How To Qualify For Small Business Loans – 2022-06-17 00:00:00 2023-02-01 00:00:00 https:///r/starting-a-business/small-business-loans/ Starting an English business Securing a loan for a small enterprise can unlock growth for your business. This guide will help you understand the financing options available and what information you will need to prepare to apply for a loan. https:///oidam/intuit/sbseg/en_us/Blog/Graphic/small-business-loan-header-image-us-en.jpg https://https:///r/starting-a-business/small -business-loans/ How to get a loan for a small business: guide and tips |
If your existing or newly founded small business needs working capital, but securing investors, a personal loan, or a small business grant isn’t an option, a business loan may be your best bet.
How To Qualify For Small Business Loans
Business financing can be a long and confusing process. But rest assured: With the following road map, you can understand the process and information you’ll need to gather as you prepare to apply for a business loan.
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In this article, you’ll learn how to get a small business loan, the different types you may be eligible for, and how to choose the one that’s best for you.
There are several types of small business loans available, including small business administrative loans, traditional loans, business lines of credit, invoice factoring, and specialty loans. Explore the different options below to see what might be the best loan for your small business.
SBA loans are funded through small business lenders but guaranteed by the U.S. federal government. The most common loan of this type is the SBA 7(a) loan. Because the federal government backs the loan on behalf of your business, your small business is more likely to get approved than if you approached lenders directly. SBA loans range from $500 to $5.5 million.
You can apply for traditional business loans directly through lending banks and financial institutions. Bank loan amounts vary depending on traditional lender requirements, the size of the lender and the industry, size and history of your company.
What You Need To Know About A Small Business Loan Application
A business line of credit is similar to a loan in that you require access to a certain amount of money. Once approved, you will have access to the funds. Unlike a loan, however, a business line of credit allows you to take out only the amount of money you need and only pay interest on that amount of money.
While it’s not technically considered a business loan, using outstanding receivables owed to your business can be a way to access short-term financing when you need cash. There are a couple of options when it comes to using your credit to access financing.
Invoice factoring is a business practice where your company sells your receivables to a third-party company (the factoring company). The factoring company immediately pays your company a large percentage of the invoice amount (often 80%–90%).
The customer then pays the invoice amount to the factoring company according to the invoice payment terms (for example 30 days, 45 days or 60 days). Once the customer pays the invoice amount to the factoring company, the factoring company pays your company the remainder of the invoice, minus a fee to the factoring company.
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Invoice financing is a similar, but slightly different form of financing, where your business retains ownership of invoices, but uses them as collateral to access financing. In an invoice financing agreement, you may be offered financing for the amount of the invoice you are financing against, less any fees charged to the lender. offers the ability to access invoice financing with Get Prepaid Invoices through Payments, so you can see your money sooner and get the money you need to keep your business going.
Specific small business loan programs support certain groups or causes. For example, the ASB’s Office for Women’s Entrepreneurship and Women’s Entrepreneurship Centers help entrepreneurs find loans. The USDA helps small business owners in rural areas get loans. The Accion Opportunity Fund provides loans to entrepreneurs of color, women and immigrants.
Before applying for a small business loan, there are some considerations to keep in mind to ensure you are prepared. Here are some eligibility requirements that most small business loans ask:
Credit history is the record of a borrower’s repayment of debt. Just like a personal credit score, your business also has a credit score. Normally, lenders look at your business credit history, but if you are a startup, lenders may ask for your personal credit history.
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In this case, make sure you understand what your personal responsibility is if a lender asks to check your personal credit history. If you cosign a business loan, you are personally responsible for the debt incurred by your business.
Typically, business loan providers prefer a credit score of around 680 and above. If you happen to fall on the lower end of the spectrum, you may need other solid business credentials as proof, such as high annual revenue and established years in business.
Your business history is a brief description of your business and its financial track record. Prepare at least five years of financial data and bank statements if you’ve been in business that long. Lenders look at your history to predict the future. They want answers to questions like:
Your proposal to lenders should specifically address how you will use the funds and how your business will repay the loan.
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For example, they want to know that you will hire software developers with the loan money and that the applications created by the developers will begin generating revenue within six months of hiring. They don’t care about the software itself, only that the software will allow your business to pay interest when due over the life of the loan.
Finally, lenders need a clear understanding of your company’s collateral. If you don’t repay the loan, the lender needs to know how he will recover the money he lent you.
Because business assets such as equipment, inventory, and trade receivables all change in value as you operate the business, most lenders will require multiple types of collateral to finalize a loan.
If you do not have collateral, the lender may require another borrower with adequate collateral to cosign or guarantee the loan. Lenders will need to verify that your business has resources to secure a loan, so make sure you understand the collateral requirements.
Things To “check” When You Apply For A Small Business Loan
Getting a loan for your small business may seem daunting at first, but it will be much easier if you are prepared to go through the application process. Here’s how to get a small business loan in six easy steps.
It might seem obvious that you should determine how much money your business needs before you start looking for a loan, but don’t skip this step for three reasons:
Before you go into debt, consider your other options. Would it be better for your business to add an additional owner in exchange for equity capital?
Instead of taking out a loan for larger additional employees, is it possible to outsource the work to a freelancer and avoid the need for the loan? In other words, make sure a loan is right for your business before committing to a debt financing strategy.
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As mentioned, there are many loan options for your business, but how do you determine which one is right? Review each loan and consider the following factors to determine suitability for your business:
Once you get a type of loan for your business, find applicable lenders. During this process, think of your business as a customer. Look round. Pit one lender against another and look for the best deal possible.
Because lenders earn on interest when it comes to small business financing, they may not offer you their best rate at the time of submission. Don’t be offended by this. Reject. Let the lender know that you are shopping for their rates and terms over the competition.
A word of caution when shopping lenders: If you give a lender permission to check your credit score, the check will show up on your credit report. You don’t want your credit score checked too often in a short amount of time. Get as many details as possible from a potential lender before giving them permission to check your credit score.
Small Business Loan
Once you’ve narrowed down your list of lenders, make sure you understand their requirements before applying. For example, most lenders require collateral to secure the loan.
In the legal documents you fill out to finalize the loan, you will offer the company guarantee as a backup. If you don’t pay the loan, the lender has the right to seize your collateral and then sell it to repay the loan.
In the event that a lender is unhappy with the company guarantee, they may require you to find a cosigner with a better guarantee. In this case, you want to find a cosigner before the loan documents are ready for signing.
Understand collateral minimums and all other loan requirements early in the process. Give yourself time to determine what risks you are willing to take to secure your loan.
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The documents required to secure a loan vary from lender to lender and are based on business history. Some of these documents include:
If your business has enough cash to cover the entire loan, you probably won’t need much more than a balance sheet and some recent financial data. However, the fact that you are considering a loan probably