A Comprehensive Guide to Small Business Loans

BY: ON THURSDAY, AUGUST 01, 2019

One of the many challenges that small businesses face is gaining enough capital to meet their goals.

Whether it’s raising funds to kickstart a business plan or infusing your current model with extra cash to pursue new opportunities, you need financing that caters to your schedule, while also being affordable to pay back over time. Thankfully, achieving your long-term plans and making an impact with your business is made possible with the help of small business loans.

No matter what type of borrowing you’re looking for, a lender can work with you to ensure that your needs are met. Plus, there are a variety of loans and opportunities for you to take advantage of that put you on the right path to success.

If you’re ready to explore financing options for your venture, here is a comprehensive guide to small business loans for you to consider:

What Type of Loan is Best for You?

Before you start working with a lender, it’s important to first determine the type of loan that’s best for you and your business.

For example, there are tons of different small business loans designed to help you thrive and achieve different business goals. From maintaining daily expenditures to purchasing or repairing vital equipment, lenders are eager to provide you with credit opportunities to suit your needs. In fact, between 2015 and 2017, online lenders alone granted around $10 billion in credit to small businesses, and the future is poised for continual growth in a variety of industries.

With that in mind, you simply need to know what kind of financing you need and how you can prepare yourself to get it from a traditional or online institution. To give you an idea of what to pursue, below are some of the most popular financing needs that businesses face:

●Inventory financing

●Commercial real estate loans

●Small Business Administration (SBA) loans

●Microloans

●Lines of credit

●Equipment financing

●Invoice financing

●Short-term or business term loan

Essentially, the answer lies in what issues you run into the most. If cash flow is a problem or you need extra funds to make purchase orders, then getting a loan may be your best option to keep things moving forward. In any case, once you can pinpoint your shortcomings, your next step is to see what you can afford and what you need to do in order to qualify with a lender.

What You Need to Qualify for a Small Business Loan

After you’ve given some thought to your borrowing goals, it’s time for you to get your finances in order and see what you need to qualify for a small business loan.

Similar to what you would need to qualify for a personal credit card or loan, small business lenders look at three things to justify your ability to pay them back:

●Your credit score

●The age of your business

●The annual revenue of your business

Based on these credentials, you can work with a lender to find the best loan option for you and get to work. However, knowing where you need to stand in each category is the key to locking in a competitive, affordable rate.

What Credit Score You Need to Get a Business Loan

Generally, a credit score above 550 will get your foot in the door with a lender, but the most compelling loan offers come with scores over 640.

Just like how a banker would look into your personal credit history to approve you for a car loan or home mortgage, business loans use the same information to gauge your level of financial responsibility, as well as how long it's taken you to repay debts. Thankfully, checking your credit score is a lot easier than it used to be, and you can now download your credit report using services like Credit Karma or TurboTax to see where you stand.

If you do happen to see any derogatory marks or alerts on your profile, try mitigating them with these solutions to improve your score. Unfortunately, fixing a bad credit score takes time, which may or may not be on your side when it comes to getting cash for your business, but having a great credit score increases your odds of getting the best loan for your needs.

Why the Age of Your Business and Revenue Matters

Research from the SBA shows that roughly 80% of new businesses fail in their first year, so needless to say, how long you’ve been established says a lot about your success and viability to a lender.

As a rule of thumb, businesses older than two years are seen as a safer choice than those within their first year. Based on your cost and revenue assumptions and annual reports, along with a lender viewing them favourably, you should be able to qualify for a bank loan or SBA loan without too much of a hassle. Of course, you need to prove that your business turns a profit so that a lender can give you a substantial loan with affordable repayments, but if your business is still within its developing stages without much revenue to show for, your best bet may be to work with an online lender or apply for a business credit card to gain instant capital.

What You Need to Apply for a Small Business Loan

Now that you have a better understanding of how to prepare for your borrowing, here’s what you need to have in order to apply for a small business loan:

Required Documentation

On average, it takes business owners 26 hours to search for credit from a bank. This is due to the requirements that financial institutions have in place before a loan can get approved. That being said, some lenders can offer same-day approval for lower amounts, but typically, the more money you ask for, the longer the process takes.

To make sure that you have all the necessary paperwork a loan officer may want to see, follow this checklist:

●Personal Tax Returns (most recent)

●Business Tax Return (last two years)

●Business Bank Statements (last two years or whatever applies)

●Statements of Financial Position (balance sheets updated within the past 60 days)

●Income Statements (last two years)

●Business Debt Schedule (Current outstanding debts and payment details)

APRs: Reviewing Your Costs, Terms, and Payment Structure

Assuming you’ve put in some ample research time and have gathered a few loan offers, your final step is to review the costs, terms, and payment structures of your loans.

Overall, your main criteria boils down to the affordability of your lender’s Annual Percentage Rate (APR) on the loan amount. For instance, if you borrow $100,000 to lease a new location, how much money do you have to pay back every month on the loan, with respect to offsetting the APR so that you can make headway on the repayment? In general, you can expect the following APRs for these types of loan pursuits:

●SBA Loans: between 7.5% to 10%

●Medium-term Loans: between 7% to 30%

●Equipment Financing: between 8% to 30%

●Business Lines of Credit: between 7% to 36%

As you can imagine, repayments can be quite challenging if you’re barely keeping your head above water, so make sure you agree to terms that help your business succeed, rather than weighing it down with more debt and stress.

Fees to Watch Out for

Finally, before you sign your loan agreement, keep in mind that there may be several fees that will add to your total borrowing plan.

Each one comes at a different price depending on the lender or relationship with other financial institutions, but here’s a quick rundown of what fees to watch out for:

●Origination Fee

●Processing Fee

●Prepayment Penalty

●Referral Fee

●Packaging Fee

●SBA Guarantee Fee

●Unsuccessful Payment Fee

●Late Payment Fee

●Wire Transfer Fee

●Payment By Check Fee

Feel free to discuss these fees with your loan officer to see what rates are negotiable and what can be waived. Remember, your ultimate goal is to get the largest loan amount with the lowest APR and total cost.

If you can plan accordingly and leverage one offer against another, you should be able to find the right opportunity for your needs and budget.

Taking Risks Leads to Great Rewards

You’ve already invested your time and money into a business you believe in, so why not take a calculated risk that could lead to great rewards in the future?

Applying for a small business loan doesn’t have to be a stressful experience. With the right resources and thorough research on your end, you can land a competitive deal that allows your business to thrive. In addition, you can even make helpful relationships with lenders to finance any projects or needs down the line.

Not only are you establishing a foundation for your initial borrowing, but you’re also cultivating a long-term strategy with lenders that can become essential to allow you to scale. Don’t think in terms of immediate satisfaction, and instead, strategize your borrowing to accommodate long-term success.

About the Author

Austin Andrukaitis

Austin Andrukaitis is the CEO of ChamberofCommerce.com. He's an experienced digital marketing strategist with more than 15 years of experience in creating successful online campaigns. Austin’s approach to developing, optimizing, and delivering web based technologies has help businesses achieve higher profit, enhance productivity, and position organizations for accelerated sustained growth.

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