Small Business loan How To Get It
Small Business Loan is very crucial when starting your own small business. Without any additional financial assistance other than the money in your bank account is not impossible. According to a 2017 Year End Report by National Small Business Association, however, the vast majority of small businesses used some forms of financing including but not limited to loans. Only about 31% of small businesses used no financing at all throughout the last year, while the remaining percentage used one or more types of financing. A business may not need financial help at launch, but at some points and as the business grows, it is more likely to apply for a loan whether for expansion purpose or simply keeping the venture running after losses.
In times when more capital injection is of the essence, business owners are craving for fast business loans. That being said, you should not rush and apply without preparations and considerations. Application process requires a bit of paperwork; on top of that, there are multiple types of loans and lenders to choose from. In general, small businesses need loans to sustain growth, but the specific purposes can be different. One may need the money to hire more professionals, while others use it for marketing efforts, expanding territories, purchasing equipment, research and development, etc. Getting loan or small business loan approval is not the easiest thing to do, but you can improve your chances of acquiring one by learning basic information about it as follows.
Before you do anything else, get the paperwork ready because the application requires significant documentations. In addition to filling out the form provided by potential lenders, you also need supporting documents for your application for a small business loan to be attached, these may includes:
- Personal Information: general identification of the business owner or applicant is necessary. You should provide the names used in the business, current address (and previous ones if available), educational backgrounds, and criminal records.
- Resume: especially if the small business loan is for startup, some lenders require applicant to submit professional resumes of all people directly involved in the business activities. Experience and educational backgrounds in management may help you acquire fast business loans approval.
- Loan history: lenders also want you to submit records of all previous loans you have applied for, so they can check the payment records as well.
- Collateral: depending on the amount you apply for and lenders’ policies, collateral may not be required at all. Proper documentation of business plan along with strong financial statement can help you avoid the requirement for collateral. Nevertheless, it is good idea to provide collateral document.
- Income tax returns: business and personal income tax returns are necessary to determine approval.
- Bank statements: most recent business and personal bank statements for one-year period.
- Loan purpose: a document about the expense the loan should cover if approved.
- Outstanding loans: a report of the amount of outstanding loans and credits you have as well as financial obligations for examples monthly payments, payment dates, and interest.
- Business’ legal documents: lenders can determine if you must provide some legal documents based on the application file submitted. Requirement varies, so make sure you prepare the following:
- Licenses and registrations
- Business formation records (such as LLC filing and article of incorporation)
- Franchise agreements, if applicable
- Contracts with third-parties, affiliates, or subsidiaries
- Business lease
Every loan application requires detailed business plan as well. Some information are already covered in previously mentioned documents for examples loan purpose and outstanding loans, yet lender also needs to know the projected growth (typically in five year period) more specifically profit statement, cash flow, and balance sheet. A good business plan should include:
- An overview or summary of the plan
- Business description and objectives
- Goods and services provided
- Target consumers and market competition
- Marketing plans
- Organizational structure
- Management skills and backgrounds
- Year-by-year growth projection
- Cost of growth or business expenses
Well-prepared business plan presented in professional manner is a strong foundation to build a convincing case so lenders are more inclined to approve loan application. This is NOT to say that all the projections are made superficially attractive for the sake of acquiring fast business loan. Overly ambitious business plan can in fact turn out to be a hindrance.
TYPES OF LOANS
The next step is to determine what kind of loan you need. As you may expect, there are many different types available – in spite of the seemingly identical procedures to get one – based on purposes of the loan itself and how you plan to repay it. Some of the most common loan programs for small businesses loan are:
- Revolving line of credit: lender allows you to withdraw as much as you need within the maximum limit. As long as you manage to make the minimum payments each time and never exceed the limit, you can keep on borrowing for an undetermined period of time. Suitable for businesses that require frequent unexpected expenses.
- Invoice financing: also known as factoring, the loan is often used by businesses that often struggle with cash flow due to yet-to-be paid invoices. Lender buys your invoices for discounted price and holds a portion of the money until the invoices are paid. You can consider invoice financing a form of emergency fast business loans; you should not apply for it if you have access to a more forgiving source.
- Commercial mortgage loan: the money borrowed from this program is intended to cover the cost of buying, repairing, building, or refinancing commercial property.
- Franchise loans: if you want to expand or purchase a franchise business, the loan program is most suitable because many lenders are willing to provide financial assistance for all franchise-related expenses such as upfront payment and marketing. You can use other loan programs, but this is an option to take into account.
In the United States, the Small Business Administration actually works together with lenders of different types to help business owners to access specific funding programs they need. Besides loans, SBA also offers help to access various options including surety bonds, government grants, investment capitals, and even disaster assistance. Lenders are categorized based on the financing programs they offer.
TYPES OF SMALL BUSINESS LENDERS
Once you determine the type of loan most appropriate for your needs, it is now time to find the lenders willing to provide the financial assistance. The requirements for fast business loans approval vary depending on each lender’s policies. In general there are only two types of lender:
- Credit Unions and Banks
One of the biggest advantages of funding programs from banks and credit unions is the relatively low Annual Percentage Rate (APR) in comparison to alternative sources, according to Small Business Administration. Approval process may be slower, so it is probably less-than-ideal if you need immediate fast business loans.
- Alternative Sources
This broad category can be further divided into two types: Peer-to-Peer (P2P) and Direct Lenders. The former can act as either direct lender or broker, while the latter actually lend their own money. Approval process is most likely quicker compared to that of traditional bank loans thanks to the streamlined processing via Internet. You can apply, check the rate, and get approved within the same day (maybe even hours), according to PwC.
The U.S. Small Business Administration suggested that the conventional source of financing (bank loans) provided nearly $600 billion for small businesses loan in 2015, while alternative sources including but not limited to angel investors, venture capital, and finance companies accounted for $593 billion. To make the right choice, it is recommended that you focus on the most important factors such as eligibility requirements, interest rate, fees, and of course lender’s reputation. The golden standards that most (if not all) legitimate lenders use in determining loan approval include minimum credit score, years in business, and annual revenue. Focusing on those factors can help you anticipate that the lender may need in terms of paperwork and identify the likelihood of acquiring beneficial financially small business loans.