In today’s ever-changing and fluctuating economic climate, small business loans and financial backing are absolutely essential. Small businesses always need extra money to fuel up their business ideology. A small business owner explores the loan options either to feed the current business losses or acquire funding for business expansion and equipment. Making the right business decisions at the right time call for in-depth research of the lending market along with a deep understanding of your business requirements. Our five-step guide will help you to figure out everything from building your creditworthiness to finding the right lender.
1. Determine why you need a loan:
It is always better to prepare before starting the voyage. You must be very clear about your need for a small business loan. This is the key determinant of your choice of lender and loan type. A small business might need financing to maintain business operations, buy new equipment, start a new branch or simply give a boost to business capital during tough economic times. Companies that are expanding themselves already have enough capital and these small loans are sought just to maintain their operating cash flow enabling them to cover any unforeseen costs. Small loans are not only beneficial for business growth but they are also easy to avail because there is an array of lending options and lenders who are more than happy to partner with business owners with a credit score of 720 or higher.
- Explore the available small business loan options:
Your reasons for taking the loan will dictate your next steps and choices. Primarily there are three types of small business loans; Bank loans that are backed by the Small Business Administration(SBA), microloans granted by nonprofit lenders and loans from online lenders. You must assess your eligibility for any of these loan options before making a loan application. A brief overview is as under:
Bank loans: An excellent business and personal credit history is the key requisite to obtain an SBA-backed bank loan. These loans are provided through 7(a) loan program of US Small Business Administration. The loan amounts can vary between $5,000 and $5 million. To qualify for this loan, your business entity should have a credit score of at least 680. Your business must be in operation for at least one year with minimum annual revenue between $ 50,000 and $ 150,000. A clear proof of your ability to pay back the loan is highly desirable. Your financial position must be demonstrated through detailed financial statements reflecting that your income is at least 1.25 times your operating expenses, including the new repayment amount.
Micro lenders: Micro lending option is best suited for a very small company. Micro lenders are non-profits that usually deal with typically short-term lending of less than $35,000. They have a much higher APR than bank loans but are among the best stopgap options to temporarily bridge a cash-flow gap. Micro lenders also require detailed paper work with respect to your financial statements and business plans.
Online lenders: Online lenders pop in your business’s financial picture when you lack collateral, run a new business and need money quickly. With an average APR of as high as 108%, online lending is always the last resort for a small business entrepreneur. Approval rates of online lending are very high with a fast release of funds within 24 hours. If you have opted for this option, be mindful of sticking to an aggressive repayment schedule before your business gets pulled into serious debt trap.
2. Decide what type of business loan suits you:
After careful evaluation of small business loans and their respective pros and cons, you are ready to take the plunge. The best loan option for you is the one that syncs well with your financial health and can give a boost to your small business entity.
Being a startup, it is virtually impossible for you to get SBA backed bank financing because your business should be one year old to qualify for this loan along with enough cash flow to support the loan repayment. In such a scenario, the right option for you is to rely on business credit cards, borrowing from friends and family, microloans or online lenders. Whatever option you choose, be mindful of Annual Percentage Rate (APR), total borrowing cost and associated terms and conditions.
|SBA Backed Bank Loans||Micro Loans||Online |
|For an established business at least a year old with credit score of 680||For a small business start up||For a small |
|Require collateral||High APR||High APR|
|Do not provide fast processing||Short term loans of less than $35,000||Fast cash processing|
4. Find out if you qualify:
Answers to the following questions determine your qualification for a small business loan.
- What is your credit score?
You can get free credit report from the three major credit bureaus – Equifax, Experian and TransUnion — once a year.
- How long you have been in the business?
SBA backed small business loans require your presence of at least one year in the business.
- Do you make enough money?
You must be able to show your minimum annual revenue. Lenders usually require a figure ranging from$50,000 to $ 150,000.
- Can you make the payments?
Without collateral you cannot opt for SBA backed bank loans. Your total income should be at least 1.25 times of your total expense along with loan repayment.
Finally, gather your documents and apply:
After careful consideration of your options and eligibility, you are well prepared to file your loan application. Depending upon your selection of lender, you need to prepare multiple documents comprising of tax returns, financial statements and legal agreements/articles of incorporation.
In short, building your dream company is not easy. Every single day is packed up with multiple financial challenges for a start up business entrepreneur who seeks respite in small business loans. Though tight lending standards have complicated the things but proper expert guidance can help you in acquiring the best small business loan that can help in the strong positioning of your business entity.