Most small businesses will require some financial help from time to time. The funds can be a capital to start the business or to sustain and expand it. In fact, a small business loan can be the difference between keeping your business afloat and complete failure.
If you are planning to start a small business or you want to expand and need funding for business, it is important you understand how loans for small business works and how you can get one.
IN THIS ARTICLE
When it comes to obtaining loans for a small business, one of the factors that most business owners are worried about is getting approved. It is tough to find someone willing to give you the money you need without being absolutely certain that you have the ability to pay back to the last cent with interest.
Thus, the first step when you want to get funding for business is to read about various small business finance sources available and study their approval criteria so you can decide which one is best for you and which one you can go for.
To understand how small business loan works, you should learn about different types of loans for small businesses and sources to get them.
Below are Some of the Major Types of
- Micro Loan: These are usually very small loan between $5,000 - $35,000. They require collateral and are mostly given to new startups.
- SBA Loan: SBA loan can provide you with any amount of cash you need to guarantee your small business success. However, approval for this type of loan is usually not easy, you need a strong business startup plans as well as other requirements you need to fulfill.
- Franchise Financing: This type of loan is reserved for franchisees of established, well-known franchises.
- Development Financing: If you are planning to get major fixed assets such as land and buildings, you can be able to get development financing which a long-term, fixed-rate financing for fixed assets.
When you have decided on the amount of loan you want to start your small business success, the next thing is to decide where to get the funding for your new startup. Below, we have listed some small business finance source:
- Family and Friends
- Government Loan Programs
- Line of Credits
- Angel Investors
- Peer-to-Peer Lending
- Venture Capital
- Small Business Lenders
Obtaining a Small Business Loan:
Now that you've known various types of loans available for small business and where you can obtain them, now is the time to learn how they work.
Below, we've listed how small business loans work:
1. Lenders Want Their Money Back (with Interest)
Whether you are getting a loan from the government, bank, or small business lenders, you must understand that they will certainly need you to pay them back with interest. You might be able to escape paying interest if you get a loan from family or friends, or from a mutual group. However, other small business loans sources will give you time to pay back the loan with interest. The interest rate you will pay may differ depending on the type of loan you are getting and the source.
2. You Need Collateral
No one will give you a loan without collateral except maybe your friends. Even if you are looking to get a loan from a friend, it may not be up to the amount of money you will need for your small business success. Thus, before you go in search of a loan, ensure you have something you can use as collateral.
3. You Need a Business Plan
All the major small business finance sources will demand to see your business startup plans before they can give you a loan. In fact, you can easily get disqualified if you don't have a strong and convincing business plan. You must show the lender how you plan to run the business, what you need, who your potential customers will be, the expected income, the expected duration of the business, the principal actors in the business - in fact, the entire plan about your business. Without a strong and convincing business startup plans, it may be difficult to get the loan you will need for your business.
4. You Need a Good Credit Score
If you are considering getting a loan from the bank, you must have a very good credit score, otherwise, your loan request will be denied. However, don't lose hope if you don't have a stellar record, you can seek for a loan from other small business finance sources such as small business lenders, angel investors, and even venture capitalists.
5. You Need Proper Documents
Apart from your business startup plans, you need other documents to tell the lender more about you and your small business. Some lenders such as Bank and government loan programs will demand a lot of documents while private lenders may only demand few documents from you.
Some of the documents you may need to get funding for business include:
- Proof of identity
- Documents about your collateral
- Business and personal tax returns
- Business and personal bank statements
- Business financial statements
- Business legal documents
Getting a loan for your small business can seem like a tough challenge but it is not. The important thing is to go through your options and know which small business finance source will approve you faster. You also need to consider the interest rate to pay on loan before you take out a loan from any source. I will recommend considering all the available options before making your decision.