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July 20, 2023
Small business owners often require financial support to fuel growth and achieve their goals — sometimes, they may even need financial support to kickstart their business ventures. One valuable source of funding for them is a small business loan.
A small business loan is a type of funding entrepreneurs can access to cover the costs associated with operation and growth. Similar to acquiring a personal loan, business owners can apply for a small business loan through traditional banks and/or credit unions as well as online lenders, including those backed by the U.S. government. Depending on the type of loan, the funds can be used for everything from acquiring equipment and working capital to making larger purchases such as real estate.
Small business loans help organizations cover the cost of doing business and make large purchases. Loans are typically issued as lump sums to be used for specific purchases or cash flow management, then repaid with interest. However, there are other types of small business loans, such as lines of credit, invoice financing and merchant cash advances, that can be used to access funds more quickly and as required.
The ideal loan for a small business will depend on several factors, including its creditworthiness, total amount that the business needs to borrow, what the money will be used for as well as how fast the company needs access to loan proceeds.
The main types of small business loans are:
These loans are granted to established small businesses that have a solid financial history and can produce sound financial statements. As part of the repayment schedule, these loans are available in a specified amount and have a fixed interest rate or a floating interest rate. Term loans are often used for specific purposes such as purchasing equipment, expanding operations or financing inventory.
A line of credit allows small businesses to access funds as needed, up to a predetermined credit limit. This type of loan provides flexibility, as borrowers can withdraw and repay funds multiple times within the credit limit. This type of loan is suitable for managing cash flow fluctuations or addressing short-term financing needs.
The U.S. Small Business Administration (SBA) offers government-backed loans based on a company’s total years in business, annual revenue and credit score, through partnering lenders. SBA loans typically have lower interest rates and favorable terms, which makes them an attractive option for small businesses. Three popular options for SBA loans are SBA 7(a) loan program (SBA’s most common loan program, which includes financial help for businesses with special requirements), the SBA 504 loan program (long-term, fixed rate financing of up to $5 million for major fixed assets) and the SBA microloan program (smaller-size loans of up to $50,000 provided through SBA funding intermediaries).
This type of loan is specifically designed to finance the purchase of equipment or machinery for business operations. The collateral for this loan type is usually the equipment being financed.
In this loan arrangement, organizations can borrow funds based on their outstanding invoices. The lender advances a percentage of the invoice value, and once the customer (of the borrower) pays the invoice, the remaining amount (minus fees and interest) is returned to the borrower.
Originally set up for organizations that relied on credit card sales, these are short-term loans that provide funds based on a firm’s future profits. The lender collects a portion of the sales until the loan is repaid, usually with higher fees and interest rates compared to other types of loans. Also, this arrangement does not rely too heavily on credit score.
The terms and conditions of small business loans vary depending on the lender, loan amount and purpose of the loan and the borrower’s creditworthiness. Interest rates, collateral requirements, repayment periods and eligibility criteria may differ across loan types as well as lenders.
Small business owners are advised to thoroughly assess their financial needs, compare loan options and evaluate the terms and costs associated with each loan type before making a decision. However, if you are not sure about which loan to apply for, you could consider consulting with an outsourced financial advisor who can help you make informed decisions regarding the loans that best suit your needs and goals.
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Obtaining a small business loan can offer several benefits for entrepreneurs and small business owners. Check out these seven key advantages:
The primary advantage of obtaining a small business loan is access to much-needed funds. Loans provide a reliable source of funding that can be used for a number of purposes, including purchasing equipment or inventory, marketing and advertising, hiring employees, expanding operations and launching new products or services. This access to capital allows firms to pursue growth opportunities that may have otherwise been unattainable due to limited financial resources.
Small business loans can fuel growth and expansion initiatives. By securing additional funding, companies can invest in scaling operations, opening additional locations, entering new markets and/or diversifying their product or service offerings. These expansion efforts can lead to increased revenue, profitability and market share.
Small business loans can help manage cash flow fluctuations, which are common in many businesses. Seasonal businesses or those with uneven revenue patterns can utilize loans to bridge gaps between payments received and expenses incurred. This helps maintain a steady cash flow and ensures that operations can continue smoothly even during periods of economic uncertainty.
Loans offer the means to make strategic investments in the business. This could include upgrading infrastructure, improving technology or equipment, implementing new software systems or renovating facilities. Such investments can improve productivity, efficiency and competitiveness, ultimately leading to long-term profitability and sustainability.
Having access to money through a small business loan allows small business owners to seize time-sensitive business opportunities, such as purchasing inventory at a discounted rate, securing a strategic partnership or even acquiring a competitor. Being able to act quickly on these opportunities can give companies a competitive advantage and open up new avenues for growth.
Successfully managing a small business loan and making timely repayments can contribute to building a positive credit history for the firm. This can improve the business’s creditworthiness and increase its chances of securing favorable terms for future loans or lines of credit. Additionally, establishing a good relationship with a lender through timely repayment can lead to a long-term banking relationship and access to additional financial services.
Small business loans allow entrepreneurs to retain ownership and control of their business. Obtaining a loan does not involve giving up equity or sharing profits, unlike seeking investment from venture capitalists or equity partners. Business owners maintain complete control over the business and have the freedom to make decisions without outside interference.
Check out this 10-step process to apply for and acquire a loan for your small business:
Before starting an application for a loan, evaluate your business’s financial requirements. Determine the purpose of the loan, whether it is for working capital, equipment purchase, expansion or other needs. Calculate the exact amount you need to borrow and assess your repayment capacity.
Your business credit score is crucial to determine your loan eligibility, so make sure to review your score beforehand. Pull your credit report and check it for accuracy and if something looks amiss, make sure to get it rectified. Additionally, assess your business credit score — if it doesn’t fall in the high credit score range, take the necessary steps to improve your credit score.
In 2023, the lending landscape offers various loan options for small businesses. Traditional lenders such as banks and credit unions remain popular choices, but alternative financing sources like peer-to-peer and online lenders lending platforms have also gained prominence. Research and compare eligibility criteria, interest rates, terms and loan amounts offered by different lenders.
To increase your chances of loan approval, ensure your loan application is strong. Gather essential documents such as financial statements, tax returns and a well-developed business plan. Improve your business credit profile by making timely payments and reducing outstanding debt. Craft a compelling loan proposal that highlights your company’s strengths, growth potential and ability to repay the loan.
Networking and building relationships with lenders can enhance your prospects of getting a loan. Connect with local banks, credit unions and industry associations, in addition to attending business events and joining online communities to establish connections. Utilize online platforms and marketplaces to connect with lenders directly.
Once you have finalized a suitable lender, follow their loan application process. Fill out the application accurately and provide all necessary information. Be prepared to submit additional documents such as collateral information or personal guarantees, depending on the lender’s requirements.
Patience is a crucial skill to have during the loan approval process. Understand that it may take time for lenders to review your application thoroughly. Respond promptly to any requests for additional information or documentation. If needed, consult with professionals to ensure compliance with regulations and optimize your chances of approval.
After the evaluation process, you may receive loan offers from different lenders. Compare the offers carefully, while considering interest rates, repayment terms and associated fees. Negotiate with lenders to secure the most favorable terms and conditions for your small business.
Before signing any loan agreement, review it thoroughly to understand the terms and conditions. Familiarize yourself with the disbursement process and repayment schedule. Once the loan is approved and disbursed, create a financial plan to manage the funds effectively and to ensure timely repayment.
Set up systems to track loan payments and stay organized. Communicate regularly with your lender, promptly addressing any issues that may arise. Stay vigilant and monitor your firm’s financial health. If needed, explore refinancing or loan modification options to adapt to changing circumstances.
Acquiring a small business loan in 2023 requires a strong application, which is the result of research and careful planning. Assess your financial needs, research available loan options and come up with a comprehensive loan application. Build relationships with lenders and follow their application processes diligently. Review loan offers, understand their true costs, negotiate terms and manage your loan responsibly.
By following these guidelines, you can increase your chances of obtaining the funding your small business needs to thrive and succeed. Remember to seek guidance from financial professionals to ensure compliance with regulations and make informed decisions.
Below are some basic business loan-related questions that trouble most small business owners, especially first-time loan applicants.
The amount of small business loan you can get will depend on a variety of factors, including your company’s size, annual revenue, creditworthiness, and the type of business loan. Other factors such as your time in business and the industry you operate in will play a role too.
Depending upon the lender, your loan application and approval process could take anywhere from a day or two to several weeks — or sometimes even months. For instance, the SBA loan disbursement process usually takes 30 to 90 days, while a loan from an online lender tends to be finalized within a few business days.
Typically, businesses that have been in operation for a longer duration have a greater chance of loan approval. Most traditional banks require small businesses to be in operation for at least two years to qualify for the loan. However, you can consider online lenders to finance your young business — they usually require applicants to be in business for at least six months to a year.
If you’re still unsure where to start with your small business loan, Escalon is here to help. Talk to our experts today to learn how we can help.
Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.
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