While well-off businesses don’t need extra cash, some find themselves in between money-related struggles that could use a boost, and that’s when they turn to business loans.
Whether you want to expand your operations, clear outstanding invoices, purchase inventory, or require some quick cash for miscellaneous expenses, you can turn to lenders to help you out.
If this is your first time taking a loan, it’s no surprise that some things will confuse you. Here’s our detailed guide on preparing for a loan and key factors to consider before taking one.
When To Get A Small Business Loan
Since there are so many types of loans, you must decide why you need any financing to begin with. Doing so will help you make the right decision and choose what works best for you.
As surprising as it may sound, you should take a loan when you have a good credit score and when the business cash flow is strong so you aren’t desperate for money; this is so you meet the eligibility criteria set by lenders. If you qualify for lower interest rates, you’ll have more loan options, and this won’t happen if you are neck deep in bills.
Plan ahead by going through your financial reports and making decisions based on your needs. For example, if you’re not in immediate need of a lump sum of money, don’t choose a term loan for working capital; instead, a line of credit will be a better option since it allows the borrower to take money from the line as and when needed.
When Not To Get A Small Business Loan
If you’re struggling to meet your financial goals according to the business plan, then don’t take out a loan. The main reason you shouldn’t wait until there is an extreme cash crunch is that you might struggle to afford to pay back the loan, making you a risk to potential lenders.
If your business or personal credit scores are dwindling, avoid getting a loan. Considering your personal credit history plays a vital role in determining whether or not you’re eligible for a loan, you’re better off trying to rectify it first so you qualify for these financing options. Pay your bills on time, watch out for your credit report, and reduce your debt.
Even if you do qualify for a loan with online lenders despite having bad credit, you may not get an unsecured loan with a low annual percentage rate. Consider a short-term loan or merchant cash advance if you really need the money. You must ensure they’re credible sources, so when questions like “is 5k funds legit?” pop into your head, go ahead and check their reviews to know for sure.
Applying For Small Business Loans
Get Your Documentation In Order
Once you decide you need a loan, gather the important documents before going to the lenders, or just contact them if you’re unsure. Usually, these are the items your lender will require:
- Business License
- Personal and business tax returns
- Personal and business bank statements
- Business plan
- Building lease
- Financial statements
- Articles of incorporation
- Profit and loss statements
Submitting Your Loan Application
With all the documents ready, it’s time to get started on your loan application process for your small business. You have the option to do this online or in person based on which lender you decide to work with.
These are details lenders commonly ask for:
- Your name
- Social security number
- Business name
- Business tax ID
- Loan purpose
- Desired loan amount
- Annual revenue
Best Types of Small Business Loans
SBA Loans
The U.S. Small Business Administration (SBA) guarantees these business loans because the federal government guarantees a repayment of up to 85% of the loan in case the borrower defaults. SBA-approved lenders choose their own annual percentage rate (APR), and the interest rates can range between 2.8%-13%. These are the most popular SBA loans: 7(A) loans, 504 loans, and SBA microloans.
Line Of Credit
These business loans work like a credit card; financing with a business line of credit allows you to borrow money as you require it and pay interest accordingly. After approval, you’re given a credit limit, and you repay what you owe as you use it. You can access this credit anytime during the draw period (usually 12-24 months), but after it expires, you no longer have access to the credit line.
Term Loan
Terms loans are a common search for small business loan options; businesses borrow money from traditional sources like banks, online lenders, or credit unions and repay the funds over time, often at a fixed interest rate. Although the terms and conditions vary, qualified businesses can borrow $500,000 or more, with an APR starting at 9% and repayment terms of up to 10 years.
Personal Loan For Business
Small businesses usually opt for personal loans because it relies on the business owner’s personal credit score and not the business credit score. These loan amounts are generally small, and the maximum borrowable quantity depends on the individual’s debt-to-income ratio, personal finances, and assets, so you must have strong personal credit.
Equipment Loan
Small businesses usually need financing for new equipment, and these loans help you do just that. The equipment you purchase using this loan serves as collateral. In the case of a default, the lender can claim the equipment to resell it and recuperate the losses. Since there is an inevitable collateral involved, the lender’s investment risk is low, which means you may get competitive interest rates ranging from 8% to 30%.
Microloans
Compared to other business loans, microloans offer small amounts of money with short repayment terms. The eligibility criteria are less stringent, and businesses can usually borrow up to $50,000. Microlenders typically involve nonprofit organizations and focus on underprivileged small business owners like women and minorities. Interest rates are quite low and sometimes non-existent.
Conclusion
With that said, every smart business owner knows when they need extra financing, but it’s all about planning ahead to ensure you don’t have to make hasty decisions that leave you in a downward spiral.