FAQ About Getting a Small Business Loan
Small business owners learn pretty quickly that it takes money to make money. Growing your idea into a successful business takes skills, critical thinking, and dedication. But without adequate funding you are going nowhere fast.
Unfortunately, most small business owners lack the savings required to fund their business totally on their own. Knowing the facts about all the loan options available is vital to your success.
Small Business Loan Sources
Though there are several different types of small business loan products out there and lenders that offer them, some are a better fit for your business than others. Each loan usually comes with its own set of qualifying criteria, benefits and drawbacks.
Where do you begin?
Filling out an application is the first step, but you will need vastly different amounts of financial documentation depending on which type of lender you choose. Be prepared that conventional lenders want proof of everything: your business finances, tax documents and the valuable collateral you own, while other lenders may only need a few bank statements.
Choosing a Lender
The first place most people think of to apply is the bank. But, according to forbes.com, there is a downside to bank loans because many applicants do not qualify. Basically, the bar is set too high when it comes to credit scores and financial history.
Let’s face it, businesses are typically looking for loans because they need money, not because they have plenty of it. And it has not always been this difficult to obtain business financing. Since the credit crisis of 2008, banks have tightened their loan requirements making qualifying more difficult, if not impossible, for some small business owners.
When the bank is a good choice:
- If you have excellent credit and can meet the bank’s application requirements, then their small business loans typically provide one of the lowest interest rates of all the funding options.
- You wish to further establish your credit history, so the next time you need money, you may qualify for a larger amount.
- You are not in a rush to get your funding. Loans can take 30-60 days to process.
When a bank is not the best choice:
- If you have had credit challenges and ups and downs in your business, this is probably not the best loan option. You typically need an excellent credit score and credit history for approval.
- You have not written up a detailed business plan. Banks require a very intricate business plan outlining your business, tax and bank records and marketing plans.
- You lack valuable collateral or cannot risk personal assets. As a small business, banks consider you a risk, so collateral is required in case you cannot repay the loan.
- If your business is relatively new or a start-up, you are knocking on the wrong door for a loan. According to Foxbusiness.com, many banks require three years of business financial data for a loan application to be considered.
Considering a Small Business Administration Loan
As a small business owner, you can always turn to the Small Business Administration (SBA), which is a government agency that offers several loan products, each with different requirements to qualify. The loans cover start-up costs for a business, expanding your business or cash flow to keep a business running smoothly. The SBA does not issue the funding, but rather connects the borrower up to one of their lending partners.
When the SBA is a good choice:
- You have good credit and some collateral to put up, and just miss qualifying for a bank loan. The SBA loan programs lend to small businesses unable to secure financing on their own through the typical bank application. The loan programs are provided through private-sector lenders and are guaranteed by the SBA, so financial criteria is easier to meet and you stand a better chance at loan approval than if you just approached the bank yourself.
- You want a lower interest rate, and are willing (and able) to wait up to 90 days or more to get your loan processed. This is a government backed loan so it takes time to get approval.
When SBA is not the best choice:
- You lack time. You need funding solutions quickly. Since this is a government agency, the application process is actually lengthier than the banks.
- Your credit is less than stellar and your resume needs work. The SBA looks at your credit and your skills and ability to manage your business are scrutinized in the decision process for the loan.
What about Credit Unions?
Credit unions are similar to a bank, except that they are nonprofits owned by their customers. They offer small business loan products comparable to a bank.
When a credit union is a good choice:
- If you can meet the credit union’s requirements (credit score, collateral and business plan) and are willing to become a member of the credit union.
- The need for funding is not urgent and you can wait 30 to 60 days for the loan to process.
When credit unions are not the best choice:
- If your credit worthiness and personal and business credit history is less than perfect.
- You lack a very detailed business plan outlining your business, product or service, competition and marketing plans.
- You are not a member of the credit union, and do not wish to open a savings and checking account with them.
An Alternative in Lenders
Alternative lenders go by the philosophy that successful and established businesses and entrepreneurial start-ups shouldn’t have to scramble to be granted affordable financing. According to huffingtonpost.com, these lenders offer several funding options including small business loans, often with more ease, speed and flexibility than other sources.
When alternative lenders are a good choice:
- Your credit is less than perfect. You want someone to see your potential and what you have built, and support your efforts with a small business loan. Alternative lenders offer small business funding solutions with less stringent requirements and a faster application process.
- You are willing to pay a bit more in interest if it means getting a great loan and taking your business to the next level. Interest rates may be slightly higher than a bank, but you stand a greater chance of approval.
- You need solutions today, or at least quickly, to keep your business moving. Alternative lenders make decisions quickly. Red tape is stripped away. The application and approval process is easy to navigate.
When alternative lenders are not the best choice:
- You are not willing to take on a bit more in interest in exchange for ease, convenience and fast loan approval. Since alternative lenders tend to risk more because of their less stringent credit requirements, the interest rate is typically a little higher.