What do you need the money for?
How much money do you need?
How long will it take you to pay it back?
How long have you been in business?
What is the current financial shape of your business?
How much collateral, if any, do you have to put up for the loan?
How quickly do you need the money?
Answering these questions will help determine if you should pursue a government-backed SBA loan, a loan or line of credit through a bank or other financial institution, a cash advance from a merchant services provider, or a loan from an online alternative lender. All offer types of loans that you can use for an array of purposes, such as smaller working capital loans for day-to-day expenses, or larger loans to buy new equipment or real estate. Each type of loan varies greatly in how much interest is required, how much money you can get and how quickly it needs to be paid back.
Once you know how much money you need and how it will be used, you have to figure out the best place to get it from.
Editors Note: Considering applying for a small business loan? If youre looking for information to help you choose the one thats right for you, use the questionnaire below to have our sister site, Buyer Zone, provide you with information from a variety of vendors for free:
Small Business Administration
One of the first places small businesses often turn to for capital is the government for a Small Business Administration (SBA) loan. The SBA offers several loan programsdesigned to meet key financing needs for a wide range of business types.
The most important thing to understand with these loans is that the government isnt directly lending small businesses money. Instead, the SBA sets guidelines for loans that are made by its partners, which include banks, community development organizations and microlending institutions. Businesses have a variety of loan types to choose from when pursuing an SBA loan, each of which comes with its own parameters and stipulations on how the money can be used and when it must be repaid.
Javier Marin, a consultant with the Florida Small Business Development Center at the University of South Florida, said the biggest positive of SBA loans are the government guarantees that come with them.
The SBA provides a guarantee that enables the bank to extend credit it would have otherwise declined, Marin told Business News Daily. This is true for startups, companies with a tight cash flow stream, and business owners with borderline, not bad, credit scores.
That government guarantee, which typically covers between 75 and 90 percent of the loan, eliminates much of the risk for the lender, said Lynette Newman, president of Newman Business Loan Consultants Inc.
Thebusiness works with the [lender] and then the [lender] asks the government to guarantee or co-sign with thebusiness for the loan, Newman said.If the business fails to repay the loan, the lender handles [it] like any other type of defaulted loan.
Its only after unsuccessful attempts to recover the amount owed, either by collecting on collateral or personal guaranties, that the lender will ask the government to honor the guaranty.
The [lender] will then take a loss on the unguaranteed portion, Newman said.The US government, of which SBA is a part, can then attempt further recovery, generally by a tax refund offset.
The terms of an SBA loan also tend be more favorable to borrowers, Newman said.
If the SBA guarantee is applied, the bank/lenders can lend more, or perhaps with less collateral, Newman said. It may also not need as much cash injection, or may have longer repayment terms than it could without a guaranty in place.
Marin said another positive of SBA loans is that the repayment terms are longer than non-government-backed loans. SBA loans are extended to 10 years for certain types of loans and 20 years for others, giving the business more time to pay if needed. Additionally, there is no prepayment penalty on loan terms under 15 years.
SBA loans arent without any downsides, however. Since the government is involved, you can expect the process of applying for an SBA loan to be much more complex than when applying for a conventional loan through a bank or an alternative lender.
Newman said there is additional paperwork to be filed and there are extra fees that need to be paid. The length of time it takes to get approved, or denied, is also lengthier, she said.
It takes longer to have a guaranty placed on a business loan than a non-guaranteed loan would take, Newman said.
When applying for an SBA loan, small business owners are required to fill out forms and documents for the specific loan they are trying to get. In addition, the SBA encourages borrowers to gather some basic information that all lenders will ask for, regardless of the loan type. Among the required items are:
Personal background and financial statements
Business financial statements
Profit and loss statement
Projected financial statements
Ownership and affiliations
Loan application history
Income tax returns
Business overview and history
The SBA also advises small businesses applying for a loan to be prepared to answer several questions, including:
Why are you applying for this loan?
How will the loan proceeds be used?
What assets need to be purchased, and who are your suppliers?
What other business debt do you have, and who are your creditors?
Who are the members of your management team?
Small business owners can find SBA loan applications on theSBA website.
While banks are often the sources of SBA loans, they also are lenders of conventional loans. The biggest difference between SBA bank loans and non-SBA conventional loans is that the government isnt guaranteeing that the bank will get its money back.
Conventional bank loans also give you a little more freedom on what you can do with the money. While a specific plan is still needed to get approval, bank loans dont come with such stringent use terms that each of the SBA loans do.
Rohit Arora, CEO and co-founder of Biz2Credit, said there are a number of reasons a conventional non-SBA bank loan is a good choice for small businesses in need of funding.
Conventional bank loans come at good interest rates, and because a federal agency is not involved, the approval process can be a little faster, Arora said.
Just like the other lending sources, there are some negatives to pursuing a conventional bank loan. Marin said bank loans typically include shorter repayment times than SBA loans and often include balloon payments. This can force small business borrowers to refinance the loan in 3 or 5 years because the money is due.
Additionally, Arora said its often difficult to get approved for a conventional bank loan.
Even though approval rates have increased, big banks approve [only] slightly more than 20 percent of the loan requests they receive, Arora said. Smaller banks approve a little less than half of the loan applications they receive.
When applying for a bank loan, youll be required to share all of your financial details. Youll need to provide your lender with all the financial background on your company, future growth plans and often your personal financial information. This allows a bank to gain an understanding of your complete financial situation.
The more information you have to illustrate that youve run your business well gives banks the confidence they need to invest in you for the future. The more information you provide, the easier it will be for your loan officer to get your loan approved.
In addition to proving that you wont have trouble paying back the loan, you will also need to show details on how you plan to spend the money. Dont skimp on specifics with banks. Show exactly how you will use the requested funds and how much you need to accomplish your goals.
Lenders appreciate attention to detail and preparedness when it comes to the facts. For example, if you are looking to purchase a new piece of equipment, provide quotes on the exact costs, how much capital you need to facilitate this purchase, and specifically how the new equipment will help grow your business.
Rare instances has the potential to rise that is going to contribute to troubles for many folks because of unusual conditions. Taking a good solid required Online Cash Advance can be quite a brilliant concept