Millions of Americans nationwide own small businesses that they rely on for part or all of their income. Even when business is good, they may find at some point that they need additional funds to grow or expand, and when they do, they may shop for small business loans to help them do that.
Small business loans come in many different forms, from many different sources. Banks and credit unions are two popular sources for these loans. SBA loans are also very popular, though it's helpful to understand that these loans are made by individual lenders, not the government. (The government guarantees SBA loans.)
Community Development Financial Institutions (CDFI's) also make small business loans, often in underserved communities or to those who traditionally have had trouble getting loans. Finally, some crowdsourcing websites are offering short-term loans to small businesses.
Small business credit cards are also a popular source of financing. They can be relatively easy to get and can offer credit card rewards such as airline miles or reward points for purchases made with the card.
If a business is fairly new, does not have many employees, or does not have significant cash flow, lenders will almost always check the credit scores of the owner and sometimes officers, as part of the application process.
In addition, most lenders will require the owners of these types of businesses to provide a "personal guarantee," which means if the business defaults, the lender can try to collect from the business owner's personal assets or income.
Applying for a small business loan can be much more involved than applying for a personal loan. For instance, lenders will typically require that current or prospective small business owners supply them with financial information, including business and personal tax returns, cash flow projections, and current statements. They may also ask the borrower to document how the money will be used.
It's important that you are well- prepared when applying for a small business loan, so you have the best shot at getting the lender to say yes. If you can't get a small business loan, but your credit score is good, you may want to get a personal loan and use it to finance your business instead.
Check with your accountant to make sure you take advantage of tax deductions that may be available.
The Advantages of Credit Unions for Small Business Loans
When you compare a bank and a credit union, you will find many similarities, but there are also a few differences that make credit unions advantageous to small business owners. Credit unions often offer much lower rates on business loans, and you can typically see a fast and easy approval process, receive better returns on any savings, and also receive valuable and free financial education.
Credit unions, unlike banks, are not-for-profit institutions which is why they can offer lower interest rates on business financing and the loan products they offer. Additionally, they are member-focused which means the credit union is owned and operated by its members, not stockholders.
With a credit union, you will also be offered better service, more flexibility if you have a tarnished credit history, poor credit, or any other issues, and you will find far fewer complications when it comes to the loan process when compared to a traditional bank.
Steps When Applying for a Small Business Loan
As business owners who are in need of some money for their small business, it is important to be able to pinpoint the exact reason you need the loan. Will the loan you are trying to get help the business? If so, you can then continue finding the right business loan that is ideal for your specific needs.
To find the best lender, you will then want to compare all your available options and look at the total cost and the terms of each loan. Gather all the relevant information you will need when applying including your credit score and annual revenue.
Once you get all your documents together and ready to go, you can then apply for the small business loan. Inquire about any other documentation they may need ahead of time as well, so you are better prepared.
Small Business Loans Within the First Year
It is very uncommon for a small business to get this type of loan within the first year. The lenders need to see the cash flow of the business to know if it can support repayment of the loan. Therefore, if you are the owner of a startup business, then you will likely be immediately disqualified from any financing opportunities until you have established the business more.
Using Banks for a Small Business Loan
If you would rather go through a traditional bank for your small business loan, rather than a credit union, then this may very well be a good option if you can provide some form of collateral to secure the loan, you have good credit, and you don’t need the cash immediately.
A bank can offer different options regarding the term of the loan, the line of credit, and even refinancing options. You can also receive an SBA loan through a traditional bank, and these loans can vary between $5,000 and a hefty $5 million.
However, if your personal credit score is not good and your personal credit history is poor, and you have nothing to offer as collateral, then you will have a much harder time getting accepted for this type of loan, and it can even take up to six months for the entire process.
Using Online Lenders
If you are looking for a small business loan that is in an amount that falls under the $500,000 mark, then online lenders may be able to help. However, the APR on this type of loan from these lenders can be astronomical. This typically depends on who the lender is, the amount of the loan, and the length of the repayment term.
However, there are much higher approval rates for small business loans through online lenders, and you can have access to the cash much faster than with a traditional bank.
Using Credit Cards for Small Business Financing
Another common source of income next to a small business loan is a credit card. There are a few pros and cons when it comes to choosing this type of financing for your business. As a business owner, it is your responsibility to choose the method that is right for the financial health of your company.
When you use a credit card for financing, you might be eligible to receive rewards or even cash back. However, a business credit cards rewards may be limited to only business-related expenses. Some credit cards may even offer a sign on bonus with a greater incentive to join.
The 0% interest promo is also an attractive selling point for many business owners because this means you will pay zero interest on your total balance. As long as you pay your balance before the introductory offer expires, you will not have to pay interest on those purchases you made.
Additionally, no collateral is required when you utilize a business credit card as financing. This ensures that if you fail to make the payments, your business assets are secure.
However, using a business credit card may also come at a higher cost and variable-rate debt because it is an unsecured loan. Depending on your personal credit score, after any introductory interest-free offers, you may see a higher interest rate.
Carrying a high balance on a business credit card month to month can also have negative effects on your credit and can raise your minimum payments and interest rate charges.
Do You Qualify for a Small Business Loan?
Now that you know a little more about the small business loan process and types, you need to know if you will even qualify.
You should get your credit reports from all three credit bureaus- Equifax, Experian, and Transunion. You should be doing this at least once a year anyway so you can keep better track of your credit history and standing. You should also get your FICO score.
After the lenders look at your credit, they will then use that information in combination with how long you have been in business and how much money the business is making. Most qualifying loans have been given to businesses that have been in place for over two years.
The lender may also look for a minimum amount regarding your annual revenue. However, this dollar amount will vary greatly depending on the lender you are going through and what kind of financing you are receiving.
Finally, is there enough cash flow to prove that you can make the monthly payments on the small business loan? You need to be able to afford the payments without having to worry about where the money will come from to pay. Look for a total income that is 1.25 times the amount of your expenses.
When figuring your expenses, be sure to include the total monthly payment or payments of your small business loan. (some institutions may require more than just one payment per month).
While it may seem like a long, drawn out, and complicated process when it comes to securing a small business loan for your needs, the process will be much smoother if you do your homework and gather all the documents and information you need before you even begin the application process.
One of the most important steps to remember when applying for a small business loan is to make sure that you have a specific purpose for the money because the lender will definitely be interested.
Disclaimer: The person depicted is a model accompanied by a testimonial for illustrative purposes only.