Summary:
This blog explores how small business loans work, detailing types, processes, and eligibility, particularly for SBA loans, to help owners secure suitable funding.
- Types of small business loans (SBA, term, microloans)
- Application process and required documents
- Eligibility criteria for SBA loans
- Evaluating and selecting loan offers
Navigating the financial landscape can be one of the most challenging aspects of running a small business today. Whether it’s for startup costs, expansion, or overcoming cash flow challenges, securing the right financing is crucial. With so many options available, understanding how small business loans work can be daunting.
Obtaining a small business loan doesn’t have to be a challenge. In this blog, we’ll cover the basics of different types of loans. We’ll also explain what makes you eligible and provide tips on navigating the application process.
Our goal is to provide you with the knowledge you need to approach financial institutions confidently. Ultimately, you’ll feel prepared to secure the funding that best suits your business needs.
Read on to discover key insights and practical advice to help you on your journey to small business growth.
Understanding Small Business Loans
A small business loan provides a source of funding that business owners can use to grow their businesses. You might use the funds to invest in equipment, streamline operations, acquire property, or prioritize marketing or outreach.
Many small business loans, such as SBA loans, are guaranteed by the US Government. Because they come with this additional insurance, lenders take on less risk. That makes it easier for businesses to obtain funding. The guidelines tend to be strict and standardized, and not all businesses are eligible.
Small business owners can also pursue term loans, which provide upfront cash for you to use to fund your business. Unlike SBA loans, these are not guaranteed by the government. While the fixed monthly payment is attractive, it can be tricky for smaller businesses to qualify for the lowest rates. You will need a high credit score and often need to offer some form of collateral.
If you do not yet have assets, you are unlikely to qualify for an SBA or term loan. As a result, you may need to take out a private loan or personal loan instead. Private lenders understand that they are taking a risk on businesses without documented cash flow. As a result, new business owners tend to see higher interest rates and stricter repayment terms.
Other Types of Small Business Loans
Other types of small business loans include:
- Microloans: Short-term loans of up to $50,000 paid back over a maximum of 5 years, offered by the government or private lenders.
- Equipment Financing: Loans used specifically to pay for high-ticket equipment and materials. The equipment itself functions as collateral.
- Business Lines of Credit or Credit Cards: Sources of credit that allow you to charge up to a pre-determined limit. Business credit cards often come with some cash-back benefits for businesses.
Not every type of loan is ideal for every small business, and every type of loan (including SBA loans) involves some risk.
Small business owners can often acquire loans from online lenders. Be aware that while these lenders may be less strict about qualifications, interest rates, and terms tend to be higher and stricter. Always do your research and pursue further small business loan information, especially if something seems too good to be true.
The Small Business Loan Process: How to Apply
According to the financial experts at LendingTree, there are five basic steps involved in applying for loans:
- Determine what type of loan you need. You should know what the funds will be used for (managing expenses, acquiring property, purchasing equipment, etc). Make sure you know how much money you need to borrow, how often you’ll need this money, and how urgent your need is.
- Research eligibility requirements. You may need to be at a pre-determined revenue level, have a high credit score, or offer some form of collateral. The more you know about your business’s financial future up front, the better.
- Decide which type of lender you want to work with. You may choose traditional banks, SBA or government lenders, or online lenders.
- Gather the documentation necessary to apply for your chosen loan, including:
- Financial documents
- Personal financial statements
- Tax returns
- Legal documentation related to your business entity
- Business licensure
- An executive summary or comprehensive business plan
You can learn more about crafting an effective business plan in our Ultimate Guide to Small Business Growth & Success.
- Apply for your chosen loan. Sometimes, this process is automated, and you may receive approval instantly. More traditional term loans may require an in-person meeting with a banker. At this point, you may also be asked to provide other information about your business or personal finances.
Evaluating Loan Offers
Don’t accept the first loan offer you receive. Review the small business loan info to ensure the offer isn’t too good to be true. Consider the following factors when determining whether a loan is right for you and your business:
- Interest Rates or APR – Annual cost, fixed vs variable
- Terms – When repayments start, how long you have to pay, and how that affects interest over the lifespan of the loan
- Additional Fees – Fees can include late charges, penalties, and origination fees, which can add to the total cost
If a loan offer seems too good to be true, it often is. Stay vigilant and be on the lookout for scams or predatory offers.
Eligibility for SBA Small Business Loans
According to the US Small Business Administration, there are several eligibility requirements for SBA loans.
You must:
- Be a for-profit business
- Be physically located and operate in the United States
- Have sound enough credit to ensure repayment
- Have exhausted other financing options
Be aware that the US government has strict guidelines outlining what business qualifies as a small business. Even if you meet the size requirement, some types of businesses may be ineligible for SBA funding. These include lending businesses, life insurance companies, and businesses involving memberships with limited capacities.
We advise you to consult with a financial advisor or lender to discuss specific needs and circumstances. Remember that every strong loan application begins with a complete, well-researched business plan. Set yourself up for success by browsing our Ultimate Guide to Small Business Growth & Success.
It’s time to take your business to the next level.