Small business loans are also known as commercial loans. Small businesses require a loan if there is an urgent demand for capital. You can secure a small business loan from a bank or a financial body. Before going for a loan, you must do ample research to understand and make it a smooth process.
Small Business Loan Procedure
Check the criteria: Before applying for a business loan, it is advisable to check if the application matches the requirements.
Submit application and documents: Generally, this can be done online too.
Wait for Approval: If the application matches the eligibility, you will be asked to submit the required documents.
Why do you need a Small Business Loan?
Small Business owners go for a loan when they experience the following:
Poor Cash Flow: In case of insufficient cash flow, a loan is required for basic operating costs.
Expensive Inventory or Equipment: Businesses use loans to procure state-of-the-art machinery and equipment required to run smooth processes.
Hiring and Marketing Costs: When you are setting up your business, you will be required to incur heavy marketing costs. Also, you will be hiring a new team that requires substantial funding.
Emergency Funds: Any business can face an emergency in the form of a natural disaster or equipment failure. A loan is required to sustain during such hard times.
Applying For the Loan
Before applying for a loan, prepare yourself with sufficient research. Here are some titbits to bear in mind:
Calculate how much loan you need: It's a good idea to use a loan calculator. This will help you decide how much funding you need. There are three core business areas for which business loans are required:
a) Business expansion
b) Operating Expenses
c) Loan Refinancing
A Business Plan
A detailed business plan is required for any lender to offer you a loan. It will help the lender to evaluate the viability of your business idea.
Do check the payment terms of the loan; this is extremely crucial. Some small business loans may even have a weekly repayment; therefore, you need to look closely at the repayment options.
Talk to a Financial Advisor
A financial advisor will be of great help in guiding you and may give you various insights regarding financial institutions. A financial advisor will also help you choose the right loan.
Decide on the Type of Loan
Your research should start with what kind of business loan you should go for. Listed here are a few of the most common loan types:
Funding for day-to-day expenses
Funding a start-up
Funding for business expansion
Determine if You Qualify
A business loan can be secured from banks, online lenders, or microlenders. Your credit score decides from where the loan can be secured. If you have a credit score of 60 and above, be assured of getting a low-rate loan from a bank. Otherwise, you can secure a bank loan from other lenders.
To get a small business loan, you need to be in business for one year to secure an online loan and a minimum of two years in business to get a loan from a bank. Also, you need to have a minimum annual revenue of $50,000 to $250,000.
Look and Plan your Repayments
You must have a close look at your cash flow
, to evaluate how you plan to repay each month. A general rule is that at least the total income should be 1.25 times the total expenses.
Collaterals and Personal Guarantees
A secured business loan requires collateral which could be a property or business equipment. In case of an unsecured loan, the lenders will ask for a personal guarantee. If you are unable to repay, you will be asked to repay through personal means.
Securing a Loan Without a Collateral
Generally, collateral is required. However, since it's a small business, you might not have adequate assets to put up as collateral. Fortunately, some options may secure you a loan without collateral. Through small business administrations and online lenders, a loan without collateral may be secured. It could be peer-to-peer lending too.
Getting a Loan through Online Lenders
Small online business lenders have an edge as you can secure the loan quickly. You can even get your loan approved within a day. When you do not have collateral but need quick funding, it is best to go to a small online lender. However, if you have a good credit score and have been in business for more than two years, you can approach banks
, for term loans, lines of credit, and commercial real estate loans.
Apply for a Business Loan
After researching and checking the process, it's time to apply for the loan. You need to have the following documents: business name, address, tax ID number, business plan, business loan proposal, business financial statements, and details about business owners.