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Whether you are launching a new business or are in expansion mode, you will need financing to fund your growth. You may be considering a loan for your business for the first time. But do you know how you can obtain a small business loan for new business? Or do you know how you can use these funds for your current business growth?
Before applying for a small business loan, you must learn everything about how it works. There are different types of small business loans available. Bear in mind that you have to pay it back with interest, so make sure you choose the type of loan that best suits your needs.
Get a small business loan for your business:
No matter at hat lifecycle your business is, you need funds. There are certain situations when sales dry out, and you are left with no option but to opt for a small business loan. Small business loans can help your business grow and help you expand it into new territories. These loans help you fund new research and development and allow you to hire new people. As a result, sales increase, and the business starts earning profits.
For those who don’t know, a small business loan is a type of financing provided by the financial institutions to purchase inventory, equipment, or manage business expenses. The lender gives you money for a specified period of time, and you have to pay it back with interest.
Now you are considering a small business loan, but you should learn everything about these loans before applying. Let’s make things easier. The following are a few steps to take in getting a small business loan:
Understand the different types of loans:
Your business needs additional funds to grow or keep its operations running. The small business loans area great help to the companies that are in dire need of cash. There are different types of small business loans available. The options vary depending on your business needs, terms of the loan, and the amount you need.
The following are different types of small business loans available:
- Invoice factoring:
Every business has its account receivable. Do you know that you can get funds against your unpaid invoices? It is a credit facility secured by the company’s account receivables (invoices). You can get cash immediately against your unpaid invoices and pay interest to the lender.
- A business line of credit:
A business line of credit works like a credit card. Your business can access funds from the lender as needed. In a business line of credit, you can get borrow an amount to a certain limit. You can withdraw money as frequently as needed within a certain limit. It is useful for managing the company’s cash flow or unexpected expenses as you get cash fast in a business line of credit.
- Equipment loan:
You can use an equipment loan to buy equipment, software, and vehicles. It typically requires a down payment of 20% of the purchase price of the equipment you have purchased. You pay interest on the loan. The loan is secured by the equipment.
- SBA business loans:
Small Business Administration is a federal agency that is helping small businesses to get funds. SBA loans are offered by banks at a low-interest rate as these loans are backed by SBA. SAB loans are the best option for small businesses, but getting these loans approved may take several weeks or even months.
Research the available lender:
You are going into debt as your business needs funds. But you cannot make a hasty decision. You should research the available lender so that you can obtain a business loan at the best rate. There are more lenders than ever before who are willing to lend money to small businesses. You can contact direct online lenders who are lending money to small businesses through a relatively easy online process.
The most traditional way is to borrow money from a commercial bank. But getting loans from a large commercial bank can take months. There are a number of sites that act as middlemen lenders and small borrowers. These peer-to-peer lending sites make decisions relatively quickly, and you get funds fast.
You can get an SBA loan as it is backed by the federal agency and a number of bank lenders issue these loans.
Make your credit score better:
The lender is giving his money to you. Though he will charge interest on that money, still he needs surety that he will be able to get his money back. The lender makes a judgment call on whether or not to make a loan based on the borrower’s credit profile. He looks at different factors to determine if he can take any action to recover his money if the borrower becomes unable to pay it.
The lender will review your credit score and history of making timely payments. So before applying for a small business loan, you should clean up the blemishes you have in your credit history. He will review your outstanding loan to determine that you will be able to pay existing loans as well as the new loan. He needs to be certain that your cash flow will be sufficient to pay your obligations.
Also, he will review the assets in the business to see if there is a good base of assets to go after if you fail to pay back the borrowed money.
Make sure your financial statements are in order:
The lender will review your financial statements and accounting records carefully. Make sure you have the following financial statements in order:
- Balance sheet
- Income and loss statement
- Cash flow statements
The lender will analyze your debt-equity ratio, account receivables, and account payables, etc. so make sure you have the answer to the questions related to these. You should provide correct and complete information in the financial statements. If there is any ambiguity in the financial statements, the chances to get the loan approved will be reduced.
Lenders prefer financial statements audited by a certified public accountant. But small businesses cannot afford the cost of auditing. Some lenders do not require either reviews or audited financial statements. So if you cannot afford the cost of the audit, you can consult these lenders who do not require audited financial statements.
Make the best loan application:
It is highly essential to be prepared and organized when applying for a small business loan. You cannot take the risk so provide all the information required by the lender.
The information lender asks for depends on the type of loan you have applied for. He may ask you to provide the following information:
- Name of the business
- Federal Tax ID
- List of executive officers and their background
- Legal structure
- Financial statements of the past two or three years
- Year to date financial for the current year
- Projected financial statements
- State filings for the company
- Copies of general liability insurance policies
- Loan amount requested
- Business credit report
- Potential collateral available
- Financial statements of the principal shareholder
- Executive summary
- Business plan
- The tax returns for the past two to three years
- Business bank statements
How are you going to use the borrowed money?
The lender is highly interested to know how much money you need and how you are going to use that money. Are you borrowing money to make payrolls or pay building rent? Do you need money to purchase new equipment? If you are planning to start a new business, then you have to make a good business plan specifying your missions and goals. It will help the lender determine whether or not you will be able to pay his money back.
Determine what security you can provide:
The lender’s primary concern is about the business’s ability to repay the loan. He wants to as reduce the risk as possible. You should determine what security or grantee can be provided to secure a loan. In a secured loan, you have to pay a low-interest rate. Some lenders insist you to provide the personal guarantee, but you should try to avoid it as it puts your personal assets at risk. When you provide your assets as collateral, the lender has the right to go after them if you do not repay the loan on time.
Analyze the terms of the loan:
You are going into debt because your business needs funds. But you should analyze the key terms of the proposed loan to determine whether it makes sense for your business to get a loan or not. Compare the terms available from alternative lenders to obtain a loan at the best interest rates.
You should ask the lender what the interest rate is and how it can vary over time. How often is the interest payable? You have to pay it monthly or weekly? Ask the lender about the originating loan fee. Also, inquire him about the underwriting fees and loan processing fees, etc.
You should also ask him about the security and collateral required. Is there any limit on how the loan proceeds can be used? Ask him about the circumstances when the lender can call a default on loan. Make sure you understand the terms of the loan completely as you do not want to end up closing your business.
Review the online profile:
Small businesses need to perform due diligence before applying for a small business loan. They need to review their online profile to make sure everything is in order. Make changes if necessary. Your website should be up-to-date and professional looking. Do not forget to review the Yelp reviews your business has received. Review your presence on social media sites.
The benefits of small business loans:
Getting a small business loan can help businesses get off the ground. But the process of applying for a small business loan can be daunting. You have to pay attention to even minor details to reduce the chances of getting the loan application rejected. A lender’s primary concern is whether you will be able to repay the loan or not. You have to assure him that you will be paying the borrowed money within the specified period.
Once your loan application is approved, and you receive the money, you can get the following advantages:
- You can use the borrowed money to purchase equipment such as software and vehicles etc.
- You can use the loan to manage business expenses. Sometimes it becomes difficult to manage the business expenses. For instance, the coronavirus outbreak has affected small businesses, and they are facing issues in managing expenses. In this situation, small business loans can help them manage their expenses.
- Small businesses can use these funds to make payroll if they are facing trouble paying the employee salaries.
- You can obtain a small business loan if you are planning to expand or upgrade your business.
- Small business loans are helpful in managing cash flows.
- You can use these funds to acquire new business.
Indeed small business loans are a great help to entrepreneurs who are facing trouble managing their business expenses. You cannot earn profits all the time. In certain situations, your sales dry out, and you need additional funds to keep the business operations running.
Small business loan decisions rely on a business’s creditworthiness. You should make sure that you have a good credit score to get the loan approved. Your business should be able to generate revenues so that you can repay the loan amount within the specified period.
Before applying for a small business loan, you need to understand the difference between a secure and unsecured loan. In a secured loan, you put an asset as collateral. In case you fail to repay the loan, the lender has the right to come after that asset. The benefit of a secured loan is that you have to pay a low-interest rate.
In an unsecured loan, you do not keep anything as collateral. You obtain an unsecured loan at a high-interest rate.
If you need additional funds for your small business, consider applying for a small business loan.