Many small businesses will require some extra effort to get their business operations up and running. Small business loans can help those companies receive the support necessary to get off the ground and start being productive.
You’ll find many loans for small businesses, but all of these loans are different in many ways. Rates and charges can vary, and anyone trying to get support should prove their ability to cover these costs. You’ll also have to complete a thorough application process to confirm your ability to cover a small business loan.
All small business loans are different, and you’ll require enough preparation to receive one. This guide will help you understand more about small business loans, including how they work and what you can do when you get one.
The Basics of a Small Business Loan
What Is a Small Business Loan?
As the name suggests, a small business loan is a funding source for small businesses. A company can apply for a loan from a lender, and the lender will provide a qualified client with the funds necessary for operation. The application process is often thorough because of the vast amount of money involved with such loans.
A small business can get thousands or even millions of dollars from a loan. The loan will provide a business with the money necessary for managing various operations.
The business will pay off the loan over time. The company will repay the principal and the added interest on the loan. Some other expenses may also apply, including origination and maintenance fees.
Clients often use their small business loans for managing different expenses, particularly ones relating to growing company operations. All loans are different in how they function and what you can expect, so make sure you are careful when finding a helpful choice.
Why Do Small Businesses Need Loans?
Small businesses can utilize these loans for various purposes:
- A business can use the loan to receive enough working capital to manage daily operations. These efforts include support for payroll and other functions.
- A loan can help a business acquire land or real estate for operations.
- Some loans can cover the cost of equipment and other devices necessary for company growth.
- Marketing costs can also be essential when a business starts, as a business needs to make itself more visible. A small business can use its loan funds to manage whatever marketing efforts it wants to run.
- Loans can also cover some debts to vendors and other parties.
It costs money for a small business to grow, so a small business loan will be necessary. A loan can help a expand and become more viable. Since the business will start growing and making more money, it should become easier for that to repay the loan.
What Are the Different Types of Small Business Loans?
You can find many loans for small business use, including ones that feature specific terms or qualifications. Traditional lenders like banks and credit unions can help you find many small business loans. Some online lenders and other alternative providers can also help, although the loans they might offer will vary.
Here are a few of the more common types of loans you can find:
- SBA Loans
Small Business Administration or SBA loans are available from the federal government. The SBA program offers loans to help grow small businesses. The government also backs the loan, providing a guarantee on a majority of the funds. Since the government is offering this backing, a lender will be more likely to send money to a client.
There are multiple types of SBA loans available:
- You can find a 7(a) loan with a capped interest rate and support for up to $5 million.
- A 504 loan has a fixed rate and is utilized to cover machinery repair or acquisition. This equipment financing loan is necessary for businesses aiming to acquire or maintain assets for production or operation.
- Microloans of up to $50,000 are also available through the SBA. Most microloans go to non-profit s, but startups that don’t have any assets can also qualify if they provide a detailed financial plan.
The loan you’ll utilize will vary over your situation and how much money you require. A lender that accepts SBA loans can provide further details on how you can use these loans while seeing if you can find something that works for you.
- Term Loans
A term loan is a more traditional loan available through various banks. You will borrow a certain amount of money and then provide fixed monthly payments during the life of the loan.
Most term loans are secured by various business assets. You’ll have to select the specific collateral you’ll use here to ensure your loan receives the support it needs.
- Working Capital Loans
Working capital loans are short-term loans you can use to cover various business and payroll expenses. This loan option is useful for many businesses regardless of credit ratings, but they are often more expensive than other loans. These loans also have shorter term periods, as you often have less than twelve months to pay off the loan.
- Business Line of Credit
A business line of credit is somewhat similar to a loan, but it doesn’t involve taking out all the funds in your line. You can draw from your credit line as necessary, and you will only have to pay back charges on whatever you draw from that line.
The flexible nature of a line of credit is convenient, plus you can be approved for a line worth thousands or millions of dollars. But the interest rate is often higher because a lender might not expect you to draw the entire value of that line. Some additional maintenance fees and other charges may also apply.
You can find some other financing options for your business, including merchant cash advances where you repay what you borrow through the credit and debit-based card transactions you collect. But some of the more traditional options here are better to manage, as they offer more predictable payments you can control.
Logistics and Processes for Loans For Small Businesses
How to Choose the Right Small Business Loan For Your Needs
While your small business loan can help you maintain control of your business, you’ll need to be cautious when finding one. You can ask yourself many questions when figuring out how to choose the right small business loan for your use:
- How much money do you have right now, and how much do you need to get something?
- What will you do with the money you get? Look at whether you’re going to use the money for expansion purposes, maintenance plans, or anything else of value.
- How long will it take for you to pay back the loan?
- Will you have to put up any collateral? You’ll also have to review the value of whatever collateral you’ll use.
- What is your credit score? Your score can influence what expenses you’ll spend on your loan.
- What is the current status of your business? Look at how long you’ve been in operation, and see if you are expecting an uptick in business or if there might be consistency issues.
You can use these questions to help you see what small business loan will work for you. You might find a microloan to be best if you require a small amount, while a working capital loan might be best if you need to manage some of the equipment in your workplace. You can also talk with a lender for further help if you’re uncertain about what type of small business loan will benefit you the most.
The Application Process for Small Business Loans
One problem many people have when finding loans involves the application process. But while you will require lots of info to complete the application, the process will be worthwhile when managed right.
You can apply for a small business loan with a few steps:
- Figure out which loan your business requires. Look at whether you need an SBA loan, microloan, or anything else of value.
- Review your credit score, revenue streams, and how long you’ve been in business. A lender might make a decision on your loan based on these factors.
- Review the approximate cost of a loan before applying with someone. Various online loan calculators can help you check how much you might spend in interest or on monthly payments.
- Prepare the necessary information for your loan, including details on your business, financial statements, and info on your business owners. You can also include details on any guarantees or collateral as necessary.
- You can submit these details to your lender.
- The lender will provide information on your loan based on its interest rate, the term for the loan, and any additional fees and terms. The timing for when you’ll get your terms will vary, with some lenders offering information in a few days or weeks.
- After reviewing the terms, you can agree to the loan.
- You’ll receive the funds in your loan after you provide details on your bank account where the money will go.
The timing for when you’ll get your small business loan will vary. Online lenders often offer loans in hours, while traditional lenders might take a few days or weeks for you to get there.
Be sure you complete all the steps for your application as needed. You could be rejected if you don’t complete all the steps as necessary. Some lenders might still contact you and ask for further info on your finances and other factors if your application isn’t complete, but this won’t be the case for all of them.
The Pros and Cons of Loans for Small Businesses
Pros
- You’ll have more control over your business operations after you acquire a small business loan.
- It’s easier to get funds from a small business loan than if you tried looking for venture capitalists or other funding options. Regardless of whether it takes days or weeks, you can get your funds faster than those other options.
- The interest rate for a loan can vary, but it will be lower than the rate for a credit card. It will be easier for you to pay off a loan than if you had a credit card.
- Some small business loans can include flexible terms, including adjustable rates and the option to pay off the loan early. Check the terms of your loan to see what you can do.
- Your business can build a stronger credit rating as you continue paying off the loan.
- You can find loans regardless of your credit history. Many lenders will offer loans for businesses that are starting up, including ones that don’t have much of a credit history.
- Startup business loans are also available for businesses that are newer. These loans can include minimal values, which is necessary for s that haven’t gotten any revenue yet.
Cons
- Not all businesses will be eligible for a small business loan. Each lender has different criteria for who can get a loan, and not all places will be flexible.
- You’ll be subject to a strict repayment plan where you have to pay a certain amount every week or month. While some loans let you provide additional payments, you’ll still have to complete these payments on schedule.
- Early repayment fees may apply to some loans. You’d have to review what it would cost to pay off a loan early versus how much you’ll spend paying off the loan as usual.
- Various fees can apply to a loan, including maintenance and origination fees, plus late payment fees can appear if you don’t handle everything on time.
- The application process is frustrating, as you’ve got to bring in several different documents to make the application work.
How to Repay a Small Business Loan
You’ll have to repay your small business loan by providing routine payments to your lender. Sometimes you might get a few months before your first payment to get time to make more money to help you afford those payments.
The most common way to repay your loan is through the bank account where you received the loan. You can wire regular payments to your lender through that account. Many lenders will let you review your loan status online. You could also add new payments through that online platform, although the terms for what you can do here will vary by lender.
A Final Note – Tips For Getting Approved For a Small Business Loan
You’ll find many options for small business loans when you look around online. But be sure to watch how you apply for your loan, as not all lenders will support your needs.
There are a few tips you can use to get a small business loan:
- Think about what the lender is considering when looking at your loan situation. Look at what a lender might see in a prospective borrower, and see if you meet those needs a lender might hold.
- Look at how much money you require in your loan. Keep from trying to borrow more money than you require. It’s easier to get approved for a loan when you keep the value down.
- While you can go online to find a lender if you’re constantly being rejected by traditional lenders, an online provider might still charge more. Since that online party’s standards are lenient, you can expect to spend more.
- Check all fees for a loan, and add them together to figure out what you’d spend. Sometimes those fees might total a few percentage points of whatever you’re borrowing.
- You could use collateral for your loan to improve your chances of being accepted, but you might still encounter problems if you can’t pay off the loan. Review the value of the collateral you’ll use, and find a backup plan for what to do if you have to surrender that collateral.
- Having an outside party cosign the loan can increase your chances of being accepted. But make sure when doing this that the party is capable of covering your loan costs if you cannot. Be certain that party is also willing to cover those charges.
You will find many resources out there to help you find startup business loans, including many that can help you understand the types of loans available and how much you could spend. You’ll require enough information to improve your chances of being successful with your loan. Be sure to contact us at the CapCompass if you’re looking for additional help finding a small business loan that fits your needs.