Both new start-ups and established small businesses sometimes require outside funding. There are multiple types of lenders that small businesses can approach. As well as conventional lenders like banks, there are now direct online lenders and peer-to-peer lending sites.
Before applying for any form of small business loan, it’s essential to understand how they work.
What is a Small Business Loan?
Small business loans are one of the key types of financing available to start-ups and small companies. There are several types of small business loans available, each of which works slightly differently.
For example, there is a simple line of credit; whereby a small business can borrow money up to a predetermined limit, only paying interest on the money they borrow.
Working capital loans are more conventional loans, used to cover the day-to-day expenses such as rent and payroll.
Companies need to define their needs before committing to any small business loan and what they intend to do with the loan.
What are the Benefits of a Small Business Loan?
Small business loans can provide a vital lifeline to small businesses suffering from cashflow issues. The range of small business loans available means that small businesses can choose the funding option best suited to their needs.
How to Apply for a Small Business Loan
The Small Business Administration is a government agency that connects small businesses with loan providers. The SBA doesn’t lend money to businesses directly, but it sets the guidelines by which lenders provide funding to qualifying small businesses. By working with the SBA, lenders can reduce their risk and facilitate small businesses’ access to capital.
To qualify for an SBA-approved loan, businesses must be able to demonstrate their repayment ability. Businesses that aren’t viable and have no clear path to rescuing their finances won’t qualify for an SBA loan. Companies must also demonstrate that they have invested their own money into the business before seeking additional financing. As a general rule, owners should invest one dollar of their own money for every three dollars they seek from the loan.
Of course, small businesses also have the option of approaching lenders themselves. Any company can approach a bank or other lender with a business plan and its business accounts to discuss funding options with them. Each loan provider will have their own conditions and requirements that businesses will need to meet to receive funding. Small business owners also need to be clear about the repayment terms before they agree to any financing; never agree to any loan until you have vetted its terms and conditions carefully.
The more you know about small business pans before applying, the more likely lenders are to provide you with funding. Make sure to research all your available options before applying. Irrespective of the type of loan you apply for, you need to be confident of your ability to repay it.