Tip #: Determine Which Type Of Loan Is Best For You
The SBA 7 loan offers high limits for most borrowers and can be used for nearly any purpose, making it a solid choice for many businesses. However, there may be other loan options that are better suited for your needs. For example, maybe a line of credit is a better choice than a loan that comes in one lump sum. Maybe your business has smaller needs that could be met with an SBA microloan. Or perhaps youve faced an economic loss due to a disaster in your area.
Every business is different, and so are your financial needs. Make sure to explore all SBA funding options and choose a lender that offers the product thats the best fit.
What Can I Use A Small Business Loan For
The lender and the type of loan will determine what you can use your small business loan for. Typically, you can use a small business loan to purchase inventory, buy business-related equipment, have working capital, make payroll, use it for marketing and advertising, and some loans even allow you to use funds to purchase real estate to expand your business.
Getting A Small Business Loan Can Be Tough And There Are So Many Variables To Consider When Looking For The Right Solutionclick Here For A Video All About Working Capital
As a small business owner, you probably know access to capital and funding is one of the biggest hills to climb. A lack of capital is also one of the main reasons small businesses fail.
While there are so many variables involved in getting a small business loan, there are a few steps that can help make it a little easier and actually increase your chances of getting a small business loan.
Small business loans are designed to do two things. Help you get your business started or growing and make banks or lenders money. Both things stimulate local economic growth in their own ways and are essential parts of your small business financing strategy.
While the reasons behind small business loans are generally positive, navigating the process and understanding financing options can be intimidating. Breaking down small business loans into manageable and understandable steps can really put things into perspective.
So, read on for 7 easy steps to get a small business loan.
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The Sba Cdc/504 Loan Program
Certified Development Company Loans are ideally used for purchases or improvements to fixed assets. The principal range on CDCs is from $1.5 million to $4 million. Unlike 7a loans, CDCs are only 40% backed by the SBA, and an additional 10% comes from the borrower, in the form of collateral.
The interest rates on these types of loans are tied very closely to 5 and 10 year U.S. Treasury Rates, with only a slight premium. In addition, theres a 3% fee attached to the loan, which most borrowers pay directly from the capital raised. The SBAs CDC/504 loan program is a bit different because instead of working with one intermediary, a borrower works with two: a participating lender and a Certified Development Company.
With these loans, the SBA provides up to 40% of the total cost of a project through a Certified Development Company. A traditional lender, such as a bank or credit union, provides 50% of the total project cost. The borrower is responsible for the remaining 10% of the total project cost. The maximum SBA loan amount distributed through this program is $5 million.
Pros and Cons of SBA CDC/504 Loans
In the right situation, applying for an SBA loan can be a smart financial decision for a small business. These are some of the advantages of an SBA CDC/504 loan.
Cons of 504 Loans
While SBA loans are a great option for small businesses in need of extra cash to make big purchases, there are some negative factors to consider.
Businesses CDC/SBA 504 loans cater for
Alternatives To Small Business Loans
No matter what type of small business financing you choose, securing a loan is no easy task.
Not to mention, it can be stressful to consider how difficult and lengthy the repayment of these loans can become. No one wants to accumulate business debt.
If you are wary about committing to a small business loan, you do have some business financing options that are a little bit easier to secure .
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Compare Our Best Picks
|$10,000 in monthly sales, 500 credit score, 6 months of business|
|Fora Financial||$12,000 in monthly sales, decent credit score, no open bankruptcies|
|Biz2Credit||$250,000 in annual sales, 660 credit score, 18 months in business|
|Rapid Finance||500 credit score, 3 months in business|
|Noble Funding||2 years positive net income, 500 credit score, 18 months in business|
|Balboa Capital||$300,000 in annual sales, 6 months in business, decent credit score|
|Crest Capital||24 months in business, 650 credit score|
|Fundbox||24 months in business, 650 credit score|
|Accion||$50,000 annual sales, decent credit score, 12 months in business|
We selected Biz2Credit as the best for marketplace lending because this company has a long track record of arranging small business loans, and it works with a network of lending partners to find you the best financing option. Biz2Credit has funded more than $2 billion in small business loans. Through Biz2Credit’s platform, you are matched with the financing products that meet your specific needs.
Editor’s Score: 7.5/10
We like the variety of options that are available with Biz2Credit. You can apply for a term loan, a working capital loan or a commercial real estate loan. Rates start at 8.99% and depend on your credit score. The better your credit, the lower your interest rate will be.
Is There Specific Documentation Required To Get Approved For A Small Business Loan
Among the documents you’ll need to provide lenders with are your annual business revenue and profit, bank statements, personal and business tax returns, a business plan, business licenses and permits, proof of collateral, a balance sheet, a copy of your commercial lease, and any legal contracts and agreements you already have in place.
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Am I Personally Liable For A Small Business Loan
Yes, in most cases you, as the business owner, are personally liable for a business loan. When you take out a business loan, youll typically need to put up collateral, which can range from business property and vehicles to personal assets like your own car or home. In the unfortunate event that your business goes bankrupt and you can’t repay your loan, you may also lose personal assets.
What Are Secured & Unsecured Business Loans
The difference between secured and unsecured business loans is simple. Secured business loans require collateral, such as real estate, heavy machinery or other assets, while unsecured business loans dont require any collateral as a guarantee for being able to pay the loan.
With secured business loans, the borrower agrees to give the lender an asset or piece of property if theyre unable to repay their debt. Collateral can make the financing process less risky for lenders.
Banks and other lenders have more certainty that they will get their money back, in the event you default. This can translate to lower interest rates, higher funding amounts, and better terms for borrowers.
Typically, traditional banking institutions will require your loans to be secured with collateral, like real estate or heavy machinery.
Unfortunately, borrowers face additional risks with secured business loans. In case you are unable to meet your debt obligations, you could risk losing the asset youve put up as collateral.
In the modern business financing world, however, you can find small business loans without collateral.
If you have collateral to back your small business loan, then you can choose to put it up. If not, then you can still find financing options. We can help you find either option within our marketplace.
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Small Business Loan Faqs
HOW DO SMALL BUSINESS LOANS WORK?
Business owners can take out small business loans generally between $5,000 and $500,000 or more to finance expenses like payroll, inventory, equipment and other costs. Repayment terms could be as short as three months or as long as 25 years. Both traditional financial institutions and alternative online lenders offer small business loans.
WHAT SMALL BUSINESS LOANS ARE AVAILABLE?
Several types of business loans are available for small business owners, including term loans and business lines of credit for general business expenses. Financing is also available for specific purchases like equipment and commercial real estate. In addition, invoice factoring and accounts receivable financing are available for businesses that collect a high volume of invoices.
ARE THERE SMALL BUSINESS LOANS FOR BAD CREDIT?
Yes, bad credit business loans are available for business owners with personal credit scores as low as 500. However, lenders may assign high interest rates to low-credit borrowers.
AM I PERSONALLY LIABLE FOR A SMALL BUSINESS LOAN?
A personal guarantee is a common feature of business loans, which requires the business owner to be personally responsible for their companys debt in case of default. A personal guarantee lowers the risk for a lender, but for the business owner, it may limit any protections your business structure offers.
CAN I GET A BUSINESS LOAN FOR A STARTUP?
WHAT CREDIT SCORE IS NEEDED FOR A SMALL BUSINESS LOAN?
What You Need To Apply For A Small Business Loan From A Bank
Once youve decided which bank or alternative lender you want to apply with and know which type of loan you want, gather what youll need for the in-person or online application.
Traditional lenders like banks may want more detailed financial statements, tax returns, and profit and loss statements, while an online lender may just want a few details about what your annual revenues are.
Youll need to provide details for your business bank account so funds can be deposited once youre approved for a loan.
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We believe everyone should be able to make financial decisions with confidence. And while our site doesnt feature every company or financial product available on the market, were proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward and free.
So how do we make money? Our partners compensate us. This may influence which products we review and write about , but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.Here is a list of our partners.
Do Minority Business Loans Exist
No, theres no such thing as a business loan exclusively for minority business owners. Lenders cant discriminate on the basis of a borrowers race. So while that means they cant reject you because of your race, they also cant approve you or give you special terms because of your race.
Note that you might see minority-specific loan programs. These generally help minority business owners strengthen their applications for loans or guide them through the loan process. They are not loans themselves.
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Final Word: Startup Business Loans
Running your own business can be difficult, and starting a business might be the toughest part for entrepreneurs. While it can be challenging to find a lender from whom to borrow, dont assume its impossible to obtain a startup business loan.
Dont be afraid to consider alternative lending options. Nonprofit lenders offering microloan programs may be the right choice for your business, or tapping a business credit card may be a risk worth taking, provided the interest rate is low. Business credit cards for startups can help build good business credit for your business and could help bridge gaps in cash flow if absolutely necessary.
Whatever option you choose to pursue, be prepared and do your research and due diligence when youre looking to borrow. Be realistic with your business and your ability to repay the loan, even if youre approved for a high credit limit.
Above all, keep your motivation for starting the business in mind. It can be a rough process finding and being approved for a startup business loan, but the right motivation and the right business can push through it and get the job done.
Are There Specific Loans For Women
Not exactly the same anti-discrimination laws that keep lenders from denying someone because shes a woman also keep companies from approving someone because shes a woman. That being said, there are small-business lending companies that have programs to help women access loans or that have loans that might work well for women business owners.
You can find out more in our guide to business loans for women.
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Why Do You Keep Saying Minority
Were aware that not everyone loves minority as a label. To be frank, weve used this term for two reasons:
Various government agencies, like the MBDA and the SBA, use minority in their reports, program names, and resources. Most lenders and investors have followed suit.
As a result, minority business owners gets a lot more search volume than similar terms. We want to make sure people who need this article can find it, so weve stuck to the term.
How Startup Business Loans Work
Startup business loans refer to various forms of financing available to businesses without an established track record or credit history. For that reason, different types of startup loans have different qualification requirements and application processes. Available loan amounts and borrowing terms also vary by lender and loan type. In general, though, startup business loans have less stringent qualifications than traditional business loans, making them more accessible to new businesses.
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How To Choose The Best Loan For Your Business
Before your borrowing journey begins, you need to figure out how much you need, how soon, and for what. That helps you determine if you should take out a long-term loan or choose a quick financing option. When you need capital fast, it’s easy to accept the first offer, giving little thought to interest, fees and the need for collateral. But that could leave you with an expensive loan you’re ill-equipped to repay.
Before you apply with any lenders, pore over all the terms and requirements. Check the interest rates and fees, then determine if the loan is an amount you can reasonably afford to pay back. Compare the interest rates and fees of various lenders until you find a rate that’s best for you.
Take time to understand the repayment terms, too. Do the terms, principal , and interest makes sense for you and your company? Will you be able to pay it back? Once you have a clearer understanding of the issues, you can start shopping for a business loan.
Tip: Small business lenders cater to different types of borrowers and segments of the market. It’s important that you shop around for a loan based on your business’s needs.
Small Business Loans Are Not Easy To Secure Here Are Eight Things That May Be Preventing You From Getting The Funding You Need
- Poor credit history and low cash flow can prevent small businesses from securing loans.
- Before applying for a business loan, make sure your financial documents are in order and that you understand what lenders need from you.
- A good business plan makes your business attractive to lenders, giving you a better chance of getting a loan.
Business loans can be essential to launching a startup or expanding an existing company, with funds often used to secure inventory, purchase equipment, rent operational space, hire employees or cover a host of other expenses. However, business loans can be difficult for new companies to get. Be aware of these eight roadblocks that can keep you from getting approved for a small business loan.
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Pro: Banks Offer A Variety Of Lending Products For Your Small Business
Many banks offer a range of loan and credit products that can grow with you as your business develops. Look for the following business lending options at any bank you’re considering:
- Business credit card: Best for short-term use on expenses like business travel, small costs or meals that can be paid back within a few months, ideal for smaller needs around $1,000
- Small business line of credit: Best for short-term or seasonal needs like inventory or production materials and can be typically paid back within a few months, great for larger needs around $10,000
- Term loan: Best for needs around $50,000 for things like new equipment or vehicles and can be paid back within a few years
- Commercial mortgage: Best for financing a new property purchase or refinancing an existing business mortgage for needs around $250,000
- Equipment finance: Financing for both purchases and leasing for certain types of highly specialized commercial equipment
- Healthcare lending: Special types of practice financing to meet the unique needs of healthcare professionals like doctors, physicians, veterinarians, optometrists and more
How To Qualify For A Small Business Bank Loan
To improve your chances of being approved for a small business loan, focus on banks that accept smaller businesses. Having a business banking account, exceeding minimum revenue requirements and proving your business can repay what it borrows will help you get approved.
Here are a few points banks look for when you apply:
- Error-free application. One of the main reasons lenders reject applicants is because they find errors or inconsistencies in the application.
- Excellent credit. Its standard for banks to require some kind of personal guarantee from each business owner, so it may consider your personal credit score as well as your businesss credit score especially if you havent been open long.
- Time in business. Banks typically want to see at least two years in business. The longer your business has been around, the more likely you are to qualify.
- Existing relationship. Having a business checking account with a bank will help prove your revenue. And if you already work with a specific banker who knows your business, you may have an added edge when it comes to getting your application approved.
- Strong business plan. A strong business plan demonstrates that you have a plan for your funds and know how your business will be able to pay back the money you borrow.
What should I do if I was denied for a business loan?
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