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Everything you need to know about small business loans

Small Business Loans
Small Business Loans

There is no doubt that small businesses are the backbone of every economy. However, most entrepreneurs close their business in less than 3 years after conception. One of the major reasons behind this is lack of capital. Coming up with a creative business idea is difficult, but proving to investors that the business is profitable can be a bigger challenge. To solve this problem, several loan options were introduced to small business owners.

Small business loans are almost similar to commercial loans. Business owners are required to request for a certain loan amount, issue an asset as collateral and repay the loan together with the incurred interest after a certain period of time. Business loans can be obtained from both direct lenders and conventional lending institutions. The down payment required for the loan is also less compared to conventional loans. This makes the loan a good option for entrepreneurs with lower investment capital. However, it can be quite challenging for borrowers with bad credit to have their business loan approved. The application process also takes time, which means that the loan may not be the best option for borrowers who need immediate business financing. The maximum loan amount varies depending on your business needs. There are also lenders who offer business loans online, making it easier for business owners to apply a loan.

Types of small business loans

Some of the different types of small business loans available include;

  • Microloans

    These are small business loans which are less than $50,000. Most entrepreneurs apply for a microloan to either start or expand their business. Repayment terms vary depending on a number of factors which includes the loan amount, loan usage, and the entrepreneur’s needs

  • General small business loans

    These loans are used to cover a wide variety of business needs which include debt refinancing, purchase of equipment and paying for other operating expenses.

  • Disaster loans

    These are low interest loans and can be provided to both start-up and established businesses. The loans can be used to replace or repair damaged items including business assets, real estate, machinery or even personal property.

  • Real estate and equipment loans

    This loan is taken to purchase or renovate real estate property. For you to qualify for the loan, you need to be of ‘good character’, have a business plan and management expertise.

All these categories have their own loan terms and borrowers are required to apply for the loan individually. Business loans can be used for;

  • Starting up or expanding an existing business
  • Purchase of commercial real estate property
  • Construction and improvement of commercial buildings
  • Purchase of new equipment or machinery
  • For debt consolidation

It is important to note that all these categories also have their own requirements, loan terms and interest rates.

What type of loan is the best for you?

For you to know the best loan to apply for your business, it is important that you familiarize yourself with different business loan types. You can speak to a financial advisor or approach a business lender for more information.

Steps in getting a small business loan

Once you know the different types of business loans available for you. You need to go through the following process

Research lenders

There are a number of lenders who offer small business loans and all of them have different terms and conditions. These include direct lenders, small community banks, large commercial banks and peer to peer lenders. The loan amount also varies depending on the business need and the borrower’s financial history. The loan application process is simple, but be sure to only work with a reputable lender.

Put together the loan ‘resume’

Most lenders will want you to have more information about the business loan you are requesting for and its financial health. Unless you are applying for an online business loan, you will have to speak to a representative about your business needs and find out which loan option is the best for you. Some of the information that you may be required to include your credit score, business assets, cash flows and if you have any outstanding loans. It is therefore important to gather all the information needed before requesting for the loan.

Have detailed information on your small business

Lenders will also want to know how long you have been in the business and if the business is profitable enough to guarantee loan repayments. Here, the lender will require you to give banks statements, tax returns, a list of executives who are involved in running the business and a business credit report.

Know what you want to do with the loan

Business loan lenders will need to know how much you are applying for and what you intend to do with the loan. You need to consider the overall costs of what you want the loan to be used for and include the potential unexpected expenses that may arise. You also need to know the loan repayment terms and interest rates of a business loan before committing yourself to the loan.

Advantages of business loans

  • Convenient and accessible
    There are many institutions that offer business loans with some lenders even offering the loans online. This makes it easier for you to meet urgent business needs.
  • Multiple loan options
    Different loan options are available for small businesses. However, it is important to get more information from a financial adviser to determine which loan option is the best for your business needs.
  • Lower interest rates
    Most business loans are secured, which means that you have to issue an asset as collateral. This makes the interest rate lower compared to other loan types.
  • Tax benefits
    If you request for a business loan from a financial institution, you will be able to enjoy some tax benefits. This is because a percentage of profits that is used to repay the loan is exempted from tax.

Disadvantages of business loans

  • Security
    For you to qualify for the loan, you are required to issue an asset as guarantee of payment. This can be challenging for startup business owners to access the loan.
  • Tight restrictions
    Even if you have to issue an asset as collateral, lenders also impose tight restrictions on the business loan. If you apply for the loan in a financial institution for instance, you will be required to keep your business debt-to-equity ratio. If the debt level becomes high compared to your equity, the lender will require you to immediately repay all the outstanding balance.
  • You may risk losing your property
    Lenders will require you to issue some form of security for the loan which may be your house, land or any other high valued property. If your business does not make enough profits to repay the loan, you may risk losing your property.

Bottom line

For borrowers who need a business loan, there are a number of options to choose from. You only need to carefully prepare yourself by gathering all the required information and documents before starting the loan application process. You also need to take into consideration what the lenders may ask you and your business needs to make the process less cumbersome. Business loans can come in handy, especially for startup owners who need funding to improve their business. All you need to do is fill out a loan request form and see your business grow.

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