When you're running a small business, having extra money on hand can really come in handy. Whether you want some startup financing to get the ball rolling or need a little assistance to cover payroll while overcoming a temporary challenge, a small business loan can help you finish the job. Let's dive into how to apply for a small business loan, where to find one, and what your options may look like.
Where to Get A Small Business Loan
If you're not sure where to begin when looking for a small business loan for the first time, there are a few kinds of paths you can pursue. Small business loans are frequently offered at banks and credit unions, as well as online lenders or alternate lenders. Each one of these resources might have different offerings and requirements, so let's have a look at what you can generally expect when dealing with each.
Banks and Credit Union
The same banks you do your personal banking at may have small business loans available. Certainly, you can look outside your usual bank or cooperative credit union also. However, if you're in excellent standing with your bank regarding your personal accounts, that can work in your favor when applying for a small business loan. Both banks and cooperative credit unions have a tendency to serve larger and more established businesses, but that does not indicate small companies can not fit those categories. Particularly, if the bank or cooperative credit union has loans backed by the U.S Small Company Association (SBA)-- these are referred to as SBA loans. Loans backed by the SBA lower the risk for the lender, so it can make it easier for newer small businesses to secure a loan.
Online and Alternate Lenders
Nowadays, you don't need to stick to traditional financing methods. Online lenders and alternate lenders (like peer-to-peer lenders) can offer similar products as banks or cooperative credit unions, they just do so without providing in-person access to customers. If you prefer to do your banking in person, an online lender may not be the very best fit. However, a lot of online lenders provide more flexibility than brick-and-mortar banks, which can be a good fit when starting a new business. There are also peer-to-peer small business loan providers that can be found online where you can get in touch with financiers looking to sustain a small business. Peer-to-peer lending usually has less rigid requirements than when working with a large bank or lending institution, but due to the fact that the risk level can be high for lenders, you might have a higher rate of interest than you would find with a traditional business loan.
Types of Small Business Loans
There are a few types of small business loans that may be available to you. Each has its very own advantages and disadvantages, so you'll need to think very carefully regarding which type is best for your business.
Business Line of Credit
A business line of credit works similarly to a credit card and you can use it to make purchases for your business such as stocking up on inventory or spending on ads. This kind of credit comes with a maximum limit you can borrow and what's useful is that if you don't borrow the full amount, you will not pay interest on any money not borrowed.
Term Loan
A term loan provides both long-term and short-term loans. Payment will consist of both interests and principal payments. Term loans are offered by financial institutions such as banks, credit unions, online lenders, and other alternative lenders.
Invoice Financing
Some small businesses have problems with cash flow while waiting for invoices to be paid. If this is an area you struggle with, invoice financing (also known as factoring) can help by allowing you to sell your unpaid invoices to a lender at an affordable price.
Merchant Cash Advance
A merchant cash advance provides borrowers with a lump sum that is based on their credit and debit card sales. This type of financing is available in any type of business that accepts credit cards, and high fees might take a cut of your sales on a day-to-day or weekly basis.
How To Apply For A Small Business Loan
The application process for a small business loan will vary a bit by a lending institution, but generally, you can expect to need to present the following supporting documents throughout the application process.
Documents Needed
Your business plan
Financial statements
A business banking account
3 months of bank statements
Your business license
Other legal documents, including articles of incorporation, etc.
Tax returns, including business tax returns
Collateral, if required
It is also likely that lenders might want to run a credit check during the application procedure. Your credit history and score can affect how easy it is for you to get a loan, and the loan amount, rates of interest, and payment terms you're offered. There's a good chance your personal credit score will be evaluated, especially if you're starting a new business, however, if you have a business credit score, that might come into consideration as well. There is one set minimum credit score that you should need to get a loan, but typically the better your credit score is, the better rates and terms you'll be used. If you have a low credit score, getting a secured business loan might be an easier path to take, as lenders will have your collateral to help lower their risk level.
Options For Small Business Loans
If a small business loan does not feel like the right fit, business owners have a few other options at their disposal.
Options Online Financing
Lease Funders provide an approved business owner with access to the funding they need to support their business, whether that be by purchasing equipment, paying bills, or overcoming flow gaps.
Business Credit Cards
Some business credit cards provide low rates of interest or a 0% initial rate which can provide small business owners with a low or no-interest loan of kinds. Many card providers offer 6 months without interest. A business credit card is only a good financing option if you have the ability to pay your purchases prior to the introductory rate ends and a higher rate of interest begins.
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