Small Business Loans & How to Get Approved

By: Chris Fuller

Today’s lenders are approving small business loans at a record pace. The good economy and tax cuts have brought lenders out of the woodwork. They want you to be successful in your endeavors. Obtaining a loan still has its challenges, however. Before you embark on an exploratory journey into the banking world, learn how to get a small business loan first. Being prepared for the process is just as important as your company’s profit margins.

Defining the Loan’s Purpose

Every business needs liquid assets for daily operations. However, it’s important to only borrow money for a specific purpose. Creating a loan proposal is a smart first step to take.

Business owners often ask for loans to:

  • Get the business up and onto its feet
  • Expand the company with another location or additional inventory
  • Keep up with daily expenses

Business loans aren’t designed to pull you out of the red. The company should be relatively successful but in need of extra funds to achieve more liquid assets to improve business operations.

Brainstorm on the purposes of your loan. There might be more than one reason why you require the funds. Be sure to add every reason to your proposal in order to strengthen your position for approval.

Comparing Unsecured Versus Secured Loans

Business loans are divided out into two types. You may have encountered these types when applying for personal loans in the past. Take a look at the differences between unsecured and secured small business loans. Both have their advantages and disadvantages.

  • Unsecured Loans

Your business may not have any collateral, such as equipment, to secure a loan. Lenders use collateral as risk insurance. If you fail to pay back the loan, the secured item or items become the lender’s property.

With this scenario in mind, it makes sense that an unsecured loan is a risk on the lender’s side. Lenders base the loan’s stability on other factors, including:

– Experience

– Professional recommendations

– Business type

If the loan is approved, the interest rate will be relatively high. This feature isn’t based on your credit or business expertise. It simply gives the lender a level of comfort with an unsecured loan being funded to your checking account.

  • Secured Loans

If you’re comfortable with putting an asset down as collateral, choose a secured loan. Lenders appreciate the business owner’s efforts when collateral is involved. Both sides have a level of risk. As a result, the loan will typically have a low interest rate along with other benefits. Collateral is always a good idea when you’re confident about your ability to pay back the debt.

Searching for the Perfect Lender

When you learn how to get a small business loan, you realize that the lender is an important component. Most business owners look for these types of lenders:

  • Online entities
  • Local banks
  • Federal government institutions

Online entities are relatively new to the market, and they have low overhead. This fact equates to lower costs on your loan. In contrast, traditional banks often have shorter repayment windows that drive up your monthly costs. These funds are often approved faster than other resources.

Federal business loans are backed by the United States government. They are usually funded by the Small Business Administration (SBA). Most business owners gravitate toward these loans because the terms are typically good for every borrower.

Considering Microlending

Every business goes through its ups and downs. In some cases, typical funding resources will not approve your applications. Don’t lose hope because microlending might be an option for you.

Microlending companies aren’t banks. They’re actually nonprofit organizations that specialize in loans for businesses that lack liquid assets or collateral. Whether you want to expand your business or invest in equipment, these organizations take your experience and reputation into consideration.

It’s possible to be approved for a microloan that reaches a maximum of $35,000. Use this money to build your credit. These loans are short-term lending solutions, so a payoff will show nicely on your credit report. When you require funds in the future, traditional lenders may look your way.

Debating the Merits of Angel Investors and Crowdfunding

Business loan rates can often leave you out of the funding loop because they don’t fit into your budget. Fortunately, there are alternatives in the marketplace. They include:

– Angel investors

Find angel investors within your circle of friends, family or colleagues. They’re typically third parties who are interested in funding a company with some return on the investment. Take on an angel investor with caution if you don’t know the individual well. Some agreements require a percentage of the company or profits to be allocated to the angel investor.

– Crowdfunding

Crowdfunding is the process of collecting money from the community to fund your company’s concepts, products or services. The major advantage of crowdfunding is the lack of debt. The funds are essentially gifts in bulk form. As a result, the community lifts up the business without any official loan activity.

Looking Toward Startup Loans

There are many different business loan types. Some lenders offer startup loans. These funds are allocated to companies that have very little experience and capital in their industry. There is high risk with these loans, so many lenders use two subcategories to allocate the money. They are:

Your company may require some equipment for manufacturing or shipping processes. A loan built around the equipment creates instant collateral. The equipment pays back the loan if the business doesn’t succeed.

On the other hand, personal loans are guarantees made specifically by the business owner. He or she uses their personal credit to gain access to funds that can be used across the business. These interest rates are often competitive with business loan rates.

Thinking Outside of the Box

You might be concerned about taking on any extra debt, but liquid assets are often necessary. It may be a good idea to look for alternative outlets to gain those funds. Asking family members for a loan is a possibility. Many people have nest eggs that are sitting in the bank right now. It’s imperative that the loan is paid back in a reasonable amount of time because upsetting the family unit has ramifications that extend beyond the business world.

Another alternative is borrowing from a retirement account or home-equity accumulation. If you choose either of these pathways, be sure to consider:

  • Tax requirements
  • Home sale issues

Some business owners know that they’ll achieve success after borrowing from their families. If success is nearly guaranteed, there’s no reason why a family loan wouldn’t be a smart option.

Using Credit Carefully

If you have a business credit card, use the funds wisely. These cards don’t always have the best interest rates. Consider a loan from the card when there’s a promotional rate. Zero percent for 12 months is a good example of a credit card with a flexible promotion.

Purchase the items that you require and keep track of the payment period. These cards can be extremely valuable to your success when interest accumulation isn’t part of the workday. If you’re approaching the promotion’s expiration date, try a balance transfer to another card. The business can benefit from a longer payback period with this strategy. However, don’t make it a habit to move funds in this manner. The interest will catch up with the charged amount at some point.

Striving for Grants

Free money is always good. It doesn’t come around too often unless it’s in the form of business grants. These monetary funds come from a variety of sources, including:

  • Nonprofit agencies
  • City or town governments
  • Foundations

Explore the available grants in your area. They’re typically given out according to a specific industry or business goal. Adding new jobs to an area might trigger a grant award. Creating a greener community is another reason why a grant might be awarded to your business.

Apply for as many grants as possible. In some cases, you’ll collect multiple grants of varying amounts, and these funds add up over time. If you’re still short of your funding goal, applying for a loan is a great way to supplement the money. The debt will ultimately be much smaller than before the grant awards.

Polishing Up the Business

Once you’ve decided on loans or business grants, it’s time to polish up your company’s credit. Take a look at your debts versus assets. Examine items as small as last month’s electrical bill. You want to show any lender that you’re on top of your organization’s finances.

You may have a lot of funds after the loan is approved, but a budget must be put in place. Consider the amount of money that you can faithfully pay toward the loan every month. Be truthful in your calculations. Asking for too much money and not being able to pay it back is a scenario you definitely want to avoid. Remind yourself about these features to your budget:

  • Monthly commitments
  • Quarterly bills
  • Tax payments

Every item adds up within your budget. Always be conservative with your finances so that there’s still some cushion as you pay back the loan.

Pulling It Together

Applying for a business loan is a lot more involved than a personal loan. Take a look at just a few of the documents that you’ll need to supply:

  • Executive employee list
  • Full name of the business
  • Federal tax identification number
  • Financial documents dating back two or three years ago

There are many other documents to pull, but the financial papers might be the most important. They’re valid proof that the business is viable enough for a loan. The lender must know that the funds can be paid back.

A projected analysis is also required. The projection includes your plans for the funds along with the potential returns. All of the financial data should have a CPA’s stamp of approval. Estimating returns with a nonprofessional won’t go over well with any lender.

Funding the Loan

In the past, funding a small business loan took weeks or months. The pace depended upon the amount, your documentation and other factors. Today, it’s possible for some loans to be funded within five days.

With these huge variations in funding times, business owners must be ready with every request from the lender. Document changes, questions and signatures should be completed in a timely manner. Holding up the process will only cause funding to take longer. Preparation on the part of the borrower is the key to a smooth lending process.

Prioritizing Payback

Your new business loan has strict payments every month. Adhere to them so that penalties and fees don’t add up on your account. If you find yourself doing better than originally projected, don’t hesitate to put extra money onto your monthly payment.

Every loan has different rules regarding prepayment, however. You’re welcome to pay down some of the debt, but the interest still accrues. The lender ultimately wants their interest on the funds.

Read about the prepayment penalties on your loan. In some cases, there’s only a penalty during the first three years of payback. Be sure to play by the lender’s rules to avoid any extra fees.

If you find yourself falling behind on the loan, though, speak to the lender. There may be some options to reduce the costs of your loan if you fall too far behind. Communicating with the lender is always the best choice in these cases.

Every institution has slightly different rules, so don’t be disappointed if the first bank turns you down. Be hopeful and move forward. A challenge can turn into success when you have an honest business that’s steadily growing. The American dream can be reached with a little monetary help.

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