Small business funding solutions – easiest ways to get a business loan
According to a US Small Business Administration (SBA) report, small businesses were given more than 61,000 loans during the 2021 fiscal year. For small businesses, loans and business financing can be beneficial for a variety of reasons that include:
- Improving cash flow and working capital
- Funds for advertising efforts
- Recruiting talent
- Investing in equipment
- Emergency money
- Waiting for outstanding invoices to be paid
If you believe your small business could benefit from small business funding solutions, read on. In this post, you will get to know the easiest ways to get a business loan to improve working capital through debt and give your business the best chance of success.
Educate yourself about the types of small business loans
In the USA, a small business owner can choose from various types of loans – the most popular being business line of credit, startup financing options like personal loans and business credit cards, and SBA loans. The most sought after small business financing options are traditional bank loans.
1. Business line of credit
Business line of credit is a type of small business funding solution that a business owner may choose when securing funding. As is the case with all types of small business loans or factoring, a business line of credit has its pros and cons.
The advantages of a business line of credit include:
- Credit limit can increase with the scale of your business making this one of the more flexible funding options.
- Interest payments are based on what’s currently being used. Making this the most affordable funding option.
- Gives businesses the funds necessary to make the most of opportunities
- Readily available from both traditional banks and online lenders
- Business owner is in full control of what gets drawn down. Therefore the company can use the capital for a short period of time, or not draw any fund because they don’t need money.
On the flip side, a business line of credit comes with the following disadvantages:
- Most lenders will file a UCC, so the general public can know you have debt on your company. Some business owners don’t want that.
- Time-consuming application with more traditional financial institutions like a bank loan.
- These funding opportunities won’t be available if you have bad credit.
- Availability is generally higher with online loans or merchant cash advances which come with high interest rates.
2. Personal loans and business credit cards
Personal loans and business credit cards are among the most popular small business funding solutions.
Some of the biggest pros of this financing option are:
- Attractive offers for short-term financing
- Equity retention
- No collateral
- Some 0% interest cards are like getting free money
- Using credit cards can help improve bad credit
- Startup companies can be elegable
- Quick turnaround while business loan applicants may be waiting longer for an answer from a bank
However, this option has certain cons as well, such as:
- One drawback might be the low limits
- Compounding interest in the event of spending more than what your business can afford
- No separation between personal and business assets
3. Small Business Administration (SBA) loans
These loans are partially government guaranteed. However, don’t make the mistake of thinking that it’s the US SBA that’s doing the lending. These loans are actually handed out by financial institutions that have been pre-approved by the SBA.
Some of the positives of SBA loans include low interest rates, greater availability, and high maximums. For instance, if you apply for an SBA express loan, you can get up to $350,000 in funding.
Know how lenders evaluate small business loan applications
The success of a lender is dependent on the timeliness of borrowers’ payments. Quite simply, before a lender approves your small business loan application, it will evaluate your small business. This evaluation typically involves multiple factors such as time in business, cash flow, industry, collateral, and business credit scores.
Time in business
If your small business has been in operation for 1 – 2 years, it stands a much better chance at getting a loan compared to a business that has recently begun its operations. The time in business reflects your ability to run your business over an extended period. This is especially true for a lower cost bank or large banks that may provide funding.
Consistent working capital and cash management
A business that has been able to maintain consistent cash balances over an extended period is preferred by lenders. This is due to the fact that a business with good cash flow can be trusted to make periodic payments.
Not all lenders provide quick funding solutions to businesses from every industry. Some tend to specifically provide loans only to businesses from certain industries. If you have a particular lender in mind, reach out to know if your industry is eligible for financing.
Certain niche industries that aren’t appealing to banks may be able to qualify for grant opportunities for small business innovation research, small business grants, economic development loans, or even venture capital. In fact, venture capitalists love niche markets because of scalability and high barriers of entry.
Current collateral value
Credit unions, banks, a factoring company and other traditional lenders almost always require collateral for processing loans for small businesses. Of course, you may still get a loan without collateral. However, you would have more options to pick from if you have collateral in the form of equipment, real estate, accounts receivable, or inventory.
Business credit score
Business credit bureaus are responsible for providing business credit scores to lenders. Through the assessment of these scores, lenders can find out whether a business’ payment history is positive or negative. Businesses with negative payment histories are typically shunned by lenders as they can’t be trusted to pay back their debts on time.
Determine loan affordability
Before you apply for a small business loan, you must determine whether you can afford it. Some of the things you would do well to remember on this front include:
- The amount you can afford to pay back monthly comfortably. You should only apply for a loan whose monthly repayments are within this amount. Of course, you can choose a higher amount as well, but it can put a financial strain on your business.
- To ensure that your loan repayments don’t impact your business’ profitability, you should stick to a safe threshold. For most small businesses, this translates to an income that is 1.25 times of the total expenses.
- Go through the fine print and loan repayment terms carefully and get things like hidden charges out of the way before you apply. This can go a long way toward preventing your business from incurring additional financing expenses.
- Calculate the interest rates correctly. Some lenders offer complex cost structures that new business owners may not understand.
Get your documents in order
Nowadays, online business funding services have made it easier for businesses to get loans without worrying much about the paperwork. However, this is not the case when it comes to SBA loans, which are known for their paperwork requirements. Some of the papers you should get in order before applying for an SBA loan include:
- Statements associated with your small business’ bank account
- Personal and business credit score
- Tax returns and associated IRS documents for both personal and business tax accounts
- Applicable registrations and licenses for operating a business
- Relevant legal contracts like articles of incorporation and management agreements
- Underserved representation documentation (for women-owned and minority owned businesses)
- Business plan with marketing strategy and growth details
In recent years, both public and private lenders have made it easier for small businesses to access business loans. The market is full of options for small businesses operating in various industries. All in all, if your business needs funding to ensure its growth, you should not hesitate to thoroughly assess the loans your business is eligible for. It can be the difference between your business collapsing and making it big.