Every business owner wants to secure funding—may it be to stay afloat amidst challenges or to be able to expand and grow. There are many ways to get the money needed in the business, but one of the most common ways to gain funding is through taking out a loan.

With the right small business loan, you will gain access to the right funds that will give you what you need to start your venture or bring your expansion plan into a reality. At the same time, the right one will not overwhelm you with high interest rates or unrealistic terms that might harm you in the long run.

To make the best decisions and find the perfect loan type for your needs, our small business loan guide is perfect for you.

What Is A Small Business Loan?

A small business loan is a type of financing option that is offered to a company by a lender. Lenders charge interest rates and fees and design a repayment schedule in exchange for an amount a business can use for their capital.

In the process of a small business loan, the amount set and all of the included charges vary in value. The basis for the loan terms, fees, and interest rates will be dependent on the lender’s assessment of your profile and the type of loan you take.

Related: All You Need To Know About Student Loans

What Should You Consider Before You Apply For A Loan?

Taking out a business loan can mean managing payments for a few months up to 25 years, depending on the type you should apply for. Because of this, you should be very careful and study all the factors before you jump in.

Here are some factors you should consider before you apply for a loan for your business.

Your Purpose For Getting A Loan

As you are planning to take out a loan for your business, you need a good business plan to back it up. Think about how you would spend the extra capital to further your operations and stimulate growth.

Some lenders would want to get the specifics on where the money goes. For instance, will you be using the money to open a new branch? Do you want to train and improve your employees? Will you be introducing a new product line? These things matter to establish your commitment and business expertise at the same time.

Your Credit History

Before anything else, your lender will look into your history—both your personal credit and your business credit. This is essential to determine whether lending money to you will be a low or high risk decision.

For most cases, lenders will only consider approving borrowers who have credit scores that are higher than 680. However, there are still other things that may affect approval, like the industry you belong in and the current economic situation.

Your Business History

Most lenders look into stability before approving loans, so the longer you are in business, the better. In many cases, at least a year of experience is more than enough to give lenders an idea of who you are. However, this is also dependent on the total amount you will borrow and the loan type, as well.

Your Ability to Make Payments

Finally, lenders will also take a look at how you will be able to repay the amount you borrow. Ensure that you have a good cash flow that you can manage meeting payment schedules on time.

Another thing that can help you prove this is your annual revenue. Around $50,000 to $250,000 a year will be required by traditional lenders. Microlenders and online lenders might have a way lower requirement, even going as low as $2,500, so it is really dependent on the type of loan.

What Types of Lenders Offer Small Business Loans?

Nowadays, there are numerous options for lenders, even for small business loans. Of course, the first on the list are traditional banks, credit unions, and other financial companies. However, small businesses can also seek help from alternative lenders like peer-to-peer lending platforms, crowdfunding platforms, and merchant lenders.

What Are The Types of Small Business Loans?

With the numerous small businesses and industries they belong to, it is no surprise that there is a variety of small business loans available to you. Finding out the differences amongst each of them can be quite confusing.

Here are some of the most common small business loans you can apply for. You just might find the perfect one for what your company needs!

Small Business Line of Credit

Having a business line of credit means being provided a financial option similar to how a credit card works. In this process, a company is provided with money up to a certain amount and then is required to repay this amount at the end of a period.

The lender earns through the interest rate, and the borrower is free to keep on spending, as long as they do not go over the credit limit. Just borrow and repay every time it is required,

A business line of credit is perfect for a company that has short-term needs, such as needing to settle an emergency, bridge a gap, or take advantage of a seasonal opportunity.

Asset-Based Loan

An asset-based loan involves securing funding with a promise of collateral, whether inventory or property. Loans like this are easier to qualify for, especially since lenders have an extra layer of security with the collateral.

The great thing about asset-based loans is that companies can gain quick access to capital—perfect for handling short-term expenses.

Invoice Factoring

Invoice factoring, also known as account receivable financing, means selling your outstanding invoices to a lender in exchange for a cash advance. Invoice factoring can be a solution for a company that needs an improvement on their cash flow and secure their funds. 

Equipment Financing

If you are in an industry that depends on a lot of high-cost equipment, getting all the equipment you need can be quite expensive. Whether it is for a car or a specialized machine that costs thousands of dollars.

When you take out an equipment financing loan, you will experience a process just like any other loan to determine the terms and the rates of your loan.

Microloans

From its name alone, you can already identify that microloans refer to loans with small amounts. Usually, the highest amount for this type of loan is $50,000. Most of the time, people go for microloans in order to jumpstart a business. For instance, businesses can get the extra capital to buy raw materials, inventory, make down payments, or other similar expenses.

Business owners can also take advantage of the lower rates you can get on microloans. However, it is also important to note that the repayment terms for microloans are way shorter than your usual business loan.

Small Business Term Loans

Another type of short-term financing option is a small business term loan. When you apply for this, you set out a particular goal where you need financial support. For instance, your term loan can be to upgrade equipment, open a new location, or renovate your current store.

What’s the difference when you get a term loan? Like the name suggests, this loan lasts for a specific term, from a few months to several years, depending on what you are looking for.

SBA Loans

The Small Business Association offers different funding for businesses, backed up by various individual banks. The most awesome thing about this is that you can utilize an SBA loan for almost any purpose for the growth of your business.

Business owners can take advantage of the long-term and low-interest offerings that are possible through the US SBA. Though the funding doesn’t come directly from the SBA, their guidelines reduce the risk for the lender and they are the ideal choice for businesses with a good credit score and at least a few years of experience.

How To Increase Your Chances Of Small Business Loan Approval

When the application time arrives, the process can be a little bit scary. But it’s not like you need to have a loan marketing career to nail it. Getting an approval is definitely achievable, especially if you put this important tip in mind: Build your credit score.

Though not all business loans require a deep credit check, they still take a glance at your credit score. The best way to get loan approval is simply to improve your credit. Not only will this get you approved, a good credit rating will also give you better rates and terms.

As a business owner, you should ensure you are registered in the credit reporting agencies for businesses, particularly Equifax, Experian, and Dun & Bradstreet. In this way, the agencies will track your business activities well.

Additionally, ensure you also look into your personal finances. Your credit history and credit score will also play a role in how lenders see you. Overall, make sure to prepare all the details necessary so your lender will have a good grasp of what type of borrower you are.

Getting approved for a small business loan comes with extra time and research. Have we forgotten anything? Let us know in the comments below!