How to get a loan for a small business

How to get a loan for a small business

When starting a small business, chances are you will need to take out some kind of loan. With everything that’s going on as part of the process of setting up your business, you can find yourself overwhelmed and taking out a loan can seem extremely daunting.

It is true that getting a business loan can be a major hurdle facing smaller businesses due to the tighter lending standards set out by banks. However, as you probably know, obtaining financial help from outside sources is usually necessary to grow a business or to cover any day-to-day expenses, including payroll and inventory. Thus, small business loans are not just for starting up, but also to cover your costs along the way.

It is appreciated that finding, applying and getting approved for a loan for a small-business can be rather difficult. But, the more prepared you are, the more likely you are to be approved without facing heartache. Here are some things to consider when attempting to take out a small business loan.

Assess why you need the loan

You must ask yourself how the money gained from the loan help your business in any way. Lenders will actually ask you this question upon request for a loan. Your answer is likely to fall into one of the following categories:

• In order to start a business
• To help you manage your daily expenses
• To push for the growth of your business
• To provide financial security – like a safety blanket

Decide which loan is right for you and your business needs

The reason you give for needing a small business loan will ultimately dictate which type of small business loan you get – to the first step is very important.

If you are seeking a loan in order to start a business, you may have to accept that is almost completely impossible to obtain a loan in your company’s first year of existence. Lenders typically require evidence of cash flow to support your application so that they can assess whether you will be a be able to make the repayments when they are due. Therefore, start-ups are more often than not disqualified from applying and obtaining a loan.

Instead of this, you will have to rely on other forms of finance such as business credit cards, crowdfunding, personal loans, borrowing from family or friends or taking out a microloan from a non-profit lender.

Once your business has reached its first birthday and has made revenue, you will find that the options you have for finances have expanded. Now, you should have little problem obtaining loans including,SBA loans, term loans, business lines of credit and invoice factoring. Do your research into these to see which best fits your business needs. Be aware that some lenders will require you to make a minimum amount of revenue before granting a loan – typically from about £35,000 in most cases. You should be able to readily provide this information when you apply for a loan.

Find the best small-business lender for you

There are a variety of places where you can find a small-business loan, these places include banks, non-profit microlenders and online lenders. These providers often offer products like term loans, lines of credit and accounts receivable financing.

From the loans which you do qualify for, it is wise to choose the one which has the lowest Annual Percentage Rate (APR). This should be the best option as long as you feel as though you are able to handle the regular repayments involved with the loan.

Just as you would for any type of assets, approach shopping for a small business loan in the same way. Once you have come to a conclusion as to which type of lender is right for you, compare two or three similar options which are based on APR (the total borrowing cost) as well as the terms and conditions.

Banks

Small businesses typically have a harder time getting approved due to lower sales volumes and cash reserves. Therefore, you may have to offer up collateral in order to secure a loan. Banks usually offer the lowest APR for small businesses. You should aim to go to a bank when; you are able to provide collateral, you have good credit and/or you do not need the money in a hurry.

With traditional bank loans, it can be the case that you will have to have at least two years attached to your business rather than just the one mentioned previously. So if you are a slightly older company, this may be the best bet for you.

Microlenders

Using a microlender may be the best option if you are finding it hard to obtain a traditional loan because your company is too small.

Microlenders are non-profit lenders which usually lend out short-term loans. The APR on these kinds of loans is typically higher than that of a bank loan. When applying, you may be required to provide a business plan and financial statements, as well as a description of the reason as to why you are taking out the loan and what it will be used for.  

Although, as the name suggests (micro), these loans are small, they work well for smaller businesses and start-up’s which cannot qualify for a loan from a bank.

Online Lenders

If you lack collateral to put up, time and are in need of funding rather quickly, then online loans may be the best route to pursue. On average the APR on online loans tends to be around 7% to 108% depending on the loan provider, the size of the loan, the type of the loan, the length of repayment agreed upon, the borrower’s credit history and whether any collateral is required.

Approval rates are higher with an online lender than with traditional banks and the funding process is often higher. In some cases, you will be able to receive your funds in around 24 hours!

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