There are many reasons to get a loan for your small business. Perhaps you’re just starting out. Maybe you’re in a growth phase. It’s possible that you’ve fallen on hard times. Whatever your circumstances, some extra cash flow can help you get in the right direction, and an approved loan might be exactly what you need.

There are many things to take into consideration before delving into the small business loan process. These include:

  • What type of loan might be best for your business?
  • What type of organization should you seek out as a lender?
  • What do you need to do for your best chance to qualify for a loan?
  • How do you apply for a loan?

This article will flesh out the following questions and more to help you determine your best course of action for getting a small business loan.

What Types of Small Business Loans Exist?

Business loans can vary by what your business needs, the terms of the loan, and the duration of the loan. Some terms might include interest rates for repayment or that businesses have suffered some kind of loss.

The duration of the loan can vary from a few months to several years. It’s all dependent on the guarantor. The following are some of the different types of small business loans that are available.

Small Business Terms Loans

A small business term loan is essentially a standard loan where the borrower receives a set amount of money, which is to be repaid on a set schedule. For small businesses, this time is often anywhere between six months to three years.

These loans can often be for larger figures as they are usually associated with high-priced business operations, business growth or expansion, or large purchases like equipment or real estate.

Business Advantage Term Loan
Source: Bank of America

Small Business Loans

Small Business Administration (SBA) loans are those backed and guaranteed by the SBA. These loans can range between $30,000 to as high as $5 million and are, and include SBA 7(a) loans, SBA 504 loans, and SBA Microloans.

SBA loans are well known and well-liked for their low-interest rates. However, they do have requirements and lengthy application processes. Many banks and online lenders are approved SBA lenders.

SBA Helps Small Business Get Loan
Source: SBA

Working Capital Loans

A working capital loan is a loan that is typically used to cover the everyday operating expenses of a small business, including payroll, rent, and debt payments for a short time. These loans can offer sums between $5,000 to $100,000 and the duration of the loans can be between 30 days and one year.

Small businesses with little or no credit history might find such a loan appealing. However, if you fall into this category, you might have to provide collateral or a personal guarantee to qualify for a loan.

Equipment Loans

Equipment loans are ideal for buying or leasing equipment, vehicles, and software that is associated with your business. These secured loans can offer figures between $5,000 and $500,000, but typically require a down payment of 20% of the purchase price of the equipment. Their interest can be accrued at a fixed or variable rate, with the loan set to be repaid usually within two to four years.

Accounts Receivable Financing

Accounts receivable (A/R) funding allows a small business to get cash right away through their company’s A/R, which is money owed to them by their debtors. Small businesses can apply for this kind of loan through A/R lending companies.

The amount of money you can receive is dependent on your business’s A/R while the interest rate for the loan can vary. The credit is paid down as your business makes money from its customers and replenishes its accounts receivable.

Paycheck Protection Program Loans

Paycheck Protection Program (PPP) loans are loans that allow qualified small businesses to have their debts forgiven if the use of the loan is used completely toward the business. Such expenses include payroll, rent, utility payments, operations expenses, property damage costs not covered by insurance, and costs of protective equipment like masks. Many businesses can get 2.5 to 3.5 times their average monthly payroll. Small businesses can apply for a PPP loan through a local lender or online lender.

PPP loans are currently associated with the COVID-19 pandemic, with some criteria of qualification being that small businesses must have been established prior to February 15, 2020. They also must have seen at least a 25% reduction in revenue between 2019 and 2020.

SBA Disaster Loans

The disaster loan program set in place by the SBA is meant to help small businesses that have fallen on hard times due to a widespread disaster. This includes the COVID-19 pandemic, for example, which has its own SBA-backed loan, the COVID-19 Economic Injury Disaster Loan (EIDL). Small businesses can apply for a loan through the SBA website.

The EIDL has among its requirements that borrowers must have suffered a substantial economic loss to their small businesses due to the pandemic and must have businesses based in a U.S. state, territory, or Washington, D.C.

Funds of the loan must be used toward working capital and normal operating expenses of the business. Loan amounts can range from under $25,000 up to $2 million. The loan is not forgivable but is payable over 30 years. Payments are deferred for the first year, although they accrue interest of approximately 3.75%.

Small Business Line of Credit

A line of credit may be a good option for small businesses who want a safeguard that they’ll have access to cash when it is needed. A line of credit is often given by a bank or other financial institution and is typically used for paying off unexpected expenses related to a business. However, its use isn’t strictly dictated toward a business as is seen with certain loans.

Business Advantage Credit Line
Source: Bank of America

The amount of money that businesses can get may be dependent on their needs and what is being offered by the lending institution. However, it is usually a limited amount, often between $10,000 to $100,000.

You will likely have to pay a fee to establish a line of credit as well as monthly interest once you begin using the credit line. Credit lines typically require annual renewal for an additional fee or else they become due in full at that time.

Small Business Credit Cards

Small business credit cards can also be a simple method of getting loaned money in the short term, although business owners often prefer to stay clear of this option due to the ease of getting out of control with credit card debt.

Typically, the main owner takes primary responsibility for the card, with the business as co-liable. Many standard credit card issuers, including American Express, Capital One, and Bank of America, also offer small business credit cards.

While interest rates and credit limits might vary depending on the card offer and the credit history of the person applying, small business credit cards often come with many of the perks seen with regular credit cards, including cash back, discounts on gas, and airline and hotel points, among others.

Where Can You Get Small Business loans?

Banks Provide Small Business Loans

Banks are typically the institutions you think of when considering a loan of any kind. These can range from Wells Fargo, JPMorgan Chase, and Citibank to local community banks, which especially enjoy supporting small businesses.

Credit unions also fall under this category. Banks are known for low-interest rates and long-term repayment options as well as strict criteria and a slow approval process.

SBA and Affiliate Lenders

Sba loans are highly coveted due to them being backed by the government. Many can offer large sums, depending on the type, but also have strict criteria and a slow approval process.

Small Business Loan Online Lenders

Online lenders are plentiful and available for many different loan types. There are direct lenders, which you work with directly to get loans, and peer-to-peer (P2P) lenders, which work with direct lenders to get you loans. They also offer fast approvals, although fees and interest rates tend to be high.

Microlenders

Microlenders are a great option if you don’t need that much money as these loans often offer less than $50,000. They’re also good if you don’t have a detailed credit history. Many, but not all, microlenders are SBA-guaranteed.

Other Small Business Loan Lenders To Consider

  • Nonprofit lenders
  • Private lenders
  • Venture capitalists
  • Crowdfunding

How To Qualify for a Small Business Loan

There are several questions you should consider when strategizing your small business loan application. Some of the main factors to consider include:

  • What is your credit score?
  • How long have you been in business?
  • Do you make enough money?
  • What payments can you afford?
  • Can or should you collateralize your loan?
  • Why do you need a small business loan?
  • What type of small business loan would you prefer?

These questions will help you determine what type of loans you might pursue. A high credit score, a solid business history, favorable financial backing from investors, and intact financial statements will go far with more traditional lenders, such as banks and SBA loans.

However, online lenders and microloans might be a better option if you or your business is lacking in any of these areas. Getting assistance from a certified public accountant (CPA) with an audit of your business might help you target any loose ends you need to address before applying for a loan.

How To Apply for a Small Business Loan

Applying for your small business loan means submitting your application and paperwork. The types of paperwork you’ll have to submit will vary depending on the lender but might include:

  • Business and personal income tax returns
  • Personal and business credit reports
  • Business financial statements
  • Bank statements
  • Business licenses
  • Business legal documents
  • Balance sheets
  • Profit and loss (P&L) statements
  • Quotes from contractors and vendors
  • Business plan

Conclusion

Applying for a small business loan is time-consuming but, if approved, it can be a cushion that can keep you moving forward through whatever stage you find your business. With careful vetting and planning, you can pick the ideal loan to assist your financial needs without hurting your business.

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