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A Guide to Small Business Loans

Written by on June 27, 2022

If you’re a small business owner, you know that there are times when you need extra money to help your business grow.

You might need to purchase new equipment, hire more employees, or even just keep your business running during tough times.

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That’s where small business loans come in.

A small business loan can provide the money you need to reach your goals and grow your business. In this guide, we will explain what small business loans are, the benefits of getting one, and how to go about getting one for your small business.

So whether you’re just starting out or you’re looking for ways to expand your business, a small business loan may be right for you!

The Basics of Business Loans

A business loan is a loan that is given to a business, usually by a bank, for the purpose of starting up or expanding the business. There are many different types of small business loans available, each with its own set of benefits and requirements.

Benefits of Business Loans

There are many reasons why you might want to consider taking out a small business loan. Some of the benefits include:

  • Access to capital. A business loan can provide you with the money you need to grow your business. You can purchase or upgrade needed equipment for your operations, hire more staff to address important tasks, or purchase more inventory to fill demand.
  • Save on taxes. Paying your taxes on time is an important part of doing business. You might be able to get some savings, however, as the interest on loans are tax-deductible. Check with your accountant to find out how you can save.
  • Builds credit. If you make timely payments on your loan, it can help build your business credit. This can come in handy if you need to take out another loan or get lines of credit in the future.
  • Get through emergencies. A loan can help you get through a tough patch. If your business is interrupted due to a natural disaster, for example, a loan can help you make ends meet until you’re up and running again.
  • Stay afloat during slow seasons. If your business is seasonal in nature, it may be difficult to maintain operations when business is slow. A loan can help you cover your costs during these down times and keep you ready for peak season.

Types of Small Business Loans

Applying for a small business loan. Photo by Karolina Grabowska
Applying for a small business loan. Photo by Karolina Grabowska

There are also different types of business loans, and you should tailor your choice of loan to your specific needs.

Here’s a quick rundown of top 5 loan types you should consider:

  1. Term Loans –  these loans are given in a lump-sum and repaid over a fixed period of time, usually between one and five years. The repayment schedule is typically monthly, but can also be weekly or biweekly.
  2. Line of Credit – this type of loan is similar to a credit card, allowing you to borrow up to a certain amount and make small withdrawals
  3. SBA Loans –  the Small Business Administration (SBA) offers several loan programs to small businesses, and repayment depends on your business’s needs. They have some of the lowest rates on the market, but it may be challenging to qualify.
  4. Equipment Loans –  if you’re in need of new equipment for your business, but don’t have the cash on hand to pay for it, you can finance it through an equipment loan. The repayment terms are usually shorter than other types of loans as they match it against the lifespan of the equipment to be purchased, and you may be able to get a fixed interest rate.
  5. Microloans – for newer businesses and  startups, or small businesses that need a small amount of financing, microloans are an option. They have low interest rates and you can borrow up to $50,000. The repayment terms are also relatively flexible.

If the above doesn’t suit you, there are other types of loans that might be a better fit. Inquire with financial institutions in your area and online to see if they have other loans more applicable to you.

Now that you know a little more about small business loans, let’s take a look at how you can get one.

Getting a Small Business Loan

The process of getting a small business loan can vary depending on the lender you choose. However, there are some general steps you’ll need to take:

Step 1: Research your Options

You should take a look not just at the loan amount and loan type, but also the organisation that offers the loan. There are many different lenders out there, so it’s important to compare your options and find the best fit for your business.

Check your possible lender’s Better Business Bureau rating, or similar ratings in your location. Find out how flexible they are, and how good their customer service is. Oftentimes their customer support for small businesses will be important over the lifetime of your loan.

You should also think about building a long term relationship with your lender, so their other loan offerings, if any, may come in handy in the future.

Step 2: Check your Eligibility

Most lenders will have certain requirements you need to meet in order to be eligible for a loan. For example, you may need to have been in business for a certain amount of time or have a minimum annual revenue.

These requirements will vary across lenders and loan types, so it’s important to do your research and find the best fit for your small business. However, most loans will look at the following criteria:

  • Your credit score – This is one of the most important factors lenders will consider when determining your eligibility for a loan. A strong credit score shows lenders that you’re a responsible borrower and increases your chances of getting approved for a loan.
  • Your business financials – Lenders will also want to see how your business is performing financially. This includes things like your revenue, expenses, and cash flow. Having strong business financials will increase your chances of getting approved for a loan.
  • Your business history – Lenders will also want to see how long you’ve been in business. The longer you’ve been in business, the more likely you are to get approved for a loan. If you’re a new business, you may still be able to get approved for a loan if you have strong personal credit and a well-thought-out business plan.

Step 3: Determine your Budget

Take a look at your business finances and determine how much you can realistically afford to borrow using a loan calculator to estimate how much you’ll need to pay. This will help you narrow down your options and ensure that you don’t end up with a loan that’s too small or one that puts your business in danger of defaulting.

There are a few things to consider when determining your budget:

  • Your current revenue and expenses –  This will give you an idea of how much cash flow you have available each month to make loan payments.
  • Your business goals – If you’re looking for a loan to help you expand your business, you’ll need to factor in the costs of that expansion.
  • Your cash flow situation – Some lenders may require daily or weekly repayments, so make sure your cash flow is sufficient if you want to obtain these kinds of loans
  • Collateral you can put up – While unsecured loans are possible, some lenders may allow you to loan a larger amount or offer a lower interest rate if you can provide collateral.

Step 4: Gather your Documents

Once you’ve found a lender that fits your business, and you’re ready to apply for a small business loan, you’ll need to gather some documents. 

The specific documents required will vary depending on the type of business and the lender, but in general, you may need to provide:

  • Business information, including licences and permits
  • Business plan
  • Business loan proposal
  • Business financial statements
  • List of business debts
  • Personal information of the business owners
  • Proof of collateral (if you are willing to put it up)

If you are taking out a personal loan to use for your business, or your business is less than 2 years old, you may also need your personal financial history to vouch for your ability to pay.

Step 5: Apply for the Loan

After collecting all the requirements, it’s time to actually apply for the loan. Make sure you follow the application procedures of your lender, as it will vary across organisations and institutions.

You may need to go through an interview or meeting, but otherwise, be prepared to wait for a decision on your application. This process can take a few days to a few weeks.

Improving Your Chances

Applying for a loan can be a nerve-wracking process, but you can help raise your chances before applying for a business loan.

Make sure you have a strong business plan and track record, and that you’re able to prove it. You can use your business’s financial statements, tax returns, and any other relevant documentation.

It’s also important to have a good personal credit score especially for new businesses. This will show the lender that you’re trustworthy and capable of repaying the loan.

Having good personal credit score can also help when applying for a business loan. Photo by Dylan Gillis
Having good personal credit score can also help when applying for a business loan. Photo by Dylan Gillis

If you have already taken out a personal loan or credit card with some financial institutions, see if their loans are applicable to you. Your previous history with them may come in handy in proving your ability to pay for your loan. Otherwise, try to build a relationship with the lender prior to applying for the loan.

If you have all of these things in order, you’ll be in a much better position when applying for a small business loan.

If You’re Denied a Small Business Loan

If your small business loan application is denied, don’t despair. There are a number of steps you can take to improve your chances of being approved for a small business loan in the future.

First, take a close look at why your loan was denied. There may be some areas where you can improve your business or financial situation. For example, if your personal credit score was low, you can work on improving your credit by paying down debt and making timely payments in the future.

You can also try reapplying for a small business loan with a different lender. Some lenders are more lenient than others and may be more willing to take a chance on your business.

Finally, you can consider alternative financing options such as small business grants or crowdfunding. These options don’t require repayment, so they may be worth exploring if you’re having difficulty getting a small business loan.

Frequently Asked Questions

What’s the easiest way to get a business loan?

You can take a look at other options such as merchant cash advances, which may be easier to get, but have higher interest rates as they are repaid back by a percentage of your daily credit card sales.

How much can I borrow with a small business loan?

The amount you can borrow depends on the lender, but typically it is up to 25% of your small business’s annual revenue.

Do banks give loans to start a small business?

Banks typically give loans to small businesses that have been in operation for at least two years and have a good track record of repayment. For startups, you can look at microloans or taking on a personal loan on your own personal credit.

What can disqualify you from getting a small business loan?

If you have poor personal credit or your business is in a high-risk industry, you may not be able to get a small business loan. Some institutions may also require collateral or assets to secure your loan.

Final Thoughts

Applying for a small business loan can be a daunting task, but it doesn’t have to be. As long as you know what documents you need to prepare and what to expect, the process will be much smoother. Good luck!

Small Business Finance 101

Download our free guide to learn the fundamentals of finance that will help make your small business more efficient and successful.

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