What’s a Small Business Loan?

A small business loan is an amazing way to expand an existing business or kick start a new business. This type of loan gives business owners access to capital to invest in their small businesses.

In small business loan structure, a lender gives money to a business owner which he/she has to pay back with interest over a decided period of time.

Although the cost, use, and terms may vary widely yet there are some basic fundamentals small business owners must know before getting the small business loan.

What’s considered a small business loan?

According to the latest data from the Federal Reserve, in the U.S., the average small business loan amount is $633,000. This amount varies by the type of lending institution you are getting a loan from. For example:

  • Large national banks offer loan amount up to $593,000
  • Small national or regional banks up to $146,000
  • Alternative lenders offers up to $50,000 – $80,000

National Small Business Association reported that 69% of small businesses used financing in 2016. It includes venture capital, crowdfunding, credit cards, and loans. The remaining 31% were not eligible to obtain finance.

How do small business loans work?

Qualifying for a small business loan is as same as qualifying for any other bank loan. Most U.S banks offer a wide assortment of small business loans, so you can find the one that is a good fit for you.

The payment of such loans includes interest and a portion of the balance in every periodic payment. The interest and the loan payment vary from bank to bank.

Since these loans are a form of debt, lenders are authorized only to repayment of the loan amount and its interest. Like in equity financing, business owners don’t have to renounce the shares of their companies in exchange for funding.

A small business loan can be borrowed for:

  • Funding working capital
  • Emergency expenses
  • Purchasing machinery, tools, and equipment
  • Marketing campaigns
  • Debt refinancing
  • Business expansion, etc.

Is a small business loan hard to get?

Although there are plenty of requirements to get a small business loan approved, it is relatively easier, especially when you choose the right financial institution to help you go through this process. Most lenders take a look at the following factors before approving the loan.

  • Credit score of business which reflects the ability to pay back debt.
  • Lenders like to see whether or not the owner has relevant education and experience to run the business.
  • The financial health of business matters a lot. Lenders track whether the business has enough cash to make loan payments and run day-to-day expenses. They also check with the financial health of business owners as they believe who responsibly pay their personal debt is more likely to do the same for their business debts
  • Lenders prefer companies that showcase a record of total revenue and profit.
  • Sometimes, lenders request a company’s financial and marketing plans.

So, make sure you fulfill these factors before applying for a small business loan.

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How to Get a Small Business Loan from Government

Government small business loans are usually long-term and low-interest that can be borrowed for different purposes like expanding the business, buying new equipment, and so on.

Although the interest rates of most government lenders are affordable, they don’t prefer lending to small businesses as they consider it a risky investment. You will need to meet the following requirements to qualify for a government business loan.

  • A good personal credit score that is above 680.
  • You must have a two-year-old profitable business.
  • You must have invested your personal time & money in the business.

How to Prepare Your Government Business Loan Application

Government lenders are infamous for needing a lot of paperwork. You can expect to spend a good amount of time gathering documents for a loan application. Moreover, processing time may also take somewhere between 4 to 12 weeks. Therefore, it is important you better prepare for it.

Below is the checklist for a small business loan from the government.

Personal Background:

You will be asked to provide your education background, personal financials, previous addresses, and criminal records (if any). Certain crimes may disqualify you.

Business Plan:

You must have a strong business plan giving at least 3 to 5 years of financial projections that include future sales, profit and loss, cash flows, etc.

Personal & Business Tax Returns

Most small business government loans will require you to submit your business and personal tax return for the past 3 years. Your personal tax returns play a huge role in whether or not you will get a loan.

Collateral

Though government loans, especially that are backed by SBA (Small Business Administration) don’t need collateral, your claimant will be stronger if you provide your valuable business assets such as real estate, inventory, and equipment as collateral.

Legal Documents

Lenders may request you to produce certain legal documents such as articles of incorporation, certification of business, copies of your business license or contracts with 3rd parties (if any).

Final Thoughts

So, get ready with these necessary requirements before applying for a small business loan from the government.

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How to Get a Small Business Loan for a Startup

Getting a small business loan can be a big hurdle for startups due to strict lending standards by lenders. Since lenders don’t have any proof of your capability to run a company, turn a profit and pay back the debt, they usually don’t prefer to lend a loan to newly-set up businesses.

Don’t worry, below are a few tried-and-tested tips that can help you get a small business loan quickly.

Analyze the startup cost you will be covering

There are a number of obstacles that may come across your way when starting a company from scratch. The one major hurdle is startup cost. The list of expenses can be different for every company, some common expenses include.

  • Equipment purchases such as machines and vehicles
  • Technology purchases such as printers and computers
  • Inventory purchase
  • Licenses and permits

Before you look for the loan option you must have an idea what initial and ongoing cost you will have to cover.

Improve your credit score

A good personal credit score is quite important for startups as it is the first thing a lender will have a look at. It ranges between 300-850. The higher is better, make sure it is at least 680+.

To improve your score, you should focus on the following actions.

-Pay your bills on time.

-Pay off debt and keep balances low on credit.

-Do not apply for too many new credits, resulting in multiple inquiries.

You can get your credit score report free from credit bureaus like TransUnion, Experian, and Equifax.

Find out if you qualify for the loan

Along with credit score, there are plenty of other requirements to qualify for a small business loan. For example, lenders may consider:

  • How long your business has been running?
  • Does your business make enough profit?
  • Are you capable of making payments?

Choose the right startup loan

Once you know how to get a small business loan, it is time to begin your startup loan search. You may get small business loans from several platforms such as banks, online lenders, and microlenders.

These lenders offer products such as Business lines of credit, term loans, accounts receivable financing, etc. Once you have decided which type of lender and financing option is right for you, try to compare 2 or 3 similar options.

Gather your documents

Most traditional lenders are hesitant to finance startups as they have no business history and proven revenue. However, if you do some preparation before you start your search for a loan you can have a better shot at securing the loan. Some documents that every lender will require are:

  • Bank statements
  • Personal tax returns
  • Income statements
  • Resume
  • Legal documents such as a commercial lease, articles of incorporation, franchise agreement, etc.

So gather them all before applying for a loan.

Final Thoughts

You should approach small business loan shopping just as you would shopping for a vehicle. If you don’t know how to get started, take help of a financial firm that help startups get easy loans.

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How to Get a Small Business Loan Without Collateral

A small business loan without collateral is an ideal option to keep your business operation running smoothly. If you’re in need of capital for things like emergency facility repairs or payment of unexpected higher tax bill, a non-collateral small business loan can be a good choice for you.

Let’s find out how to get it.

Getting a small business loan without collateral

To obtain a small business loan without collateral, you will need to provide either a blanket UCC lien or a personal guarantee. They help lenders to minimize the risk of lending to you without needing you to offer any specific collateral. So, if these are acceptable to you, below are the options available for you.

SBA Loan

There are some small business loans available backed by Small Business Administration (SBA), that don’t need collateral. Even startups can apply for these loans.

Since SBA promises to repay up to  85% of the loan in case the borrower defaults, most lenders easily provide this loan. This guarantee acts as collateral itself and ensures banks that they are not taking such big risk all by themselves.

You must have a strong credit score (not less than 620), borrowing history and a solid business plan to qualify for an SBA loan. According to SBA, about 95% of all small businesses are eligible for an SBA loan. Their 7(a) program requires borrowers to show only the evidence of positive cash flow to obtain the capital.

Alternative Lenders

Though numerous lenders require a personal guarantee of cash flow, they don’t necessarily need collateral. Below are some good options.

A term loan: This is a lump sum that you borrow and repay along with an annual percentage rate within 4 or 5 years.

A line of credit: In this loan, you get a set amount of cash that you utilize whenever is needed. This loan type is used by businesses need to finance cash-flow gaps.

Generally, it is a disposition amid a financial institution and borrower that sets up a maximum loan balance that lender permits the borrower to maintain. As long as a borrower doesn’t exceed the maximum amount set in the agreement, he can get funds from the line of credit at any time.

Merchant Cash Advances: Merchant cash advance is another great option if you don’t want collateral. These financing companies purchase your future assets instead of asking you for collateral.

In this type of financing option, you get a set amount of cash which you pay back with a set percent of your daily credit card sales. The major advantage of this option is, you pay more when business is strong and less when it is making a loss.

Final Thoughts

These are a few most-liked financing options that you can apply for if you don’t want to give anything as collateral. Take help from a financial firm to find out more options available for you.

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How to Qualify for a Small Business Loan

When you’re well-prepared, it is easier to qualify for a small business loan. Here is your to-do list that will help you qualify for a loan and get the cash you need for your business.

1. Build your personal as well as business credit scores:

Your personal credit score defines your ability to repay debts. This score ranges between 300 to 850 and is based on factors like your payment history, how long you have had credit, etc.

Most lenders check this score before accepting your loan application – purpose is to see how you manage debt. To keep your credit score up, pay your bills on time.

Business credit scores, on the other hand, ranges from 0 to 100. To keep it good, keep your business information up-to-date with consumer reporting companies like Experian, Dun & Bradstreet and Equifax.

2. Check with lender’s qualification and requirements:

To become a strong applicant, you must fulfill the lender’s requirements and applications. Meet the minimum criteria related to credit scores, years in business and annual revenue.

If you want to apply for loans backed by the SBA (Small business administration), you will need to meet additional requirements of SBA

3. Carry all your legal and financial documents:

Banks and other traditional lenders may ask for a wide range of financial and legal documents, including:

-Personal and business income tax status report

-Personal and business bank statements

-Business license & commercial lease

-A resume that shows the relevant business experience

-Financial projects if you have a limited operating history

4. Create a strong business plan:

Your business plan must include how will you use the loan amount for the growth of your business. Make sure you create a solid business plan the clearly describe how you will repay the loan amount. It will improve your chances at loan approval. A good business plan must include:

  • Company description
  • Product and service description
  • Marketing and sales strategy
  • Information about the management team

5. Provide Collateral

To back your loan, sometimes, you may have to provide collateral. Collateral can be assets like equipment, inventory or real estate that can be seized by the lender if you fail to make your payment. Basically, it is the way lenders can recover their money if you don’t make your payment.

There are some online lenders that don’t require collateral but may require a personal guarantee. Each lender has its own rules and requirements, so don’t hesitate to ask questions if you are not sure.

6. Personal and business tax returns

You will also need to provide both your business and personal tax returns. It is just another step in the process that lenders will take to ensure you will be able to repay the loan you apply for. So to be safe-side prepare them before you dive into the application process.

Final Thoughts

Understanding what a lender can review when applying for a loan helps you improve your chances of a small business loan. A reputable financing firm can help you understand the requirements of a lender. So, seek assistance if you need to.

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How Much Small Business Loan Can I Get?

How much small business loan can you get depends on a myriad of factors, ranging from your credit score, the annual profit of your business, number of years you are into that business, your ability to pay back debt, type of lender and loan you choose.

Although every loan is unique, there are some general rules of thumb, on the basis of which, let’s find out how much a lender will loan you.

Loan types available for small business (maximum loan amounts)

There are numerous financing options available for a small business. Depending on factors like how fast you need capital and your credit score, you may look for an SBA loan, bank loan, or online short-term loan. All these loans carry different maximum loan amounts.

Short-Term Online Loans: $5,000 to $500,000

Most short term online loans come with one or two-year repayment term. Such loans are a good option for buying inventory. To obtain this loan, your business must have completed at least one year period with annual revenue of $50,000. Generally, your credit score should be above 600.

Bank Loans: $5,000 +

In bank loans, you repay the amount plus interest over a fixed period of time. However, the loan amount may vary from bank to bank and borrowers to borrowers. You must have more than 700+ credit scores to get this loan

Bank Lines of Credit: $5,000+

Like bank loans, these loans are not a lump sum. You get access to a specific amount of cash that you use whenever you want. It is an ideal financing option for business dealing with continual cash-flow issues.

SBA Loans: Up to $5 million

How much SBA loan you can get depends on your debt service coverage ratio (DSCR). Most lenders need a DSCR of 1.15 or higher.

Business Credit Cards: Up to $100,000

They are similar to lines of credit; you get a specific amount of money, which you draw as needed. You pay back a minimum balance each month.

Final Thoughts

If you are still confused, seek the assistance of a financial firm that can walk you through the funding process and help you get sufficient funds as per your requirement.

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Are Small Business Loans HMDA Reportable?

According to the Home Mortgage Disclosure Act (HMDA) in 1975, Congress ensures fair lending practices to be followed by lending institutions and banks.

HDMA needs lenders to collect, report and disclose certain information about mortgage lending activities. Even now it applies to business purpose loans (including small business loans) as well.

The new HDMA rule clarifies that a property used for commercial and residential purposes is considered as a dwelling if the primary use of the property is residential.

As per the rule that became effective on January 1, 2018, lenders will have to submit some information during the application process to the CFBP, which is Consumer Financial Protection Bureau through the new HMDA platform.

Under Regulation C, if an open-end line of credit or a closed-end of mortgage loan is for small business purpose, home purchase, improvement or refinance, secured by a dwelling then it is HMDA reportable. However, non-dwelling secured loans for home improvement are not reportable.

In simple words, if you determine that the property is a dwelling primarily, then it is HMDA reportable, but if it is not primarily a dwelling then it is not!

Are Small Business Loans HDMA reportable?

Any property that is used for both commercial and residential purposes like a building having a dwelling retail space and apartment units, it is HDMA reportable.

However, if your small business is secured by one-to-four family members, it is not reported as HDMA unless the aim of the loan is home improvement or purchase. Nor is the loan reported as small farm loan or business loan if the security interest is not taken as a precaution.

Such type of loan may be provided by examiners as “other loan data” for considering during a  Community Reinvestment Act (CRA) evaluation. The refinancing of this type of loan would be reported under HMDA.

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Small Business Loans Secured or Unsecured

Every business, small or medium needs finance at the certain point of time. It can be borrowed to pay for a new equipment, smooth out cash flow, or for expansion.

Regardless of the reason, small and medium-sized companies rely often on secured and unsecured business loans, either from banks or online lenders. However, many people are confused about which type of loan they should opt for – Secured? Or unsecured?

In this post, we will talk about the distinctions between secured small business loans and unsecured small business loans.

Unsecured Business Loans

This type of small business loan needs no collateral but it is solely based upon the creditworthiness of the borrower. If you have a good credit history, then you can easily obtain an unsecured loan. However, the interest rate of such loans is quite higher.

Unsecured small business loans have no guarantees and no asset backing. They are short-term loans that are fairly small amounts.

Banks and other financial lenders also offer unsecured loans that are usually provided for educational loans, property improvements, personal loans and credit card purchases. Getting these loans approved is quite difficult unless you have a stable source of income and a strong credit history.

Because the lender relies on your agreement associated with your business, loan terms reflect that risk. A lender may want the money back so it might be less inclined to offer a huge amount as there is no guarantee if you don’t pay the borrowed amount.

Few examples of Unsecured loans are Signature loans, Credit Cards and Student Loans.

Pros

  • No need to pay collateral
  • No risk losing your collateral
  • Easy to borrow a small amount of money

Cons

  • Higher interest rates
  • Small borrowing amount
  • Personal Liability
  • Shorter repayment terms
  • Secured Small Business Loans

Secured Business Loans

As the name suggests, these types of loans are secured as they are backed up with some form of collateral. Collateral is a pledge as security for loan repayment. It means if you cannot repay your loan then you may lose your collateral.

The concept is as same as when you take the loan to buy a car, the bank keeps the deed to your car until you repay the full amount, including interest and fees. If you are unable to make payments, the bank put a lien on your vehicle.

If you are looking for a substantial amount of money, then secured loans should be your first choice. Lenders usually give a large amount of money if you have a valuable asset to keep as collateral that back-up the loan.

Few examples of secured loans are Mortgages, construction loans, auto loans, and home equity line of credit.

Few examples of collateral for secured loans are land, offices, cars, jewelry, and other valuable assets.

Pros

  • Lower interest rates
  • Longer repayment terms
  • Higher borrowing limits

Cons

  • Some assets are needed to “secure” the loan.
  • Risk of losing collateral to the lender if you are unable to repay the loan.
  • Longer repayment terms means you will be in debt for longer.

Which small business loan is right for you?

The loan type right for you depends largely on the situations you are in and your goals. A secured loan will offer better terms like higher borrowing limits, lower interest rates and longer repayment schedules. But if you don’t have anything to provide collateral, or you are more concerned with just paying your debts instantly or not worried about paying higher interest rate than unsecured loans are the right choice for you.

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Small Business Loans or Grants

Whether you are a business needs funding to expand your operations or an individual in need of a personal loan, it’s necessary to know what financing options are available to you. Small business loans and grants are the two most common funding options you can choose from.

Although the two accomplish somehow the same end results yet both are fundamentally different. It is advisable, before you submit an application, get to know the difference between them.

Difference Between Small Business Loans and Grants

The major difference between loan and grant is repayment. A loan needs you to repay the capital (along with interest) you borrow while the grant is usually a gift.  A grant may be endowed by trusts, corporates and government departments to an individual, educational institutions, businesses or nonprofits. On the contrary, loans are generally given by financial institutions to businesses and individuals.

Advantages of a Loan

In comparison to grants, loans provide more opportunities, you can get loans from banks, private lenders or individuals. Moreover, with grants, you can expect a limited amount of financing. Usually, they are supported by government departments and only a limited amount of funds are available each year. On the other hand, the loan gives you funds according to your credit score and ability to repay.

Advantages of a Grant

Grants are non-repayable, therefore you need not to worry about monthly payments. There is no risk involved in grants. If the loan is not repaid, you may put your credit rating in danger.

Small Business Loans or Grants For Minorities

Over the years, minority-owned businesses have expanded their reach across the country. Their contribution to the economy is beneficial, still, it is difficult for them to access sufficient capital.

Let’s get to know whether loan or grant can help them manage their finances.

Small Business Loans

It can be difficult for minority-owned business getting a small business loan from a traditional bank, especially if they are just starting out. Some banks may request collateral that can be claimed if a loan is not repaid.

Fortunately, there are a variety of commercial funding sources available such as online lenders and financial service providers providing products like unsecured lines of credit, invoice factoring, equipment lease, etc.

Private Grants

Although you don’t need to pay back your grants, they are much more restrictive than other funding options available for minorities. Grants come with strict guidelines related to who qualifies for funds and what those funds can be used for.

There are some government-backed grants available, but they might be industry or geographic-specific grants. You will need to check whether or not you qualify for them.

Small Business Loans or Grants For Veterans

For veterans, who are entrepreneurs, a small business loan can be helpful for a variety of purposes like hiring new employees, purchasing equipment and funding marketing expenses. Some of the popular business loans veterans can apply for includes Military economic injury loans, veterans business fund, SBA loans, etc.

Speaking of grants for veterans, they always come with strict guidelines limitation. In most cases, it almost impossible to qualify for these funds. So, before you make a decision, seek the assistance of a reputable financing firm that can better guide you on which option you should go with.

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How to Get a Small Business Loan with Bad Credit

No lender will risk lending you if you don’t prove your ability to repay the funds. Before taking a look at your application, lenders may ask for the information like credit history, collateral and business experience. So, how to get a loan with bad credit?

Fortunately, there are a few ways you can secure a small business loan even with bad credit. Let’s find out what they are.

Find out what lenders are looking for

You should find out what the average lender is looking for when they audit your application. Every lender may have their own slightly different approval method but their fundamentals are more or less the same. So, be aware of them.

Below is what most lenders want to see when reviewing your application.

  • Lenders prefer borrowers their debt is under control.
  • Lenders want to see your revenue is high and growing consistently.
  • Your cash flow must be well managed and high.
  • Lenders like borrowers meet at least the minimum borrowing requirements.

The basic requirements of most lenders

  • You must have been in business for anywhere from 6 months to 2 years.
  • Most lenders will require you a minimum monthly revenue of $10,000 or more.
  • If you are behind on payment with another lender, chances are your application will get rejected.

Review some potential funding options for those with bad credit:

Peer-to-peer financing:

Also known as peer-to-peer investing, it enables individuals to get a loan straight from other individuals rather than financial institutions. Usually, it is an unsecured loan. The interest rate for this type of loan is set by the lenders or company facilitating the transactions on the basis of the credit score of the borrower.

Unsecured Business Loan:

Though interest is often higher in this type of loan, it doesn’t use traditional collateral to guarantee the loan. The interest rate may go up to $2 million depending on the lender and approval amount.

Find a partner

If you have a strong business plan that has high growth potential, there is a good chance you can attract a partner with a good credit score who can apply for the loan. You and your partner will cooperatively sign the loan.

On the basis of how you agree to service the loan, both you and your partner will be partially responsible for the loan repayment.

Gather all your important documents

Once you have an idea of what loan options you have, it is time to put together all the necessary documentation. Since every applicant is different, lenders may request a particular document from you. Get the following documentation in order.

  • Proof of business ownership
  • Profit and loss statement
  • Business licenses
  • Voided check
  • Property lease agreement
  • Driver’s license
  • Bank statements
  • Debt schedule

Gathering all your documents is added benefit that may speed up the approval process.

Final Thoughts

So, these are a few tips that can help you get a small business loan with bad credit. To get a quick loan at a low-interest rate, approach a reliable financial firm that especially helps small businesses or startups secure capital.

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