You hear a lot about self-funding and bootstrapping for small businesses and startups. This may work for some people, but other methods exist for building a successful business. Many entrepreneurs have used small business loans to boost their growth.
There’s a dilemma regarding ownership: You need capital to get started, but you must also be running to generate wealth. Small business loans are a good option for people who need to invest cash into their business immediately.
If you are new to how these loans work, you’ve come to the right place and wonder if it is the best idea for your situation. We will look at some considerations and how to obtain a business loan.
Why you should apply for a small business loan
The number one reason entrepreneurs look for a loan to start a business is that they need more cash to run their business how they need or want to. This could manifest as:
You don’t have enough money to cover daily expenses like inventory or operations.
Need for high-level employees who have a lot of experience and skills but will cost more than an entry-level employee.
Depending on the type of business you run, you may have difficulty buying the equipment you need.
You need a larger advertising budget to generate the company you need to grow.
Unpreparedness for an unexpected event can lead to a lack of emergency funds.
How to write a business plan
They will likely not lend you any money if you do not have a solid business plan. This document is used to describe your business’s long-term goals. It will also explain how you intend to use any loan money and how it will affect the company’s growth.
Your business plan should include the following sections:
Your company’s core team and a description.
How do you run your business, and what is your core business model?
You offer products or services.
Analyze your market and industry to see how you fit in.
SWOT Analysis: Strengths, Weaknesses, Opportunities, and Threats.
What tools and processes do you use to generate sales and marketing?
How do you intend to use the funding, and what is your request for it.
Your financial projections for the next few years.
Note While many new online lenders offer a streamlined application process that doesn’t require business plans, they often charge higher interest rates.
Consider repayment terms
Decide how you will repay the loan. Calculate a realistic monthly payment. Consider external factors like social changes, interruptions in the supply chain, and market lulls.
Your lender will determine your monthly payment based on these factors:
How long has the business been in existence?
Profits for business owners.
Profitability is essential for business.
Small business lenders know that each business is different and offer various loan options. Understanding the repayment period of the loan that you are considering is essential.
These are the most common types of loans and their average repayment period:
Term Loans: up to 10-year term.
SBA Loans: Working capital and Fixed Assets can be repaid within ten years.
Microloans for a maximum of six-year repayment periods.
Invoice Financing: Repayable in a few months.
Lines of credit for business: Repayable up to 5 years.
Equipment Financing: Repayable up to 10 Years.
Note Some lenders charge prepayment penalties when a borrower pays early. You don’t need to pay extra money to get out of debt.
Consult with a financial advisor
Using this option’s not 100% necessary if you are willing to research the loan independently, but it is a good recommendation. A financial advisor can help you better understand your cash flow and what loan makes the most sense. They can also provide a plan to ensure you make your monthly payments on time.
A financial advisor can help you choose the right credit union or business lender for your company based on its circumstances and needs.
Choose the type of loan
Many types of loans are available, and no one is the best. What your business needs will determine which loan options are best for you. Some of the most common loan types are:
Long-term loans: These are typically for higher loan amounts. A term loan is usually between two and ten years. Many of these loans require proven profitability, which is only sometimes possible for smaller businesses.
Small Business Administration loans (SBA): Similar to a term loan from a private lender, the SBA offers more significant opportunities for underserved populations, such as women and people of color.
Online Loans: Short-term and long-term business loans are available for those businesses that still need an established track record. This includes startups or companies with bad credit.
Invoice factoring is a less conventional type of loan. This type of loan is best for companies that depend on invoices for income. It may take some time for customers to pay.
Request a loan
It’s time to submit your application after researching and finding a loan that suits your needs.
Choose a lender
If you have good credit and small business finances, a conventional lender can help. If you do not meet these criteria, consider looking for other loan options, such as merchant cash advances.
Different lenders have different approval ratings. The following is the latest Small Business Lending Index from Biz2Credit.
Choose a financial institution that will offer you the loan and pay it back within a suitable time for your business.
Gather all your documents
The lender will give you a list of the necessary documents for processing your application. Although each lender has their requirements, they usually include the following:
Business Information includes a business plan, name and address, tax ID, and more.
Financial Statements for Personal and Business Purposes. These include tax returns, bank statements, credit card bills, pay stubs, and balance sheets.
Information about the owners of businesses, such as personal information of anyone owning more than 20% or 25% of a business.
Submit your application
Lenders will have different instructions and processes for applying. The application process often includes interviews. You could set up a telephone interview or visit a bank branch. Follow the instructions from your lender.
You can ask during the interview how long they usually take to process the application so that you will know when you should expect to hear back. You can also follow up if necessary after the submission.