Every small business needs some capital to get up and running. As a business owner, you may need to hire people, rent a shop or office space, or invest in equipment or technology necessary to manage day-to-day operations. How do you get enough money to get your small business off the ground?
Securing a small business loan is one way of starting a business or helping an existing business grow. These loans are especially important now as so many small businesses are struggling with the COVID-19 pandemic. In this article, we'll cover the following:
What is a Small Business Loan?
Small business loans are financing options that lenders can make available to small business owners to help them achieve their goals. It is an umbrella term that encompasses a wide variety of different loans, many of which are specifically designed for small businesses that want access to capital and want to grow.
When applying for a small business loan, lenders decide whether or not to approve it by doing a credit review on your business, based on factors such as total sales, creditworthiness, and the length of time the business has been in business was determined. If you are currently trying to build your business's bankroll, check out our other articles below Tips for business loans.
Before completing a small business loan application, you also need to decide whether you want to take out secured or unsecured loan. Secured loans are secured by collateral or valuables that you, the business owner, would lose to the lender in the event of default. With unsecured loans, however, you do not need to provide collateral, which is a higher risk for the lender.
Because of the higher risk, lenders will consider an unsecured loan application with more scrutiny than a secured loan. Additionally, Unsecured loans are usually associated with higher interest rates, shorter repayment terms and lower principal amounts. So, consider your business needs and determine whether a secured or unsecured loan is best for you before completing a loan application.
Types of Small Business Loans
Below are a number of popular small business loans that can take a few weeks to a few months to process and approve.
Business loans are one of the most common types of loan for small business owners to take away. It's a fairly simple type of loan where a company borrows a lump sum from a lender and then repays it over several years with installment interest.
Small Business Administration (SBA) Loans are government-secured loans issued by banks and other lenders. These types of loans are known for their incredibly low interest rates and long repayment periods, both of which are beneficial for small business owners.
Commercial mortgages Financing commercial real estate such as physical stores, restaurants, and office space. You can also use a commercial mortgage to remodel or expand one of your existing commercial properties.
Business acquisition loan can help individuals buy an existing business or franchise.
Credit lines offer entrepreneurs a flexible form of financing. You are free to use it when you need it and then only pay interest on the money you used.
Equipment finance can be used by small business owners to purchase the tools and equipment needed for their business.
Start-up loan are issued to companies that have just entered the market and are trying to grow (see our Tips for starting a small business). The interest rate and terms of this type of loan depend on the personal credit of the entrepreneur rather than the creditworthiness of the business.
Loans that allow financing in days
In those cases where your Small business finance You can't wait weeks or months for an inflow of money. With short-term financing, you can get the loan you need within a few days. Short-term loans are typically taken out when a company expects a quick return on its investment. That's because The repayment periods for short-term loans are usually between six and 18 months– a sharp contrast to the repayment periods of more traditional loans, which can often be ten years or more. Here are some examples of short term loans:
Dealer cash advances You can borrow against future earnings to ensure quick funding.
Accounts Receivable Financing allows lending against unpaid bills.
Small business credit cards They act as a line of credit, help your business build its creditworthiness, and make it easier for you, the business owner, to separate your personal and professional finances.
SBA 7 (a) loan
SBA loans are small business bank loans that are backed by the United States Small Business Administration (SBA) and generally offer low interest rates, affordable fees, and favorable repayment terms. The SBA guarantees a repayment of 50% to 85% of these types of loans in case the borrower defaults and this makes the lenders feel more secure when they offer low interest rates and good loan terms.
Through an SBA 7 (a) loan, you can secure up to $ 5 millionwith loan repayment terms that can be up to seven years for working capital, 10 years for equipment, and up to 25 years for real estate. The down payment required is generally between 10% and 20%, which is small compared to most other types of loans that may require up to 30% down payment. SBA loans also come with access too Training and mentoring resources sponsored by the SBA Designed to help you manage and grow your small business successfully.
Because of their low interest rates and flexible terms, SBAs 7 (a) are very competitive, and securing this type of funding can be a challenge. The application also requires a lot of paperwork and can often take a long time to get approved.
In general, in order to qualify for an SBA 7 (a) loan, you will need a few things as per sba.gov::
A for-profit business
Doing business in the USA
A proven effort to secure other sources of funding first
Prove that you have invested a significant amount of your own time, money, and effort in running your small business
In addition, some of the documents must be completed in order to apply for an SBA 7 (a) loan:
A business credit request letter
A comprehensive business plan
Financial documentation – both for your company and for you as an entrepreneur
Advantages of Small Business Loans
Small business loans provide businesses with the capital they need to grow their businesses, grow businesses, increase marketing efforts, develop their service or product, or strengthen any other aspect of their business.
What is Required to Qualify for an SBA 7 (a) Loan: Be a for-profit company, the company is located and doing business in the United States. The company tried to secure funding from other lenders first. The owner must be invested in their business
Small business loans serve different purposes for different businesses, depending on their specific needs. As the various types of small business loans listed above demonstrate, they are different in nature. But here are some of the key benefits they offer:
Small business loans are usually convenient, easily accessible, and readily available
The ability to improve and grow your business
Invest in new technologies that can increase productivity
They often get a better interest rate than a personal loan, for example
In contrast to many private investors, banks will grant you a loan without expecting a share of the profit
Other types of small business finance
In most cases, small business loans are only granted to creditworthy organizations that have been in business for a year or more. In case you've only been in business for a few months, try starting a startup or there are other reasons why you might not qualify for a traditional small business loan. Consider completing a personal business loan.
Most personal loans do not require collateral and lenders will assess your eligibility for these loans based on your personal creditworthiness. However, before getting a personal loan for your business, make sure that the lender does not have any restrictions that would prevent you from using the loan to finance a business. You should also keep in mind that as an individual, unlike some types of business loans, you will be held responsible for repaying a personal business loan.
If you don't qualify for a small business loan, you should try finding a venture capital fund or private investor willing to fund your business. Going this route will give you access to the capital you need. The downside, however, is that a VC fund or private investor is unlikely to be willing to give you money unless you offer them a stake in the company or part of your future profits. As a result, this option can potentially cost you much more in the long run than a small business loan from a bank that only requires you to pay back the loan you took out plus interest.
Support for Small Businesses Affected by COVID-19
If your business is struggling to get out of the COVID-19 pandemic, you are not alone. Over 160,000 companies have reported the closure since the beginning of the pandemic, either due to local mandates or due to dire economic conditions.
As a result of these unprecedented circumstances, many small business owners have tried to obtain credit and investigate COVID personal finance tips to keep their businesses alive through lengthy closures. Loans can help small businesses deal with the common problems they had during COVID-19, such as:
Cash flow problems
Additional maintenance and cleaning costs
Additional training for employees on security procedures, local mandates and new company guidelines
Adjustments to rapidly changing market conditions
Maintaining a workforce
Realizing the severity of the situation SBA has provided COVID guidance for small business owners, and the federal government has passed laws designed to help.
There are two key measures to help small businesses that have been put in place in response to the COVID-19 pandemic and the ensuing economic downturn. These are the Family First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security Act (CARES). These legal acts provide details on unemployment benefits, amounts for individual stimulus tests, withdrawals from retirement benefit accounts, and loans and other facilities for small business owners and the self-employed.
For more information on government facilities and funding, see usa.gov, but here's a quick rundown of the business owner relief efforts:
A deferral of existing SBA loans means that small business owners who have already taken out SBA loans will not have to make any payments for six months and the SBA will instead pay lenders.
Access to additional loans for small businesses and the self-employed. Mainly two types of instant loans: PPP (Paycheck Protection Program) loans and EIDL (Economic Injury Disaster Loans) loans.
PPP Loans: Unsecured loans with an interest rate of 1% that can only be used to cover expenses such as labor, healthcare, rent, mortgage payments, utilities, and interest payments on existing debts.
Economic Injury Disaster Loans: Loans offered directly by the SBA that can provide up to $ 10,000 advance grants to small businesses within three days of submitting an application.
Employers can also receive a 50% tax credit on wages up to $ 10,000 per employee if they close in accordance with government regulations or if they experience a 50% or more decrease in gross earnings compared to the same period in the year before. Remember that this is an advantage Not available if you've taken out a PPP loan and employers need to follow some rules to get this tax credit.
For example, they must give two weeks of paid leave to quarantine workers, workers who are quarantined to care for a loved one, or those who have symptoms of COVID-19 and are waiting to be diagnosed. In addition, employers must give workers who need to look after their children up to 12 weeks of paid vacation as schools or daycare centers are closed.
As a small business owner, you likely have a number of important decisions to make every day. This year in particular, there have been more than a fair share of unique challenges, and maybe your small business, like many others, is struggling to stay afloat. If you're wondering how to make ends meet, a small business loan might be the answer. Use this guide to find the small business loan that best suits your needs and will allow you to weather the economic storm of 2020.
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