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What do you think when you hear the term small business? It is a privately owned and operated business that has a small number of employees. Very business begins its operations to earn profits, but things do not go smoothly all the time. You may need additional funds to run the operations of the current business or acquire a new one. Small business loans are for small business owners looking for funds to meet their financial needs.
But before applying for a small business loan, you need to know about what it is and how it works. You should learn everything so that you can make the best application that has more chances to get approved.
So, what are we waiting for? Let’s have a quick look at what you need to know about small business loans.
What is a small business loan?
You love the idea of being your own boss, but due to a lack of funds, you are unable to start your own business. You had a great business plan in mind; then, you should apply for a small business loan. If you choose to start your business, you realize it takes quite a bit of money. A small business loan can provide you can your venture needs.
Besides, if you are a business owner already and need additional funds to purchase inventory, equipment, make payroll or hire new staff, you need funds, and a small business loan can provide you with enough funds to do all this.
Many businesses rely on small business loans to fuel their growth. A small business loan is a type of financing provided to small companies for different purposes by various lenders.
Different types of small business loans:
Small business loans are provided to companies looking for additional funds to meet their needs. There are different types of small business loans available, and you should choose one according to your needs only:
- Account receivables financing:
If you need cash fast, then invoice factoring or account receivables financing is the right option. Every business has its account receivables, and it can use these unpaid invoices to get funds. You sell your outstanding invoices to a lender and receive an early payment for them. Since the lender takes a risk on your unpaid invoices, he provides you funds in exchange for a fee. But of course, if you need huge funds, you need to consider other types of business loans.
- A business line of credit:
A business line of credit is similar to a credit card. It allows you to borrow up to a certain limit, and you pay interest on the funds you have obtained. The advantage of a business line of credit is that you can borrow money frequently within the specified limit. You cannot go over the credit limit. This type of financing is great when you need cash to meet day to day business expenses.
- Equipment loans:
You need to replace the existing equipment or buy a new one? You can apply for an equipment loan that is specifically designed for the business to help them purchase new equipment to grow. Equipment loans require less documentation, and you get funds relatively faster. If you are a healthcare business and need to purchase an X-ray machine, then apply for a small business loan now.
- SBA loans:
What can be better than getting a guaranteed loan? SBA loans are backed by the U.S federal agency that helps entrepreneurs grow their business. Small business administration guarantees 75% of lager loans and 85% of loans that are $150,000 or less. Since these loans are guaranteed, which means if the borrower is unable to pay them back, SBA will repay these loans. Getting an SBA loan is not that easy as you have to meet certain criteria to qualify for an SBA loan.
- Working capital loans:
The businesses obtain working capital loans to finance the everyday operations of the business. You have to pay rent of the building or make payroll; you can apply for a working capital loan. In addition, you can use these funds for debt payments.
Working capital loans are short term loans and feature a small amount. Sometimes these loans are linked to your personal credit. If you do not repay them on time, your personal credit will be affected.
What is the difference between a secured loan and an unsecured loan?
As a business owner, you know how important it is to keep the business operations run smoothly. But sometimes you are left with no option other than going into debt. But before you apply for any loan, you must know the difference between a secured and unsecured loan.
A secured loan requires some type of collateral for you to qualify. You keep an asset as collateral to secure the loan and pay low-interest rates. It is common for high-risk businesses to obtain a secured loan. If the business defaults on loan, the lender has the right to seize the asset to recover his money.
An unsecured loan is the opposite of secured loans. In an unsecured loan, the business borrows money without putting an asset as collateral. To qualify for an unsecured loan, you must have a good credit history. If you have no outstanding debts and a long track of profitability, then you can qualify for unsecured loans. In this type of financing, the borrower has to pay a high rate of interest.
Where to get a small business loan?
Now you know about the different types of small business loans. It is time to learn where you can get these loans from. There are several different places you can go to get a small business loan:
- Larger commercial banks:
When it comes to obtaining a loan, people usually think that commercial banks are the only option. A commercial bank is a traditional financial institution that provides funds to businesses. Getting a small business loan from a large commercial bank can be challenging, especially when you have a bad credit score. You need to pay attention to even minor details if you want to qualify for a loan.
But when you succeed in getting a small business loan from a large commercial bank, you do not need to pay a high-interest rate. Also, they offer larger loans than other lenders, which is quite helpful when you are growing your business.
- Large community banks:
Another way to obtain a small business loan is to contact community banks. These banks are locally owned and operated. Since these banks are small than large commercial banks, they can offer you more individualized service.
Large commercial banks focus on your credit score. But these large community banks pay attention to other aspects as well. They review your entire credit report, which helps you obtain a loan even if you do not have a good credit score. But of course, you should have a solid credit history to get a loan from large community banks.
- Direct online lenders:
Gone are the days when you only had commercial banks to apply for a small business loan. Now you can get a loan from direct online lenders. They use the power of technology and algorithms, so you get funds faster.
But there are a few cons of getting a loan from an online lender. The cost of getting a loan may be high, and you will have to pay a high-interest rate. If you want cash faster and facing trouble qualifying for a loan from a bank, then you can apply for a loan to a direct online lender.
- Banks backed by SBA:
Small business administration n is the U.S federal agency that is helping small businesses to grow. It provides funds to small businesses for growth and expansion. SBA does not directly provide loans to businesses. It has bank lenders that work as an intermediary party between SBA and a borrower.
It is not easy to qualify for an SBA loan, but it is indeed worth considering. When you succeed in obtaining an SBA loan, you have to pay a lower down payment and a lower interest rate.
How to qualify for a small business loan?
You need funds to keep the business operations run smoothly or want to purchase a new franchise. You can apply for a small business loan. To get a small business loan, you have to meet certain requirements provided by the lender. The lender’s primary concern is whether or not you will be able to make payments. Once you assure him to repay the loan within the specified period, you succeed in getting the loan application approved.
Lenders will take a look at your personal or business credit score to determine whether they should lend you money or not. Your credit score indicated that you would be in the apposition to repay the back within the specified period.
Your personal credit score shows your ability to pay personal debts. Managing a good credit score is essential to get a loan. The banks do not lend you money if you have a bad credit score. A credit score of 700 or above is considered good.
You must have everything ready in your hands to apply for a small business loan. The lender may ask for certain personal information such as your financial statements and tax returns etc.
Why developing a business plan is necessary?
If you are applying for a small business loan to start a new business, you must have a strong business plan. Your business plan tells the lender how you will use the borrowed money and how it will help your business become more profitable. Since the lenders hesitate to provide funds for small companies (due to high-risk), a good business plan can help you obtain a loan.
You should include the following information while creating a business plan:
- Business description
- Product/service description
- Market analysis
- Management team
- Sales and marketing strategy
- Financial plans and projections
Your business plan specifies your goals and missions. It tells the lender how you are going to use the loan proceeds and how much revenue the business will generate. Your business plan gives the lender an idea about whether or not you will be able to pay back the borrowed money.
Is it important to know your options?
Getting a small business loan is not easy. You are going into debt, and you have to make monthly payments to pay it back. It is important to understand that you have to meet the business expenses and repay the loan at the same time, so you should know what type of small business loan is best suited for your business.
When you do complete research before applying for a loan, you become better able to things. You should not borrow the money more than what you need. Bear in mind that you will be paying interest every month so getting more amount means you will have to pay high interest.
Make it a priority to pay back your loan on time, as it is highly important to have a good credit score to obtain a loan in the future.
It’s time to apply for a small business loan:
Now you know what small business loans are and how these loans can help your business grow. Make sure you understand the small business loan interest rates and schedule of payments. Due to the coronavirus outbreak, businesses need loans to keep operations running. Small business loans are a great help for small businesses to get out of this troubling situation.
So, what are you waiting for? Your business needs additional funds? Apply for a small business loan now. You have a good credit score, and your business is generating revenues, then getting a small business loan is much easier. If you have an asset to keep as collateral, then you can obtain a loan at a low-interest rate. SBA loans are the best as you get these loans for a long period at a low-interest rate.