How to Get Small Business Loans?

March 20, 2024
13 Minutes
Modified on:
March 20, 2024
Written by:
Swati Bucha
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Exploring business loans can take a lot of work. However, small business loans have your back as they come with minimal documentation and a simple processing procedure. These loans are the easiest business loans to get, with easy eligibility. Are you wondering whether your business is eligible for a small business loan? You may need one if your business is in the early stages of growth. 

Let us understand what makes small business loans different from other business loans.

Small Business Loans and Their Types

Small business loans are different types of financing that companies get from various lenders for various purposes. Several small business loans have emerged to help entrepreneurs meet their respective goals. 

You can consider taking several small business loans if you run small and medium businesses. 

1. Small Business Line of Credit

Source: Lantern

A small business line of credit functions like a credit card. You can borrow up to a certain amount and then only pay interest on the amount you borrow. You can also draw funds and repay them as often as you would like if you take out a small business line of credit. This process can happen if you do not exceed your credit limit.

2. Accounts Receivable Financing

Source: Trade Finance Global

It is also called factoring and involves selling your receivables or outstanding invoices to a particular lender. This helps you receive early payment for them. The lender takes the risk on your receivables and then provides your business with cash in exchange for a particular fee. 

The age and quality of these receivables will play a huge role in the money you receive. Quick access to cash is a primary advantage of accounts receivable financing. However, you are likely to pay more for this type of financing, especially if your specific business credit is less than stellar credits. 

3. Working Capital Loans

Source: Yubi

These capital loans finance the everyday operations of your small or medium business. They are unlike other small business loans intended to pay for long-term assets or investments. These operations can include several things like payroll, rent, and debt payments. Working capital loans feature shorter terms and lower amounts than small business loans. You can also link these loans to your credit. However, this could take a hit if you do not pay on time.

4. Small Business Term Loans

Source: Funding Circle

If you take a small business term loan, you will receive a lump sum of capital that you will pay back at a fixed interest rate with regular repayment terms. In most cases, these loans are repaid in five years and are used to fund a specific investment for any small business.

Small business term loans are just like mortgages and car loans. They usually follow an amortization schedule, meaning most of your payment will go toward your interest initially.

5. SBA Small Business Loans

Source: Napkin Finance

The US Small Business Administration always guarantees an SBA loan. It is a federal agency in the United States that helps entrepreneurs grow their businesses. A guarantee means that the SBA will pay the guaranteed amount if you cannot pay your lender. The SBA often guarantees 85% of loans lower than $150,000 and 75% of other larger loans. That is why an SBA small business loan can be challenging because of this guarantee.

6. Equipment Loans

Source: Corporate Finance Institute

These loans can help your small business replace existing equipment or buy new ones as it grows. For example, you may use an equipment loan to pay for X-ray machines or infusion pumps if you run a small hospital. Equipment loans are advantageous because they require less documentation than small business loans

7. Small Business Credit Cards

Source: Credit Mantri

A small business credit card’s functionalities are similar to a personal credit card. However, you need to know a few noteworthy differences. A small business card offers reporting features to categorize and track your spending limit. It may feature a rewards program, too, that can help you save on all your common business expenses. Examples include office supplies and marketing services. 

How to Get a Small Business Loan?

The process of qualifying for small business loans involves several steps. These include: 

1. Build Personal and Business Credit Scores.

Lenders who offer small business loans will check your personal credit score at the beginning. This will help them determine whether they should lend money to your business. Your credit also shows your ability to repay all your debts. Examples include your mortgage, car loans, and other credit cards. The higher your credit score is, the less risky you are in the lender's eyes, who will think about lending you a loan. 

2. Know Your Credit Score.

You must know what constitutes a good credit score to ask for a loan. A score of 700 or above is always considered good. However, it is better to have a score of 800 or above. You can visit various websites and obtain free copies of your reports to know your credit score. A few of them may send you a free credit report every 30 days.

We recommend paying your bills on time, paying off any remaining debt, and keeping balances low on credit cards and other revolving credit if your credit score exceeds the expected limit. You must also refrain from applying for too much credit. This may lead to multiple hard inquiries in your credit file that may have a negative impact on your score.

3. Check Your Business Credit Score.

Once you have built your personal credit, you can focus on your business credit score. Establishing business credit involves obtaining a federal Employer Identification Number (EIN) to incorporate or form an LLC. It also consists of opening business accounts in your business name.

4. Know the Requirements.

You can increase your chances of getting approved for a small business loan by understanding a lender's minimum requirements and qualifications. Some lenders may be flexible, but most require that borrowers meet a minimum credit score, years in business, and annual revenue.

SBA loans are the most difficult to qualify for out of all the business loans available. The minimum credit score for these loans is 640. However, lenders always prefer a higher score in the 700s or 800s. 

The requirements for small business loans from direct online lenders and peer-to-peer lending sites have become less stringent. You may also get approved with an average or above average credit score of around 600s. 

You will need various legal and financial documents to complete the application paperwork apart from fulfilling the credit score requirements. These documents include several things like a voided business check, bank statements, driver's license, business and personal tax returns, and profit and loss statements. 

5. Develop a Business Plan.

You should then prepare a business plan to show lenders how you plan to use their money. This particular plan will always help convey the purpose of your loan. It also mentions how you believe it will help you become more profitable over time. Make sure to include the following information when creating your business plan. 

  • Business description
  • Product or service description
  • Market analysis
  • Management team
  • Sales and marketing strategy and implementation
  • Financial plan and projections

6. Provide Collateral If Needed.

A few lenders may require you to provide collateral or any other asset. This includes real estate, equipment, or inventory in exchange for a small business loan. You give lenders the right to seize and sell the collateral if you provide it. This rule will apply if your business struggles or you need help making payments.

An unsecured business loan, which does not require collateral, may make sense if you worry about losing your asset or do not have one. However, such small business loans come with less favorable terms.

Where to Get Small Business Loans?

You can get small business loans in different places, which include: 

1. Direct Online Lenders

You will find several online lenders that offer loans directly to all small business owners. The loans these lenders offer are quicker to obtain than traditional lenders because of the power of technology and algorithms. 

However, the costs of borrowing from direct online lenders are higher. You may pursue this route only if you need quick cash or are having trouble qualifying for another loan from a traditional lender.

2. Large Commercial Banks

These banks have the power to offer larger loans than other lenders. However, they have rigorous requirements for small business loan borrowers. The loans received from commercial banks can be very helpful when you are growing your business.

Another advantage of getting small business loans from a large commercial bank is lower interest rates. However, these loans can be challenging to qualify for, especially if you do not have the best credit score.

3. Large Community Banks

These banks are always locally owned and operated because they are smaller than commercial banks. However, they can provide more individualized services that benefit your business. Community banks are more likely to look at your credit report and other relevant aspects of your business before offering a loan.

4. Peer-to-Peer Lending Sites

It is easier to qualify for small business loans from peer-to-peer lending sites than from traditional lenders. The money you receive here often comes from a group of investors instead of a single lender. However, these loans usually come with higher interest rates that may increase the cost of your loan over time. 

5. Bank Lenders Backed by the SBA

Many SBA-preferred lenders constitute reputed banks and financial institutions with strict requirements for all applicants. SBA loans are worth considering despite the fact that they can be challenging to qualify for. These loans come with lower down payment requirements, longer repayment terms, and lower interest rates than traditional options.

Final Thoughts

Money is the lifeblood of any specific business, irrespective of its size. That is why pushing finances smartly into your business is guaranteed to ensure success regardless of where you are in the growth cycle. Various loans and funding solutions are available in the market today. Moreover, credit is no longer meant only as a last resort. However, you must consider several things when seeking small business loans

Getting approved for a loan for your small or medium business is much easier when you have researched. It means you know all the best business loans for running your activities efficiently. Make it a priority to pay the business loan back on time regardless of what type of finance you receive. This will help your venture in the long run. 

Frequently Asked Questions

1. Who is eligible for a small business loan?

You should be self-employed, aged between 21 and 65, to receive small business loans. Moreover, you must be at least 2 years into the business with a CIBIL score of over 675. Most importantly, your business should not be blacklisted.

2. Can a foreigner get a business loan?

In a few countries like the United States, immigrants can apply for business loans. Immigrants can get an SBA loan within the US and possess an appropriate work visa. 

3. Is the SBA loan only for the citizens of the United States?

At least 51% of the specific business must be owned by a U.S. Citizen or a Green Card holder to be approved for SBA lending. Moreover, 49% of ownership will be for non-citizens in that particular business.

4. What should be the minimum CIBIL score for a small business loan?

Your CIBIL score must be within the 700-800 range to qualify for small business loans. However, in some cases, a few lenders also consider a credit score in the 600 range.

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