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Obtaining a small business loan as a new entrepreneur or a seasoned business owner does not have to be daunting. With a little research, information, and direction, you can easily find out how to get the proper funding.
- 6 steps to getting a small business loan
- Small business loan resources
- The bottom line
6 steps to getting a small business loan
These are six steps on how to get a small business loan:
- Choose an appropriate loan for your small business.
- Assess if you qualify for a business loan.
- Determine how much you can afford monthly.
- Choose a secured or unsecured loan.
- Research and choose the best lender for you.
- Finally, apply for your small business loan.
1. Choose an appropriate loan for your small business
You will need to understand your business needs to complete this first step. When selecting the appropriate loan for your small business, ask these important questions:
- What do I need a loan for?
- How much money will I need?
- What would I like to accomplish?
Types of business loans
Every small business needs working capital to cover equipment costs, purchase real estate, cover day-to-day expenses, invest in advertising and marketing, or expand their brand awareness, for example. That being said, there are many types of business loans. Some of the most popular loans are:
- SBA loans: The Small Business Administration is a government-backed and funded program where banks and other lenders provide the loan. This type of loan has strict requirement qualifications and a longer period for approval which can take up to three months. SBA loans are a good option if you can wait out the approval time and are highly sought out due to their low-interest rates and longer repayment periods.
- Term loans: This loan is cash provided by a bank or online lender that the borrower must repay over time with interest on a fixed payment plan. These loans can vary depending on how much money you need and what you are using the money for. Normally the business/business owner would be required to have a good credit score and cash flow history and may need to have available collateral.
- A business line of credit: This type of loan provides access to funds up to the amount of your credit limit and is more flexible than a traditional business loan. It works like a personal credit card and can help to build up business credit and is unsecured, which means that it does not require collateral, but rather yearly fees/dues. Business lines of credit are a good option if you are unsure about how much money you need or would like the possibility of having the leisure of spending as you go. With a business credit card, you are paying interest on the card balance rather than a term loan, where you must pay interest on the entire lump sum of the loan.
- Equipment loans: One major reason that business owners seek out a small business loan is to cover the cost of large and expensive equipment and do not have the working capital to cover these purchases upfront. These loans are specifically designed to help cover heavy machinery costs, for example, computers, vehicles, furniture, or large appliances. These items are then used as collateral if you cannot repay the loan. These are just a few examples of types of loans, as there are many more out there; invoice factoring, invoice financing, cash advances, commercial real estate loans, microloans, or personal loans.
Once you assess your business needs and understand the different types of funding , you can determine if you meet the requirements.
2. Assess if you qualify for a business loan
Each loan and lender has specific qualifications that must be met to be approved for funding. You can predetermine a few basic requirements before applying for a loan.
- The lifetime of your business: How long has your company been operating? Usually, lenders require one to two years in business before providing a loan.
- Credit score: A credit history is usually required to determine if you can repay your loan. You can obtain a free credit score quote online with a few pieces of information.
- Cash flow: Does your business revenue bring in enough money to cover your overhead plus a loan? Many lenders have minimum cash flow requirements before approving certain loan amounts.
Once these basic questions can be answered clearly and with proof, you can determine how much loan you can afford monthly.
3. Determine how much you can afford monthly
This step is crucial. A bank or lender will not provide small business funding if you cannot afford the monthly loan repayments. Use this free online business loan calculator tool as a guide.
Evaluating your business finances means determining your minimum monthly cash flow and profits. As a rule of thumb, your income should be 1.25 times your monthly total overhead expenses. These expenses include your predetermined small business loan repayment amount.
Something else to consider is the repayment schedule and frequency. Some banks and lenders require payments every week, biweekly, and monthly. This should be detailed and noted when you do your initial research.
4. Choose a secured or unsecured loan
There are two types of loans: secured and unsecured. A secured loan requires collateral. Most lenders are willing to give out their money when collateral is provided in the form of real estate or owned property which the lender can seize if you default on your business loan.
An unsecured loan is simply a signed agreement that you, as the borrower, will personally repay the loan if the business falls under and cannot afford to repay the loan.
Each lender is different; research will prepare you and help determine your preference.
5. Research and choose the best lender for you
Banks and lenders differ in:
- Loan amounts
- Interest rates
- Repayment schedules
- Financing options
- Required collateral
- Years in business
- Credit scores
Look at the pros and cons of bank and online lenders, then decide which works best for your needs.
6. Apply for your small business loan
Finally, it’s time to apply for your small business loan. Choose two to three lenders that best fit your needs and time frames. You’ll need:
- Full business name and address
- Business tax ID number
- Business plan
- Business loan proposal
- Full business financials
- Information on company owners
Once you have all of these items, go ahead and fill your application out and hope for the best.
Small business loan resources
There are many free resources to help new business owners or entrepreneurs. The first thing to remember is each state has rules and regulations for startup companies and requirements for obtaining business loans. Make sure to educate yourself on the state regulations in which your business is registered.
Some online resources are:
- Small Business Administration (sba.gov)
- Business Loan Calculator
- Business plans – Office.com
- Secured vs. Unsecured Business Loans: What’s the Difference?
The bottom line
Historically, banks have required small businesses to operate for years with proven working capital, abundant cash flow, and guaranteed collateral before lending out their money. Luckily today, several options are available to small-business owners looking for a small business loan.
You can obtain the right business loan with clarity on your business’s needs and wants, but you’ll need to know your qualifications upfront. Now is the time to gather all this information if you have not already.
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