A natural question when deciding on growth opportunities or starting a small business is "How do small business loans work?".
Small businesses may borrow money from various lenders through small business loans. There are different types of loans available to help entrepreneurs achieve their goals. The way each loan works depends on the type of loan.
Maybe you've come up with a killer product. Maybe your business needs a piece of equipment to boost its growth. Perhaps you need to pay outstanding invoices in order to cover operational costs. Whatever it may be, it may be time for a loan.
What is a small business loan?
So let's talk about small business loans. To put it simply, a small business loan is any funding option specifically designed for small businesses. It allows existing or startup businesses to borrow money from various lenders. Various loan types exist to help entrepreneurs meet different goals.
In order to get the most out of your lending options, it is important to review just a few.
Term Loan - A standard bank-type loan. You receive the funding and pay off the principle plus interest over time.
Equipment Financing - An excellent way for a growing business to get an edge. You receive the equipment upfront and pay it off over the life of the equipment.
Accounts Receivable Financing - If you have large amounts of outstanding invoices, you can borrow against them. The invoices act as collateral and AR Financing offers lower rates.
Merchant Cash Advance - A merchant cash advance is borrowed against future credit card sales. A borrower then pays back a percentage of daily CC sales to the lender. So, you never have to see the payments!
Business Line of Credit - A business line of credit works just like a non-physical credit card. The owner of a small business is extended a line of credit and is charged the interest only or what is spent.
Requirements to Apply for Small Business Loans
Although specifics may differ, the basic requirements for small business loans remain the same.
Because you are responsible for a small business loan, your credit score matters and has a significant impact on the loan amount. For businesses with multiple owners, lenders will ask for credit scores for each individual, as well as your overall business credit score. Make sure that your credit report is accurate before applying for a loan at the bank. It may also be necessary for you to boost your score a little bit if you are close to a higher threshold.
Business Banking Records
The bank needs to review your business banking records to make an assessment of the foundation and determine the business' borrowing capacity. Follow these tips to ensure you are in good standing:
The bank will consider certain key numbers when determining your rating and loan amount. Lenders are interested in a broad approach, so they will inquire about annual gross sales, as well as monthly numbers for:
Monthly Sales Volume or List of Collateral and Assets
Depending on the lender, collateral may be requested or not. In most cases, you will need to list company assets in your application. The lender wants to know what will cover your obligations if you can't repay the loan. Alternatively, you can provide proof that you have sufficient deposits in your business bank account to satisfy the lender that loan payments can be met.
Benefits of Small Business Funding
What type of financial support do you need? Wondering “where can I go to get a small business loan for a new business?”. There are many benefits to obtaining a small business loan. You can use them to keep control of your business and profits, avoid problems with loans from family and friends, and safeguard your personal assets.
Your capital needs will vary depending on whether you are purchasing equipment, additional inventory, or expanding your leasehold, or if you are seeking long-term financing for expansion and growth.
Sometimes, a simple line of credit is all you need to make purchases, pay payroll, or finance accounts receivable. According to CB Insights, 29% of businesses fail because they run out of cash despite new options for small business loans.