Whether you are just starting your business, in growth mode, or just cruising along – there will come a time when you consider getting a small business loan. A small business loan is essentially a way of financing your business when you would otherwise be unable to. The number of reasons why you would get a business loan are as varied and numerous as the types of business loans available. Business owners usually look to lenders to provide business loans to finance vehicles, equipment, real estate and other expenses. They are generally short term loans (6 to 10 years) but could be longer based on the type of financing required. Some type of collateral will generally be required by the lender to secure the loan. Usually this is the vehicle, equipment, or real estate being purchased with the loan.
usually provide business loans to finance vehicles, equipment, real
estate and other expenses. These loans are generally for a short term,
such as six to seven years, but the duration can often vary based on the
type of financing required. Some type of collateral generally must be
used to secure the loan - usually the vehicle, equipment or real estate
being purchased with the loan or what is called a “blanket lien” on
other assets. You should also expect to pay a loan origination fee, and
of course interest. The rate of interest will depend on a number of
factors including your credit rating. Business loans can offer the
security of a fixed monthly payment and a fixed interest rate, although
variable rate loans may also be available.
You may be considering a small business loan if you have the ultimate
business idea to grow your business, or you want to spend more on
marketing and growth, or really have outgrown the space you are in.
Well, every good idea needs one thing - money. Success in getting
financing of any type, including a loan for your loans for small
business is not an easy task. In today’s economy, lending is tight, and
only those who can prove they are not a risk are able to reap the
When considering getting a small business loan, it pays to be
knowledgeable about what a lender will look at before loaning money to a
business. There are a number of different financial items that a
lender will look at. Knowing these criteria beforehand and having the
answers in place will go a long way in getting you that loan. The first
thing that a lender will look at is your ability to repay the loan. An
established business will definitely have an advantage as it has a
proven track record and can provide financial statements from prior
years that can show growth and profitability (or the potential for it).
A business that doesn’t have high profits but has an excellent
marketing plan to expand into a new key market also has the key
information that the lender will want. A start up business has the
disadvantage of not having a track record of any type, and may need to
overcome this disadvantage this with excellent business planning and a
well thought out marketing strategy that will show how the business will
make money and how it will pay for the loan.
The second factor that lenders look into when considering a small
business loan is your individual credit history. Just as if you were
getting a personal loan, the lender will pull the three major credit
reports and will check scores for credit worthiness before issuing a
small business loan. Being prepared by checking over your credit
reports and being familiar with your credit score is always a good idea
when apply for a loan. Be sure you are checking for inaccuracies and
errors, if there are any you should start the process to correct the
information. Doing what is needed to correct any past due accounts will
also be helpful.
Lenders will also consider equity prior to issuing a loan. They will
look for some form of equity in any business before lending money to it.
Most of the time, they expect the business owner to have invested at
least one quarter of the total value themselves. Along with equity
comes collateral, and before issuing a small business loan, a lender may
ask for some type of collateral. Lenders are more willing to invest in
a business if there is a secondary way for them to get their money
back. A business that has collateral that can be sold off in the event
of defaulting on a payment will have an advantage on getting a loan over
another business with no collateral.
Finally a lender will look at business experience. You will need to
show them that you have the business experience to make things happen.
Lenders are never too eager to lend money to someone starting a business
in a field which they have no prior experience in. Either you will
need to gain the experience before getting a loan or have plans in place
to hire someone with that experience to run the business for the lender
to be comfortable in loaning the money to the small business. Knowledge
equals profit in the eyes of the lender. It is critical that you
consider what the lender will require from you when seeking a business
loan. This can only help you in getting a little bit of an edge and
perhaps having someone give your small business loan application deeper
Knowing how to get a small business loan may seem like a difficult
proposition, but in reality it’s not too difficult when you are armed
with the right information. Knowing what a lender will require is a good
start. You will also need to consider what type of loans you are
looking to take advantage of (small business loans, lines of credit,
specialized loan programs), and more importantly what you are going to
use the funding for. That will help ultimately determine what type of
loan you should be looking at.
So really think about what you need the money for. Of course there are
urgent needs, long term needs, and things that you just need to help
your business run. Each of them may require a different type of loan,
with a different term. The main types of loans to consider for your
small business are ones to pay for inventory, to increase working
capital, and for real estate purchases.
A major characteristic to consider when contemplating loans is the
length of the loan and whether it is short term or long term. The length
of loan is typically matched to purpose of the loan. Long-term loans
are used to finance the purchase, improvement, or expansion of fixed
assets such as equipment, company vehicles, and real estate while short
term loans are used to finance current or short term assets and
liabilities such as accounts receivable, inventory, and accounts
One type of short term loan is to fund inventory purchases. Almost all
small businesses need inventory to get started, and then also need to
anticipate future inventory needs. Your business will be a success or
failure depending on your ability to be able to consistently give your
customers what they want, exactly when they want it, and optimally give
it to them before they know they even want it. Meeting that demand
keeps you in business; going above and beyond helps you grow. Since most
small businesses are seasonal in nature, you may need more inventory
before you have made enough to pay for it.
Lenders have special loans available to small businesses designed to be
used to just purchase inventory. Also called “inventory financing” it
is a line of credit or short-term commercial loan made to a company for
the specific purpose of purchasing products for sale. These products or
inventory will serve as collateral for the loan if the business cannot
repay the loan. Inventory financing is especially useful for businesses
that must pay their suppliers in a shorter period of time than it takes
them to sell their inventory to customers. Lender loans to purchase
inventory are generally short-term in nature and companies are usually
able to pay them off the season is over with the proceeds of sales from
their seasonal sales.
Loans to increase work working capital are similar to inventory
financing. They are short term loans designed to get and keep your
business running. Lenders will sometimes provide short term financing
to small businesses to enable them to get off the ground and grow.
Working capital loans are a great way for small businesses to generate
capital and start focusing on business growth. To be able to run and
grow a business it is critically important to have capital on hand to
cover costs, payroll, and any other unexpected costs that may occur. If
you are aware that you will have a slow period during the year, you can
use the loan to meet your payroll or other recurring payment
obligations. Or you can use a working capital loan to stock up on
inventory before the coming holiday season and you don’t have enough
cash on hand. You can even use your loan to buy things on sale! Yes,
take advantage of seasonal discounts offered to you by vendors. You
don’t have to exhaust all of your finances to meet your financial needs
use working capital commercial loan to keep money in your businesses
pocket as well as meeting your needs with cash to spare.
you are looking to make a real estate purchase for your business.
Small business loans are available to finance real estate! If your
business is growing, turning profits, but you are busting at the seams
in your office – you may be a great candidate for a commercial real
estate loan. You may want a completely new space for your business and
warehouse, or you may just need to expand on what you already have.
Unlike working capital and inventory loans, real estate loans are a type
of loan for small businesses that is long term. Longer term financing
is available to business owners to allow them to purchase commercial
real estate or to expand their existing operations, and in turn grow
their business and as a bonus bring jobs and money to the local economy.
Lenders are more likely to approve commercials real estate loans for
existing businesses that want to purchase real estate to expand their
operations. If a business has been established for a while and ready for
expansion, then the lender has some confidence that the business is
successful and will continue to be. Of course the lender will look at
your financial statements, and if you are ready to expand they will see
that your company is turning a profit, has a positive cash flow, and
positive forecasting numbers for the future.
And another consideration when looking for loans for small businesses,
is do you qualify for a special loan program? There are a number of
specialized financing programs available to certain industries, groups,
and business sizes. One of the largest most diverse programs is through
the small business administration. The small business administration
helps small businesses grow. They offer special programs for veterans,
women in business, and are perfect for those who many not qualify for
traditional financing. Small Business Administration
loan programs are designed to help borrowers who may not meet the
lending standards set by most banks. These can include issues such as a
recent change in business ownership, a shortfall in collateral to secure
the loan, business principals who have a low net worth or the need for
extended payment terms.
These are U.S. government-backed term loans that are available at most
banks and commercial lending institution. In any given year, the SBA
can guarantee tens of billions of dollars-worth of loans that support
tens of thousands of small businesses. Loan terms can last up to 25
years for real estate, up to 10 years for equipment (as long as the
equipment is likely to stay useful during that time) and usually up to
seven years for working capital. Interest rates are also competitive
because the SBA limits the interest rate spread that banks are able to
offer on the loans.
There really is a lot to consider when you are pondering the
possibility of obtaining a business loan. But, once you have done your
research, decided on what and how much you need, you will be armed with
everything required to get that business loan.