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A Guide to Small Business Loans

Operating a small business comes with a unique set of challenges. In addition to the things that business owners expect and plan for, from payroll and operating overhead to supply chain concerns, rent, utilities, regulations and taxes, there always seem to be unexpected pitfalls waiting around every corner.

Bad economic news, major vendors closing, a drop-off in tourist traffic, and changing consumer tastes can all buffet your small business. Even good news can bring challenges, whether it's a seasonal spike in shoppers or the opportunity to expand. Small business loans can be helpful in navigating the unexpected, providing a lifeline to a business on the edge of failure or providing a springboard for those on the edge of success. Knowing what's involved in the process can help to transform your challenges into opportunities.

small business loans

When Should I Take Out a Small Business Loan?

Small businesses of all stripes can benefit from loans at one time or another. You might be a landscaper who needs to invest in new equipment, a store owner eyeing a new location in the next town, a manufacturer facing a spike in demand thanks to holiday shopping, or a small design firm that could easily expand if you only had the people and payroll to do it. The reasons can be as unique as your business.

On the other hand, there are also times to stop and think twice before taking out a loan. If you haven't thought through your business plan, or if you suspect that your business might be on the verge of failure, it's time to take stock of the situation and make sure you have a viable plan to put your business back in the black before burdening yourself with more debt.

How to get a Small Business Loan?

There are numerous options, including credit unions, banks, and other for-profit lenders. The criteria, application process, and terms can vary widely from one lender to the next. It's important to read and understand the paperwork, to understand the process, and to get assistance if you don't. A bit of research goes a long way.

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Who Qualifies For Small Business Loans?

Qualifications vary depending on the type of business, the length of time the business has been active, creditworthiness, collateral, and a number of other factors.

Small Business Loan Rates

The interest rate paid on your small business loan is indexed to the Prime Rate, and typically varies between 6 and 13 percent, though rates for bad credit can be much higher. Business loan interest rates are typically based on the number of years you've been in business, your personal credit score, the number of years in which you've turned a profit, and the size of the loan taken.

I Need a Small Business Loan, But What About My Bad Credit?

We have more loan information for businesses with bad credit, but a brief recap is worth mentioning here. The recent recession left many small business owners with bad credit. While bank loans are typically a preferred small business funding source, other resources exist for those needing a loan but lacking the excellent credit typically sought by banks.

What Drawbacks Should I Be Aware Of?

While you're probably aware of the benefits of taking out a small business loan, there are a few things to consider before filling out the loan application or accepting a line of credit once it's extended:

  1. Take only what you need: If you need $250,000.00 to open a new location, don't ask for $500,000. Your lender will take into account your needs when you apply, and if you're taking a larger loan that is necessary, you're likely to be turned down. Even in the event that you're approved, there's no sense in paying interest on money you didn't need.
  2. Pay attention to the fine print: In addition to interest rates, be aware of origination fees, early repayment penalties, and all of the other legalese buried in your loan agreement. If you're not sure, have a lawyer or accountant help you so there are no rude surprises later.
  3. Don't settle for bad terms: It's important to compare rates, since the same loan application and financial data can sometimes get vastly different terms depending on the lender.
  4. Don't over-extend your credit: Too many loans or open lines of credit now can harm your ability to get credit later.
  5. Work with your creditors: Your business might be having a bad month, a bad quarter, or even a bad year. If you're making your best effort to keep up with payments but you anticipate problems, contact your creditors. It's in their best interest that you pay them, and they will typically work with you in the event of hardship. It's when they're the ones calling you that things can turn ugly, so it's in your best interest to keep that from happening.

Some Top Business Loan Providers

The top banks for small business loans in the US as of this writing include many names you'd expect to see, including Wells Fargo, Bank of America, JPMorgan Chase, U.S. Bank, Citibank, PNC Bank, Suntrust, Ally, TD Bank, and Regions.

Some banks, however, put a small business focus front and center, including First-Citizens Bank and Trust Company, and Bank of the West, whose business lending makes up 27.7% and 10.2% of their total loans. However, it can also be worth exploring local options, since a bank that's headquartered in your town or region will often prioritize the success of local businesses and may offer benefits and incentives that a larger bank would not.

Not for Profit Lenders: Alternative to Small Business Loans

There are many forms of alternative financing that will offer money to any enterprise as long as certain guidelines are met. Not for profit loans work a little differently, in that the business of the borrower is more important than the terms of the loan. While there are many companies and individuals that can access this type of lending, some of the most common industries include:

  • Childcare
  • Restaurants
  • Minority-owned businesses
  • Environmental agencies

Many nonprofit lending companies make it their mission to provide capital to small companies that employ people in urban and impoverished areas. These businesses may not have the type of financial history needed to secure a bank loan, nor do they need to borrow as much money as banks demand for a minimum. Nonprofit lending agencies are often the only way these small businesses can get the necessary financing.

How to Get Approved

Eligibility requirements vary depending on the type of business you run and what the money is being used for. In most cases, some of the standard lending protocol applies; prospective borrowers should have decent credit and will hopefully have been in business for over two years. How the funds will be allocated matters as well, and many lenders provide cash to companies that are looking to invest in solar and other forms of green energy. Not for profit loans can also be used to purchase inventory and equipment needed to help small businesses grow. In these cases, a company’s financial records should show that business has been steady but revenues have plateaued.

Loan Terms

The terms of financing depend on the company through which the loan is granted. In very specific circumstances, philanthropic lenders will provide interest-free capital to the right company providing the right service. This is atypical, as most loans come with an interest rate that is competitive with local banks. While there are a few exceptions, loan amounts generally range between $10,000 and $50,000.

Pros and Cons of Not for Profit Loans

These loans provide a helpful means of securing capital, though they may not be the best choice for every company. Of the many advantages that come with this lending practice, one of the most valuable is the advice and guidance that’s offered by the lenders. Since loans are frequently granted to small businesses in specific areas, the investors may have a particular interest in a certain company’s future growth and profitability. This type of personal investment is something that larger banks are unable to offer, and the mentorship can do wonders for a company trying to expand.

On the negative side, most of these lenders don’t have access to huge amounts of capital. Not for profit loans typically come in small amounts, and when lending companies are trying to provide for multiple borrowers, available capital gets spread a little thin. These loans can also take a while to process, with lenders considering a variety of factors before determining the exact terms.

Online Business Loans: Alternative to Small Business Loans

There are a few types of online lending practices, each with different pros and cons. The major benefit of going through an Internet lender is the expediency with which the loan requests are processed. While bank loans can take months to be approved and issued, funds borrowed from digital lenders are typically advanced within a week. For business owners considering online loans, it’s important to understand who exactly is providing the funding and what criteria will have the greatest impact on the terms.

Breaking Down the Lending Options

There are essentially three possibilities when it comes to online business loans.

  • Peer to peer lenders
  • Balance sheet lenders
  • Marketplace loans

Each lending practice has a number of similarities and differences. Learning the distinctions will make it easier for you to decide which is right for your business.

Peer to Peer Lending

This option might be the most popular among small businesses and investors. With a P2P loan, the host site connects entrepreneurs in need of financing with individuals and hedge fund companies that are looking to invest. Peer to peer loans are available for both personal and business use, with a wide variance in terms. To secure this type of lending, entrepreneurs file applications that provide credit scores, business history and other pertinent information. From there a grade is given that determines an individual’s level of risk and subsequent interest rate. Rates range from single digits to mid-30s, and these loans can be obtained for both short and long-term investments.

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Balance Sheet Loans

With balance sheet loans, the lending company is responsible for the financing, unlike P2P loans that source funds from third-party investors who take on the risk of borrower default. More often than not, these online business loans are used to fund working capital and short-term purchases. Borrowers usually reimburse the lenders through portions of their sales, making this lending practice ideal for companies that are already established and looking for a quick burst of capital.

Marketplace (or Lender-Agnostic) Loans

This option has gained some notoriety in recent years as more people become interested in online lending. Whereas most loan services let financiers choose where their money will go, online marketplaces allow borrowers to pick their lenders. This is managed by pre-approving both parties. Business owners declare how much money they need and how those funds will be allocated; lenders invest capital that is made available for specified purposes and qualified borrowers are able to draw from those funds. This creates variety for business owners in need of financing, provided they have good enough credit and business standing.

Online Business Loans: Pros and Cons

There are a few reasons that people prefer alternative and Internet lending to standard loans. Since many small businesses need cash in a hurry to keep up with the costs of growth, going through a bank simply isn’t an option. Thanks to the manner in which online loans are funded and the financing tools provided by the web, it’s possible for a company to apply for and receive a cash advance within just a couple of days. Another benefit of Internet lending is that even people with a bad FICO score are able to get approved. Many digital loan companies take factors such as business revenue and the proposed use of funds into consideration, while banks often won’t look past bad credit.

The biggest problem with these business loans is the exorbitant interest rates that business owners might face. To make these practices worthwhile for investors, P2P and balance sheet borrowers will often be saddled with interest rates above 30 percent. For some, the high APR is balanced out by the speedy processing; for those looking to borrow larger amounts, double-digit interest rates can end up being financially unsustainable.

In Conclusion

Small businesses face a range of challenges on a daily basis. Some are overcome by hard work, grit and determination, some by experience, and some, whether we care to admit it as business owners or not, by simple dumb luck. However, there's no getting around the fact that for all the time and sweat equity that money can't buy, there are times when an infusion of cash is precisely what's needed. From renovation to innovation, the right small business loan can help your business get -- or stay -- on the right track.