64% of small businesses start with less than $10,000. While more cash would no doubt be helpful, many people don’t know how to get a small business loan.
Funding your small business may seem like a nightmare when you are just getting started. This is especially true if you don’t already have a strong track record. Investors are holding onto their money tightly looking for a sure thing.
Instead of waiting for an angel investor, it’s time to get things started. Continue reading to learn how to get the start-up funds you need for your business.
How to Get a Small Business Loan to Build Your Business
Building your business without the proper funding is a business owner’s nightmare. You know the next steps you need to take, and you understand what you need to do, but you are strapped for cash.
Before you approach anyone about getting a loan, you need to know why you need the money. If you say you need the money just for the sake of having it, your loan dreams will be dead in the water.
You may need to start your business, grow your business, need cash for day-to-day operations or it could be a safety cushion. Knowing exactly why you need the money and being able to communicate this is a key part of getting the loan for your business.
What Type of Loan Do You Need?
Depending on why you need the loan money, you may need a different type of loan. If you are trying to get a loan within the first year of your business, you can try again – after your first year.
Lenders need to see cash flow which proves you’ll be able to pay your loan back. Instead of getting a standard loan, you’ll need to fall back on business credit cards, friends and family that are willing to lend money to you and crowdfunding.
If your business has over one year under its belt, you have many more options. Some of the options you have include SBA loans, term loans, invoice factoring and business lines of credit.
Now that you have an idea of what loans are available to your business let’s go on to talk about the lenders.
What Is the Best Type of Small Business Lender?
If you have less than stellar credit and you are trying to get a loan, you might be worried. You might be worried that you won’t be able to move forward with any loans because of your history. You can get a loan again; you just need to keep your debts down and try not to open any other lines of credit.
Some of the places you can get loans from are:
- Banks
- Nonprofit Microlenders
- Online Lenders
These lenders can also offer different types of loans.
Once you know what type of loan you want, you should look at various companies that offer these loans. As you look through the terms available to you on the loans, you want to find the lowest APR. As long as you have enough money each month to cover the payment, strongly consider going with the lowest APR loan.
When to Use Banks:
Banks are the best way to go if you have great credit, can provide collateral and don’t need money fast.
The products available through banks are term loans, commercial mortgages, and lines of credit. The U.S. Small Business Administration has a program called the 7(a) loan program, provides disaster loans, and short-term microloans through banks. The size of SBA loans ranges from $5,000 to $5 million.
Since small businesses have lower sales volume and lower cash revenues, it is harder for them to get the loans they need. Many times their owners have less than great personal credit and nothing to put up as collateral. SBA loans often take between two and six months – be prepared to wait.
While banks may be the lower APR option, not everyone can get a bank loan.
When to Use Microlenders:
When you can’t get a traditional loan because you have a small company, this is a good time to use a microlender.
These companies are nonprofits that usually lend short-term. Their loans are usually under $35,000. APRs for these loans are often higher than bank loans.
You will be required to write out a detailed business plan, tell what the loan is for specifically, and financial statements. The loan process can be lengthy, and you should be prepared to go through all the steps.
If your company is a small business or a startup, these microloans could be exactly what your business needs.
When to Use Online Lenders:
If you don’t have collateral, haven’t been in business very long and need funding quick then online lenders might be perfect for you. You will see larger APRs for these loans, but they can get you out of a jam if you need cash right away.
Some APRs are as low as 7%, but others can be as high as 100%+. There are a lot of factors that determine how much you are going to have to pay in interest but a big part of the APR is who the lender is and what their criteria are.
Can You Qualify?
Before you try to get funding from any lender, you should know what your credit score is. You should also know what qualifications are necessary to get the loans you need. If you have collateral, that will help you through the process, but many people just starting a business don’t have collateral.
If your business needs funding, its best to pull out all the stops. Looking through the options you have and comparing them using a spreadsheet and pros and cons list can be helpful.
Don’t Miss Out On Other Important Business Information
We are glad to have helped you understand how to get a small business loan. Now you know how to move forward in this area. Read our other business articles to increase your business prowess.