenders tend to have several things in common, so the following are some of the elements of a small business loan you are likely to see regardless of the lender you have approached:
- Short terms:
The first thing you need to bear in mind is that small business loans tend to be short-term loans. These loans range from three to five years. However, in some circumstances, these loans can range from 5 to 10 years, but these circumstances are less common.
- Fixed interest rate:
The lender is lending you his money, so he charges a fee. Most small business loans have a fixed interest rate, which means the APR will remain the same over the life of the loan. Now you may be thinking why the interest rate is fixed in these loans. Well, small business loans are short-term loans, and fixed interest rate makes it easy to repay the loan. The variable interest rate can fluctuate the market. So, the rate of interest is fixed in small business loans.
Small business loans are commonly used to expand or start a business. These loans are used to purchase inventory or equipment ,etc. so it is far more common for a small business loan to range from $10000to $ 500000.
Small business loans are a great help for those looking for funds to turn their entrepreneur dream into reality.
They have to pay a fixed interest along with the borrowed money. If you are planning to obtain a small business loan, make sure you know everything about it. It will help you develop a great business plan, which is very important in the loan approval.
If you fail to repay the loan amount within the specified period, the lender has the right to sell your asset (collateral). Many businesses assume that they only pay an annual interest rate, but this is not always the case. There may be any hidden fees, so you should always watch out for hidden fees. Make sure you understand your interest rate and whether it may fluctuate over time.
Also, you should know what documents you need to present to the lender for the loan approval. You must have your bank statements and financial statements ready. You should use the amount for the purpose you have obtained a loan.
The small business loan makes sense for small businesses that need cash to keep the operations running. The lender will review your documents and application to determine if you are eligible to obtain the loan. You should be committed to repaying the borrowed money within the specified time.