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When, Why And How Should You Apply For A Small Business Loan

Small Business Loan

If you are planning to start a business or are already running one, you may need to ask for a loan at various stages of the business. There are essentially two types of loans: Secured loans, which require you to put up collateral, and unsecured loans, where no collateral is required. Let’s explore the different loan options at your disposal. 

SBA loans

With an SBA loan, the collateral is unnecessary. SBA loans are loans that are guaranteed by the Small Business Administration, which is an arm of government that encourages lenders to give out loans by guaranteeing large portions of it.

Business Line Of Credit

When a lender extends a business line of credit to your company, they are giving you an opportunity to access a predetermined amount of credit. You can decide to use all or part of the money whenever you desire, but you will only be required to pay back what you use. The lender refills the cash to its original amount after you pay back what you use plus the accrued interest.

Equity Financing

Unlike debt financing, equity financing does not leave you with debt. Instead, you are required to give up part of your business to get access to capital. The lender (investor in this case) is essentially buying part of your business. This form of financing will often get you more money than debt financing would, but giving away part of your business is not a small price to pay. You need to decide whether you are ready for that sort of thing.

Alternative Forms Of Financing

One alternative form of funding that has gained a lot of traction is crowdfunding. If you have a great business idea that can easily excite people, you should try out this option. You will not be required to give up any or even pay the money back. Other alternatives include 401K financing, grants and competitions.

Why Would You Need A Loan?

  • Startups – If you are looking to get your new business off the ground, you will need to get your hands on some capital. Unless you’re filthy rich, chances are you won’t consider financing your startup with your own money. Debt financing, therefore, becomes the next favourable option.
  • Emergencies – Running a business is not always a smooth ride. They will always be bumps along the way. When the unfortunate happens, and your business is staring at a financial crisis, you can always apply for a loan to cushion your small company.
  • Opportunities – Of course, it is not always doom and gloom. Sometimes good things do usually happen in the business world. For example, you may land some unexpected new clients or strike a deal that necessitates an expansion. If you haven’t saved up enough money to buy more equipment or hire new workers, you may need to acquire a loan.
  • Seasonal businesses – If you are operating a seasonal business, you will need access to some cash during the low season to maintain the payroll and other necessary expenses. A loan will come in handy during such times.

How Do You Apply For A Loan?

Banks make a lot of money by lending loans to businesses like yours. They are, therefore, not in the business of denying people loans. If the lender rejects your loan application, it’s because it didn’t meet certain requirements. You need to prepare adequately before making your request.

  • Start early – Lenders, like most people, like to work with people they know and trust. It is, therefore, important to build a relationship with them before your business needs a loan. It is not mandatory, but it might help a great deal.
  • Decide what you want to do with the money – It may not be obvious for a startup, but when the lender poses this question, you should be ready to articulate how much money you need and for what you intend to use it. Some of the reasons are outlined above.
  • Review your credit score and history – The lender will evaluate your credit score and history before giving you a loan. Take some time to study your credit report beforehand. Contact the agency and deal with any errors that will need fixing.
  • Choose a lender – Compare the different options at your disposal and settle for an option that is favourable to your business. Don’t just consider the big commercial banks; you might have a better chance with smaller regional banks.

In Summary

You will need to apply for a business loan at various stages in your business. There are many financing options at your disposal. Some will require you to put up collateral while others will not require any form of collateral. To increase your chances of getting a loan, you should establish a relationship with the lender, check your credit report and prepare a solid business plan.

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Anthony is a Financial Advisor who is now living in New York and loves sharing his opinions and vision to people who are interested in improving their financial status. He is also the founder of Personal Finance Hub, a place with straightforward articles about loans, debts, credits and other financial situations you might bump into, willingly or not.