Small Business Funding: How to Get a Business Loan
The old adage that “it takes money to make money” often rings painfully true for small businesses struggling to grow and prosper. From overhead to inventory, the expenses required to run a business often seem staggering. Thankfully, plenty of funding is out there for small businesses in every sector.
Where can I find small business funding?
When it comes to loan offerings, small businesses have a number of possible entry points:
Am I eligible to take out a small business loan?
To qualify for a small business loan, you’ll need to prove you are a good risk. For non-SBA loans, eligibility may vary by individual lender, while SBA loans have specific requirements. Once you’ve met the criteria as a qualifying small business, the SBA wants to see enough cash flow to make your payments. In addition, the SBA also requires applicants to demonstrate good character by filling out a “statement of personal history.” This information shows whether you’ve paid previous debts and obeyed the laws of your community.
If your history has a few blemishes, don’t panic. While solid credit and a clean record are strongly preferred, the SBA personal history form clearly states that an arrest, conviction or record doesn’t necessarily disqualify you. Even a previous bankruptcy won’t automatically rule you out. Some lenders approve SBA-backed loans after bankruptcy if you’ve repaired your credit in recent years.
Be prepared to back up your commitment for most SBA loans. Generally, 7(a) loans are fully secured, although when all other factors are favorable you may still be approved with insufficient collateral. If you own 20% or greater equity in your business, you’ll also be expected to personally guarantee your loan.
How much can I borrow?
Small business loan amounts vary depending on the needs of a particular company, that company’s size, and its projected growth. The average SBA loan is about $371,000, but they may range from microloans of $5,000 to the maximum guaranteed amount of $5 million. The median non-SBA loan offered through the banking industry is around $130,000 to $140,000.
If you apply for a business loan financed through a credit union, be aware that federal regulations only allow them to lend the lesser of 1.75 times their net worth or 12.25% of total assets. As such, the amount available to borrow through their individual offerings may be limited. You can still finance SBA loans of up to $5 million through credit unions.
Types of business loans
Business loans may be secured, unsecured or even take the form of lines of credit. Some sort of collateral, such as real estate, investments or other valuable assets, is required to back a secured loan. If you default on this type of loan, the lender can seize that collateral. Unsecured loans don’t require any sort of collateral backing. In this case, the lender can’t take your property if you’re unable to pay, but the tradeoff is generally higher interest rates. A line of credit is an agreement between a borrower and lender that allows the borrower to draw funds as needed, up to an agreed-upon limit.
The Small Business Administration offers four primary types of loans:
The SBA also offers lines of credit to help meet the short-term needs of businesses with a demonstrated positive cash flow. Some other general types of small business loans include:
Navigating the loan application process
Planning will help you get through the loan application process with a minimum of stress. Before applying, you will make sure your business qualifies as a small business under the SBA’s criteria, and be prepared to demonstrate good character, decent credit and the ability to pay back your loan. Seek out institutions that are open to lending to small business owners. Often, if you approach banks or credit unions that already are familiar with you as a customer or community member, you’ll have a better chance of approval.
If you submit an incomplete loan application, your small business loan may be delayed or denied. Before meeting with a lending officer, ask exactly what documentation is required so your application will be in perfect order. Although individual lenders have their own requirements, here’s a general idea of what you’ll be expected to provide at your loan interview:
Start-up loans are one of the hardest types of small business loans to acquire. If you’re starting a new business, you’ll improve your approval chances by showing excellent credit, a strong business plan, some personal resources of your own to invest and solid collateral. Smaller banks, credit unions, and community financial institutions may be more likely to take a chance on you than a large national or international bank.
Need more help or advice?
For more information and guidance concerning small business loans, contact any of these organizations:
Originally posted on NerdWallet.
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