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.