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.
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:
- 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.
- 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.
- 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.
- Don't over-extend your credit: Too many loans or open lines of credit now can harm your ability to get credit later.
- 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.
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.