Small business loans are available from a large number of traditional and alternative lenders. Small business loans can help your business grow, fund new research and development, help you expand into new territories, improve sales and marketing efforts, engage new people and even more.
This article presents 10 key steps to getting a small business loan, with tips and information on the loan process.
1. Understand the different types of loans available to small businesses
There are several types of small business loans. The options vary depending on the needs of your business, the length of the loan and the specific terms of the loan. Here are a number of small business loan choices:
- Small Business Line of Credit. As part of a small business line of credit, your company can access the lender’s funds as needed. The amount of accessible funds will be capped (for example, $ 100,000), but a line of credit is useful for managing a company’s cash flow and unexpected expenses. Setting up the line of credit generally pays, but no interest is charged until you use the funds. Interest is usually paid monthly and the principal used on the line is often amortized over several years. However, most lines of credit must be renewed each year, which may result in additional fees. If the line is not renewed, you will have to pay it in full at that time.
- Financing accounts receivable. line of credit for receivables is a credit facility secured by the customer’s accounts receivable (AR). The AR line allows you to get cash immediately based on the level of your accounts receivable and the interest rate is variable. The AR line is paid as customer accounts are paid by your customers.
- Working capital loans. working capital loan is a means of borrowing used by the company to finance its day-to-day activities. Companies use these loans to manage fluctuations in revenues and expenses due to seasonality or other circumstances of their business. Some working capital loans are not guaranteed, but companies that have little or no credit history will have to pledge the loan or provide a personal guarantee. Working capital loans tend to be short-term loans of 30 days to 1 year. These loans typically range from 5,000 to 100,000 euros for small businesses.
- Term loans for small businesses. erm loans are generally fixed-rate (for example, USD 250,000) and are used for commercial operations, capital expenditures or expansion. Interest is paid monthly and the principal is usually repayable within 6 months to 3 years (repayable over the life of the loan or with a lump sum payment at the end). Term loans may or may not be guaranteed, and interest may be variable or fixed. They are good for small businesses that need capital for growth or large one-time expenses.
- Small business loans SBA. ome banks offer small businesses attractive, low-interest loans guaranteed and guaranteed by the United States. mall Business Administration SBA). Due to the SBA guarantee, the interest rate and repayment terms are more favorable than most loans. Loans range from € 30,000 to € 5 million. However, the lending process takes time and imposes strict requirements on eligible small businesses. Visit the SBA website to see a list of 00 most active SBA lenders.
- Equipment loans. mall businesses can buy equipment through a loan of equipment. This usually requires a down payment of 20% of the purchase price of the equipment, and the loan is secured by the equipment. Interest on the loan is usually paid monthly and principal is generally amortized over a period of two to four years. Loans can be used to purchase equipment, vehicles and software. The amount of the loans normally varies between 5,000 and 500,000 euros and can generate fixed or variable interest rates. Equipment loans can also sometimes be structured as equipment leases.
- Credit cards for small businesses. Although some business owners are reluctant to use them, small business credit cards can also be used for short-term financing for small businesses. Interest rates vary depending on the issuer of the credit card, the amount available on the card and the creditworthiness of the cardholder. Many small business credit card issuers require the principal owner to be co-responsible with the corporation. Many credit cards offer promotional introductory rates of 0% for a short period (6-9 months).
More lenders than ever are ready to lend to small businesses.
2. Search for available lenders
More and more lenders are ready to lend to small businesses, and many of them can be found from a simple online search. Here are the main types of lenders:
- Direct online lenders. number of online lenders make loans to small businesses through a relatively simple online process. Well-known companies such as wift Capital rovide very early cash advances to small businesses, orking capital loans and short-term loans ranging from € 5,000 to € 500,000. Sites like undera nd endingTree ives you access to several lenders, as a lead generation service for lenders.
- Large commercial banks. raditional small business market lenders are banks such as Wells Fargo, JP Morgan and Citibank. These tend to be slower with stricter loan underwriting criteria.
- Local community banks. any community banks are eager to lend small business loans to local businesses.
- Loan sites between counterparts. here are a number of sites that act as intermediaries between individual and institutional lenders and small borrowers. These lenders can make decisions relatively quickly.
- Bank lenders backed by SBA guarantees. number of bank lenders issue SBA-backed loans and, as noted above, this guarantee allows them to offer more favorable terms.
Predict how the lender will review your credit profile and risk profile
In the end, lenders wonder whether or not they are lending to a small business based on the credit and risk profile of the borrower. Lenders will consider he following factors. Therefore, review them carefully and consider taking any appropriate corrective action:
- Credit score / credit report. enders review your credit history, credit score, and timely payment history for credit cards, loans, and supplier contracts. So, examine your credit report and clean up any imperfections you can.
- Outstanding loans and cash flow. he lenders will review your outstanding loans and debts to determine that your cash flow will be sufficient to pay the existing borrowings and bonds, as well as the new loan being considered.
- Assets in the company. enders will examine the company’s assets (particularly short-term assets such as cash and accounts receivable) to determine whether there is a good asset base to use in the event of loan default.
- Time in business. enders will tend to favor companies that have been in business for several years or more.
- Investors in the company. enders will see the company more favorably if it has professional venture capitalists, strategic investors or leading angel investors.
- Financial state. enders will review your financial information as outlined in the section below.
Make sure your financial statements are in order
Depending on the size of your loan, the lender will carefully review your financial statements and your books. So make sure they are complete, correct and complete, including balance sheets, income and loss statements and cash flow tables. The lender will analyze your cash flow, your gross margin, your debt ratio, your accounts payable, your accounts receivable, your EBITDA, etc., so be prepared to answer your questions. Consider asking your accountant to review your financial statements to anticipate problems that a lender might raise.
Lenders prefer audited financial statements by a certified public accountant (CPA). But many small businesses do not want to bear the costs of an audit. One solution is to “revise” the financial statements by a CPA (cheaper and faster). However, some lenders may not need audited or revised statements.
5. Gather detailed information for your small business loan application
If you want to get a small business loan, you must be ready to provide detailed information and documents about your business. It is important to be prepared and organized. Here is the type of information often required, depending on the type of loan:
- Company name (including database administrators)
- Federal tax identification number
- List of the members of the management and their antecedents
- Legal structure (such as LLC, company S, corporation C)
- Financial statements for the last two or three years and financial statements for the current year (balance sheet, income statement, income statement, shareholders’ equity)
- Forecast financial statements (so that the lender can get a sense of your expected future cash flows and operations)
- State filings for the company, such as a certificate of incorporation, deposits of foreign companies and certificates in good standing
- Copies of key insurance policies and liability
- Amount of the requested loan
- Corporate credit report (for example from a credit reporting agency like Dun & Bradstreet)
- Potential guarantee available for loan
- Financial statements of the main shareholder / owner of the business (especially in the event that a personal guarantee is required)
- Business plan, executive summary, or company investor presentation (see ow to create an ideal launching platform for start-ups )
- The company’s tax returns for the last 2-3 years (signed copies with all attachments and exhibits)
- Bank statements
ee also 5 questions that venture capital investors will ask start-ups.
6. Be prepared to specify the amount you want to borrow and the intended use of the proceeds of the loan.
The lender will want to know how much money you are looking for and how the loan proceeds will be used. Will the loan be for the purchase of equipment or capital expenditure? Expansion or rental? Increase in stocks? Improved sales and marketing efforts? New research and development of technology? New product development? Expansion into new facilities or new territories?
You may want to borrow a little more if you are having financial difficulties that last a month or two. You must avoid defaulting on the loan.
7. Determine what security or guarantee can be provided
A lender is primarily concerned about the borrower’s ability to repay the loan. To the extent that a lien can be given to the lender on the assets of the company (equipment, property, receivables, etc.), the borrower should be able to increase his chances of obtaining a loan on favorable terms. Some lenders may require the personal guarantee of the main owner of the business. It is best to avoid this as much as possible because it endangers the personal assets of the owner, not just those of the company.
8. Analyze the key terms of the proposed commercial loan
To make sure that the proposed business loan makes sense for your business, you need to analyze the key terms a lender offers and compare it to the terms available from other lenders. Here are the key terms to review:
- What is the interest rate of the loan and how can it vary over time? Many loans vary over time depending on the “prime rate” in effect or the IBOR.
- How often are interest payments payable (weekly or monthly)?
- When is the capital owed or how is it amortized over the life of the loan? You must be comfortable with combined interest and principal payments from the point of view of cash flow.
- What is the loan setup fee?
- What other costs or fees are charged (such as sales charges, administration fees, loan processing fees, etc.)?
- What are the operating covenants imposed on your company (such as the maximum debt ratio or the minimum cash threshold held by the company)?
- What are the circumstances in which the lender can call a default on the loan?
- Is there a security or warranty required?
- What periodic reports or financial statements must be provided to the lender?
- Are there limits to using the proceeds of the loan?
- Can the loan be paid in advance without penalty? And if there is a penalty, is the penalty reasonable?
Check your profile and ads online
A small business lender will perform a due diligence, which may include an analysis of the information available online about the business and its primary owner. Therefore, perform the following review, providing for such due diligence to see if you need to make any changes or deletions to your online presence:
- Check your company’s website. Is it up to date and professional looking?
- eview its presence on LinkedIn, Facebook, Twitter and other social media sites.
- eview the Yelp reviews your business has received.
- heck out the main owner’s posts on LinkedIn and other websites.
0. Learn more about the small business loan process
The more you learn about small business loan options and procedures, the more likely you are to succeed in getting a loan. Here are some additional articles to consider:
- 8 Things to Look For Before Choosing an Alternative Loan Solution
- uaranteed business loans: how do they work exactly?
- ired of being turned down for small business loans? Here’s how to get the money you need
- tips for getting a small business loan
Small business loans are available from many lenders with a myriad of choices tailored to the financial situation of your business. By anticipating what these lenders will consider and demand, you will greatly increase your chances of getting a small business loan.