Do you have plans to start or expand a small business? The journey is quite thrilling. But one of the greatest challenges in small businesses is to get the funds they require. A small business loan could be the answer you need. It gives you the required startup capital to make your dreams a reality.
This guide is here to help you understand small business loans. We’ll discuss the various types of small business loans available, as well as how to apply and increase the probability that your loan will be approved. Let’s cover how a small business loan can make your business transcend.
Understand Small Business Loans
What is a small business loan? Why do you need it? Let’s take a closer look.
What is a Small Business Loan?
A small business loan is money borrowed by a company that needs additional capital funds either for expansion or for running operations. Unlike a grant, one pays back the borrowed funds along with applicable interest. It is differentiated from equity investments, wherein one would surrender his/her interest in return for cash. One can keep the total rights of ownership and control of the business because he would give only a loan.
Why go for a Small Business Loan?
Small businesses create the push you need. They offer you the leverage to expand your business, cover daily expenses, or buy new equipment; dreaming about opening a second location or advertising can now reach customers outside of your area; and purchasing the new machinery will take the kinks out of daily business operations. Loans can make it happen. It is also a great way to manage your cash flow for timely bill payments.
Types of Small Business Loans
There are the types of loans available for small businesses. Each type has its different terms and suitability for different needs. Some of the common ones include:
Term Loans
These are simple loans that will be paid back over a predetermined period. There will be a monthly payment that includes an interest portion. In essence, these loans are good for bigger purchases, such as equipment or property. Banks and credit unions mainly offer term loans.
SBA Loans
It guarantees loans from the Small Business Administration so as to help small businesses qualify for loans in this manner. It minimizes risk for the lenders, hence creating more opportunities for small businesses. Several types of SBA programs are available: 7(a) loans for all types, 504 loans primarily for purchasing real estate or machinery, and small amounts for small-scale businesses are covered under Microloans. Eligibility will be found on your credit score and business plan.
Business Lines of Credit
A business line of credit is your company’s answer to a credit card. Borrow up to a certain limit whenever you need the funds, paying interest only on what you borrow. This works well for those who want to prepare for short-term borrowing or unexpected expenses. It allows more flexibility by bringing finances into your business.
Prepare for Your Loan Request
Getting ready to apply for a small business loan is very important. Doing your homework will help you get approved. It also ensures you borrow the right amount.
Assess Your Business Needs
Before applying, determine how much money you actually require. You should not borrow more than you need. Then, earmark the money for which purpose: would you buy new equipment, or would you be investing it for marketing campaigns? A clear strategy will help you decide the right amount for it. In brief, calculate all your needs with precision.
Gathering Required Documents
A lender will demand some specific documents. These are the only criteria for evaluation of the business with them. Common documents include the business plan, financial statements, such as profit and loss, balance sheet, and cash flow statements, tax returns, and bank statements. Also, have any legal documents ready. To speed up the application process, have these documents organized.
Navigating the Loan Application Process
Applying for a loan seems like a big ball to chew on. Breaking it down into steps will certainly ease the process. This is because, this is how one should prepare for applying a loan.
Choosing the Right Lender
Different lenders have different terms and requirements. These include banks, credit unions, and online lenders. Online lenders generally have quicker application processes than banks, which usually have comparatively lower interest rates, but might have stricter requirements when it comes to loan approval. Credit unions stand to offer personalized services. Have a comparison of interest rates, their fees, and loan terms and find what is the best fit for your business.
Filling in the Application
Careful filling out the application form without any omissions will increase your chances of getting an approval notice. You must therefore supply every detail that is requested of you and also be honest. The applicant is expected to include all relevant supporting documents with the application. Recheck the application before submission. Internal checks usually boost chances of approvals.
Maximizing Chances for Approval
Are you on the lookout for ways to better your chances of accessing a loan? Then you might want to look into these few areas.
Improving Your Credit Score
Your credit score is one of the most essential criteria for getting a loan. A high credit score indicates that the lender can trust you. Pay your bills on time. Keep your debt low. Check your credit report for any mistakes and get them fixed.
Conclusion
Small business loans could become a weapon that can be used to grow your business. These could be the available money for you to reach your goals. You can, thus, ensure that you are well versed with all types of loans and that your application is prepared early in advance while improving your finances, to ensure higher chances of approval. Take that first step. Getting financial backing might be the answer that unlocks the doors to all the potential in your business.
