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When you start a new business, one of the first things you learn is that you need capital to keep the operation running. You may turn a profit every month that you throw back into the business, but there will be times when you’re going to need an extra infusion of cash. This is where small business loans come into play. A small business loan is a loan extended to a small business that it can use in any way that can help the business continue to grow.
Reasons to Get a Small Business Loan
There are many reasons to get a small business loan. Just a few of them are below:
- You may need to hire more people to help run your business.
- You may need to buy new equipment or repair existing equipment that has broken down.
- You may have a business expansion opportunity that you don’t have the cash on hand to participate in.
Getting a Small Business Loan
Once you decide to get a small business loan, you’ll soon realize that the process isn’t necessarily simple. Small businesses often have problems getting funding because they have to prove to lending institutions that their businesses are profitable and that they’’ll be able to pay the loan back. Many small businesses have difficulty proving this, especially if they’re relatively new or in a crowded market. There are several types of new business loans, however, and one of them may end up being the best choice.
Types of Small Business Loans
There are several types of small business loans available to businesses. The one that they end up going with depends on their companies’ financial health.
SBA-Backed Bank Loans
An SBA-backed bank loan is one that is backed and guaranteed by the SBA. This type of loan is one of the most difficult types of loans to get and the one guaranteed to make a business jump through the most hoops. You will need to prove to the lender that you have a minimum 680 business and personal credit score. You will also need to prove that your company is has been operating continuously for at least two years period and at a profit.
You will also need to show that you will be able to pay back the loan easily. For most banks, this means that they want your business income to be at least 1.25 times your operating expenses. Keep in mind that this “1.25” amount is merely a baseline, and most banks want you to have even more income. Banks will also want you to meet a minimum annual revenue threshold, usually between $50,000 and $150,000. All of this information will need to be proven with clear and concise documentation.
Businesses that look good on paper but can’t meet the above guidelines need to search for alternative loan options. Some of those businesses turn to microlenders. A microlender is a non-profit lender that extends loans to small businesses in need of relatively small loans. Loans from microlenders rarely exceed $35,000, making them ideal for businesses that need to cover temporary shortfalls.
If you don’t quality for either of the above loan options, you may consider going with an online lender. Online lenders can get you money quickly, usually in as little as 24 hours. They have laxer rules when it comes to lending, making them a great option for businesses that are new or that don’t have the credit history to qualify for more traditional types of loans.
If you’re going to go the online lender route, be aware that they charge incredibly high interest rates, sometimes as high as 108 percent. Keep that in mind when figuring out how much you intend to borrow, and make sure that you get a repayment amount that your business can handle comfortably. Online lenders are also attractive to companies with great assets and credit that simply want to get their money as quickly as possible.
Because of the difficulty obtaining small business loans, some small businesses turn to other funding options. This could be anything from reaching out to friends and family to soliciting local investors to crowdfunding. At the end of the day, simply ensure that your small business has some sort of an option when it comes to obtaining funding.