Operating a small business can be challenging, especially when the business is facing cash flow problems. If you have pending orders or want to buy equipment, and you need financing, you can always go for a small business loan. Acquiring a loan is an easy process, but you need to fulfill certain steps. Here is how to qualify for a small business loan.
Step 1: Choose the Type of Small Business Loan
There are many types of small business loans. They include standard business term loan, a business line of credit, merchant cash advance, and more. Regarding standard business term loan, you get a specific amount in advance, which is then repaid with fees over a particular period. The payments are fixed and paid each month. In a business line of credit, you receive a credit limit, which you can borrow from at any time. In merchant cash advance, you get a lump sum that is repaid through a fixed percentage of credit card sales or daily debt. The other types include an SBA loan, business cash advance, equipment financing, and invoice factoring.
Step 2: Determining the Lender
After deciding on the type of small business loan you want, you require determining the lender that provides the loan type and the borrowing amount you want. Some of the lenders you can approach are PayPal, Kabbage, OnDeck, United Capital Source, Peer to Peer Lender, and Commercial Bank. For instance, PayPal offers a merchant cash advance that has a borrowing limit of $500,000 and is usually received within 1-2 days. Kabbage provides small businesses with a business line of credit that has a limit of between $2,000 and $250,000. The loan is received within 1-2 days.
Step 3: Loan Terms and Interest Rates
Each lender has their interest rates and terms when it comes to the loan facilities they provide. When a lender like PayPal offers you a merchant cash advance, a portion of daily sales that are credited to your PayPal account will be deducted to settle the debt. The portion deducted depends on the amount borrowed, which depends on your PayPal sales history. After the loan is approved, you get to pick from various daily rates of repayment. However, regardless of the rate you choose, the loan must be repaid within 18 months. The loan lacks periodic interest charges, pre-payment fees, penalty fees, and late fees. A merchant cash advance from OnDeck attracts a simple interest rate of 9 percent while business term loans from the same lender attract 9.99 percent interest rate. If you get a line of credit from them, you will be charged 14-40 percent interest rate. While business lines are payable within six months, merchant cash advances and term loans are payable within 3-26 months.
Step 4: Lender Requirements
Each lender has their requirements. For instance, Peer to Peer Lender requires that the small business is in operation for over one year. They also require a 600 minimum personal credit score and $50,000 minimum annual sales. On the other hand, OnDeck requires the business to be operational for at least 12 months when it comes to lines of credit and business term loans. They also require a $100,000 minimum annual sales for both loan types. The personal credit score for term loans should be at least 500, and that of lines of credit should be 600. Additionally, the lender requires zero personal bankruptcies and personal guarantee when it comes to a term loan.
Step 5: Paperwork
After picking a loan type and determining the lender that has terms and requirements that are favorable, there is one more thing that is required from you. You need to prepare the necessary paperwork. You need to provide the lender with a cash flow statement, balance sheet, bank statements, profit and loss, and tax returns. With regards to a bank loan, you require presenting a detailed business plan that shows how you will utilize the loan. Particular bank loans could also need a personal resume, articles of incorporation, commercial leases, and business licenses.
Conclusion
Once you get your loan, you can invest in cash generating activities that will allow you to repay the loan in full. These steps may appear quite lengthy, but if you are patient, you can acquire the loan in even 24 hours.
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