It is not uncommon for small-business owners to require financial help in order to turn their entrepreneurial dreams into reality or to keep an existing company afloat. If you need money to purchase necessary equipment, fund marketing campaigns or cover your payroll, it may be beneficial to take out a small-business loan. A small-business loan is not the same as other types of loans, and it’s important to understand how the different loans work before you decide to apply for one.
Small-business loans can be acquired from numerous sources, including banks, credit unions and online lenders. When gathering research on potential lenders, it is crucial to consider both the interest rates being offered and the repayment terms they have available. If you need help to qualify for a business loan, the Small Business Administration offers several resources for business owners. The SBA will not extend loans to small businesses. However, it does collaborate with business owners in order to help them secure loan funding. If your business is relatively new or you do not have substantial collateral, it may be more beneficial to secure an SBA-guaranteed loan rather than a traditional bank loan.
Often times, the application for a small-business loan is exhaustive and there are seemingly endless aspects of information the lender may require. For example, the lender may ask about your previous experience owning or operating a business if you are seeking to acquire a start-up loan. The lender will also expect you to explain, in detail, what exactly the money will be used for. This is why having a well written, detailed business plan can greatly work to your advantage. A detailed business plan specifies the goals and mission of your business, makes accurate projections regarding cash flow and profits, and outlines your intended marketing plan. In addition to information about the business, you will also need to provide certain personal information, such as copies of your credit report and previous year’s tax returns.
The repayment terms generally depend on how much you plan on borrowing and what the interest rate of the loan is. If you can manage to put up some collateral, such as your home, you may receive a better interest rate than you would with an unsecured loan. You will either be required to repay your loan in monthly installments or in one lump sum. When applying for a small-business loan, it is essential to read the fine print to determine if you will be assessed with any additional charges, such as a loan origination fee.
Do I Qualify for a Business Loan?
Qualifying for a business loan depends primarily on where you apply for your business loan. For example, in the latter half of 2016, banks were only approving 20-25% of small business loans. Whereas, alternative lenders were approving approximately 60-62% of similar loans. Moreover, in an online lending marketplace, we are able to work with more than 75 lenders continuously, so there is almost always a way to find a loan that will work for you. The only way to ensure your loan qualifications is to fill out an application and see for yourself!
What is the difference between borrowing money and selling ownership interests in my business?
When you take out a loan, you are required to repay the money over time (usually monthly) and with interest. The lender will not acquire an ownership interest in your business, and you will not have to share any future profits with the lender.
By contrast, if you raise money by selling equity (ownership interests), you will not need to make these monthly interest payments or repay the investment at any specific date. Instead, if your business is profitable, you will be obligated to share your profits with your investors, generally in proportion to the percentage of your business they own.
In order to secure a small-business loan, you may be required to submit a personal guarantee. This personal guarantee effectively states that if you are unable to repay your loan, the lender has the right to take possession of your personal assets in order to collect what they are owed. Whether or not a personal guarantee is required generally depends on how old your business is, whether you have any collateral and your personal credit history. If you fail to make repayment on a small-business loan, regardless of it is a bank loan or an SBA-backed loan, the lender is entitled to seek judgment against you in civil court. The only solution to removing a judgment is to pay the debt or file for bankruptcy.
Bank Loans for Small Business
* Convenient and accessible– Since banks are used regularly and are typically abundant within communities, they are easily accessible. After being loyal customers of a bank for years, the bank becomes convenient and familiar, and this personalized sense of service makes it the first choice to consider for a loan.
* Multiple Loan options– Banks advertise various types of loans so that there are multiple options for each business. The bank earns money from these loans on the interest they charge. Options like term loans, standard business loans and numerous others are available for the business-owner.
* Non-profit sharing– Venture capitalists and angel investors will agree to provide a loan to entrepreneurs in exchange for partial ownership, a share of the profits and a say in decision-making. Banks, however, will not ask for these conditions. If they do sanction a loan, banks are solely interested in receiving their interest and partial loan payment instalments.
* Lower rates of interest- Though difficult to receive, banks do provide loans at lower rates of interest than other lending agencies or credit cards.
Despite the many benefits of acquiring a loan with a bank, actually qualifying for and receiving the loan is not easy, and the disadvantages include:
* Lengthy application process– Banks require verification of all your credentials and details about the business before sanctioning a loan. Therefore, the application process is extremely tiresome and the review process is notable for taking a very long time.
* Unnecessary – The degree of detailing that banks require is extremely cumbersome, and from an entrepreneur’s point of view, completely unnecessary.
* Preference given to existing, running businesses– Banks have a preference for running businesses because they can accurately estimate its profitability and credit history before releasing a loan.
* Long list of prerequisites to qualify for a loan– Banks have an extremely long list of conditions that a business must fulfill before they are able to clear a loan. Often times, entrepreneurs have difficulty meeting all of the requirements.
* Risk of losing Collateral– Bank loans are usually sanctioned against some collateral, usually the entrepreneur’s house and/or property. If the business should fail to take off, the costs for being unable to repay the bank become substantially higher.
* Entire amount not granted– Banks are well known for not agreeing to grant the whole amount requested for a loan. They usually grant approximately 70 or 80 % of the sum applied for. This makes it very difficult for the entrepreneur to begin, since they are forced to make up the remaining balance and research other agencies for funding before they can truly start running their business.