Small business loans

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Loan Types Template

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What are small business loans?

Loans are exactly that, money you borrow from someone else in the form of personal loans and and bank loans. These forms of funding rely on three major concepts: risk assessment, leverage, and your ability to pay off a debt.

  • Small Business Administration Loan. The SBA works with lenders to provide loans to small businesses. The agency doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.

  • Business Term Loan. With a traditional-term business loan, you are lent a lump sum amount upfront, which you pay back (along with fees) over a set period of time.

  • Business Line of Credit. With a business line of credit, you can borrow up to a maximum credit limit and only pay interest on the amount of capital that you borrow from your credit line.

  • Personal Loan for Business. Personal loans can actually be helpful for newer businesses that don’t have any financial history. Plus, personal loans can have lower rates than business loans.

  • Invoice Financing. Invoice financing lets you sell invoices to a lender, who fronts you a portion of the invoice amount. The remaining percent (usually 20%) is held until the invoice is paid.

  • Startup Business Loan. Startup loans offer newer businesses capital to grow. Business credit cards, lines of credit, and equipment loans are great startup loans if you have strong personal credit.

  • Equipment Financing. With equipment financing, the lender will front you cash to help purchase the equipment outright. You then pay back the total amount lent, plus fees, for a set period of time.

  • Short-Term Business Loan. With a short-term small business loan, you are lent a set amount of capital upfront, which you quickly pay back (along with fees) over a short period of time.

  • Merchant Cash Advance. With merchant cash advances, a financing company fronts you a lump sum of capital, which you repay (plus their fee) with a set percentage of your daily credit card sales.

Before we get started, learn about many other small business loan options and the advantages and disadvantages for each! Click the lnik on the right to copy the Google Sheets file to your Google drive.

How do can you apply for and get small business loans?

  1. How much do you need. Figure out exactly how much money you need and when you’ll need it by.

  2. Prepare and have a business plan. This will help you demonstrate knowledge of your industry, be able to articulate the opportunity you’re going after, and highlight your competitive advantage. You should also have a firm grasp of what you plan to use the money for, and how this investment will impact your bottom line.

  3. Check your credit. Your credit is an important indicator of your creditworthiness. Request a copy of your personal credit report and score. Contact the credit bureau to resolve any issues, and if your score is in the 600s or lower, take steps to improve it before you approach lenders.

  4. Educate yourself and research whether you actually qualify for a loan. There are 5 C’s of Credit used by lenders industry-wide to determine the creditworthiness of potential borrowers.

    • Character: What is your reputation and track record for repaying debts?

    • Capacity: Do you have the financial ability to repay the loan?

    • Capital: How much “skin” in the game do you have? If this business fails, what do you lose?

    • Collateral: What assets can you pledge to support your loan?

    • Conditions: What are the large circumstances surrounding your business?

  5. Ask about the terms. Here are some thing you should be asking:

    • Interest rate (or other applicable rate like AIR, APR)

    • Upfront fees, where do they go? Some typical fees are used for origination, application and guarantee.

    • Loan term, or lifetime

    • What is the full cost of the loan over its lifetime?

    • Payment amounts and frequency

    • Prepayment penalties

    • Check processing penalties

    • If going through a broker, do they have or are they disclosing their fees?

    • Speed, how fast will you get access to the funds

  6. Prepare your documents

    • Business bank statements

    • Many lenders will want to see your balance sheets or “statements of financial position.”

    • Profit and Loss Statements, also known as your Income Statements.

    • Some lenders are going to want to know if you currently have business debt and if you do, the weekly or monthly payment details of that debt

    • Most lenders will want to see your most recent personal tax return to verify your income

    • Most lenders will want to see your business tax returns from the last two fiscal years.

  7. Prepare your investor pitch

  8. Apply and wait for a response

  9. Choose to accept or decline your loan. Ask yourself:

    • Can I repay this loan?

    • Am I comfortable with the payment, whether it has daily, weekly, or monthly payments?

    • Can I confidently say this is the lowest rate I will find?

    • Do I know all potential fees associated with the loan?

What are some advantages of small business loans?

With a small business loan, you maintain full control of your business and any potential profits. Small business loans will help yo grow and expand your business without any hassle, so you have financial flexibility for your daily operations.

What are some disadvantages of small business loans?

A lender may require that you put up some form of security to obtain the loan. You face the possibility of losing not only your business, but also your home, car or other property.

You may be required to adhere to certain restrictions during the course of the loan.

They are difficult to obtain. Many lenders are leery of lending money to upstart businesses and will lend money only to established entities that are in a solid financial position.