A Comprehensive Guide for Entrepreneurs
Small business loans can make sense as a way to get money to finance your business without giving up any ownership. Whether you’re starting a business, growing it, or looking to survive cash flow ebb and flows, knowing small business loans is an important part to your overall business acumen.
What are Small Business Loans?
Small business loans are types of loans intended to help small business owners meet their financial needs. Those loans can be issued by banks, credit unions, online lenders and government-backed entities such as the Small Business Administration (SBA) in the United States. loans have very little to do with upgrading a house… they have to do with running a business… buying equipment, paying employees or covering operating expenses.
Why You Might Want a Small Business Loan
There are many motives that can motivate a business owner to borrow:
Startup Costs: New companies frequently incur large start-up costs. A loan can be used to help pay for things like licensing, a place to work and marketing.
Working Capital: For seasonal business that may have to wait longer for their invoices to be paid, or those with longer invoice cycles, a business can use a loan to manage cash flow.
Emergency Bills: You never know when a new bill will pop up. Loans can serve as a financial cushion.
Types of Small Business Loans
Term Loans
These are the classic loans: you borrow money in a lump sum, and then pay it back (with interest) over a certain term.
SBA Loans
Sponsored by the U.S. Examples of these are the SBA 7(a) loan, SBA Microloan and SBA 504 loan.
Business Lines of Credit
And interest is only charged on the amount you borrow—great for cash flow.
Equipment Financing
This loan is designed to buy business equipment. (In most cases the equipment is actually posted as collateral.)
Invoice Financing
This type of funding, also called accounts receivable financing, lets businesses borrow against outstanding invoices.
How to Qualify for a Small Business Loan
In practice, however, most lenders will look at:
Credit Score (Personal and Business): Your personal and business credit scores are taken into consideration when determining whether you’ll even get a business loan—let alone be approved or receive favorable interest rates.
Business Plan: A comprehensive business plan demonstrates to lenders how you are going to utilize and pay back the loan.
Financials: Income statement, balance sheet, and cash flow projections are commonly requested by lenders.
Time in Business: Some lenders look for businesses in operation for 6 months to 2 years.
Collateral: Lenders may ask for property, inventory, equipment or other assets to be put up as collateral in case a borrower defaults.
Advantages and Disadvantages of Small Business Loans
Pros:
Capital for expansion or in case of emergencies.
Keep the business 100% in your name and under control
Loans designed for specific circumstances
Interest payments may be tax-deductible (consult your accountant)
Cons:
Risk of borrowing too much
Good credit and business history required
Collateral might be necessary
Default and credit damage
How to choose the best loan
Know Your Needs: State how much you need and what you’ll use the funds for.
Compare Lenders: Don’t accept the first offer. Compare rates, fees and repayment terms.
Know the Terms: Make sure you understand the fine print, so that you don’t get hit with obscured fees or a balloon payment.
Get Help: Talk with a financial counselor or tax professional before borrowing money.
Final Thoughts
Loans for small businesses can be a key tool in helping entrepreneurs build and grow their businesses. But they are not without risk and should be approached thoughtfully. With knowledge of the types of loans available, preparing a strong financial profile, and selecting a lender that will work with your business, you can use a small business loan to grow your company and your income.