The Information & Starting Guide on Small Business Loans

It is getting easier every year for small business owners to access capital through a bank loan, an investor or new online lending services that lend you up to $100.000 within minutes. Yet, small business owners are not taking full advantage of the funding resources available offline, and online. They dip into savings or family capital which could hurt the future. There are so many aspiring foodtruck owners, barbershops and beauty salons who do not take full advantage of what’s out there.

According to Hartford’s Small Business Success Study, about 46 percent of small business owners believe it’s only slightly or not difficult at all to get a loan or other capital for their business in 2014 — a 39 percent increase from 2012. However, 36 percent of the small business owners surveyed used personal sources of funding, such as personal savings, retirement savings or capital from their family and friends, over traditional sources of funding such as bank loans, bank credit lines or Small Business Administration (SBA) loans.

Now that more small businesses are being created than ever before, the demand (and thus supply) for small business loans is growing. In addition to several new programs being offered by traditional sources, there are several relatively new sources available, like peer-to-peer lending sites and crowdfunding websites.

There are also several new programs being offered by traditional sources. However, where does a new business owner start with little knowledge about finance? Many new business owners are still in the midst on where to turn when it comes to getting a small business loan for investing in weed-related stocks. This is why we collected all the information you need to know when starting a new business and looking for a small business loan. We will discuss how and where the get started, how to get a small business loan that fits your business and more specific information for start-ups, women, and grants.

How to get a Small Business Loan?

How to get Small Business LoansMoney is the lifeline of any business, so whether you’re starting a business or running an existing one, securing financing is a major factor, especially for small businesses.  Many new entrepreneurs find the task challenge and don’t even know where to begin. However, companies with sound business strategies still can borrow. Options are discussed below and include loans from traditional banks and institutions affiliated with the Small Business Administration, as well as financing from Internet-based lenders.

3 Ways to get a Small Business Loan

SBA loans

One way to find a bank loan is through the Small Business Administration or SBA. The SBA can direct you to banks that offer loans guaranteed by the agency. This way, you will have the advantage of approaching banks specifically interested in lending to small businesses. Banks granting SBA loans place increased emphasis on business plans, cash flow and profit forecasts in deciding whether to lend.

Online opportunities

Another source of loans is the Internet. There are several sites where businesses can seek alternative lenders, such as individuals Growth Consultants and small companies. Interest rates are generally a little higher than what a bank will charge, but it’s much less than what you’ll have to pay on your credit cards. It is very important that you do throughout research on the lending company you are going to lend from. Before paying for anything, make sure the company is legitimate.

Bank loans

Ultimately, the best place to get a small-business loan is still a bank. Banks typically offer the lowest interest rates and many have established reputations as trustworthy lenders.

Small Business Loans Growth

SBLF provides capital to community banks and community development loan funds in order to expand their lending capacity to small businesses. More than 90 percent of participating community banks reported stronger small business lending as a result of the program.

7 Steps to Take to Get a Small Business Loan

Below is a simple and practical guide from the US Small Business Administration on how you can prepare yourself best when applying for a small business loan. Follow these steps to be prepared and look professional to guarantee the best loan for you company.

Step 1 – Go over the requirements

Different banks or lending institutions have different standards but generally, in order to consider your application for a small business loan, the bank will require:

  • The loan must be for a sound business purpose. For SBA-guaranteed loans, the business must be eligible based on size, use of loan proceeds and the nature of the business like pyramid sales or gambling.
  • You and your partner(s) have sound experience and good personal and business credit history.
  • The ability to pay back the loan and reasonable to strong collateral is extremely important. SBA expects the loan to be fully secured, but they will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral.

Step 2 – Know your credit score

Lenders still look at personal credit scores as a way to judge the reliability of the principals who are borrowing the money. It is important to know what lenders look for and how the scores compare to those expectations.

  • Credit score: A credit score of above 650-700 is considered acceptable, but does not guarantee a loan. Most lenders will look for a credit score that is at least in the 700-800 range.
  • Debt to income: Personal debt payments should not be more than 33% of gross monthly income.
  • Time in business: Lenders give unsecured working capital lines and term loans to businesses which are over 2 years old and have a reliable record of incoming accounts receivables.
  • Report on industry risk: Industry risk is rated based on the government SIC codes which are ranked. A small business owner needs to find out how their industry is rated.
  • Report on cash flow: The higher the operating cash margin, the better the chance is for a business to survive slower market conditions and ensure long-term survival and growth. In the final analysis, most lenders give money based on the company’s cash flow since it measures the ability to successfully repay the loan.

Step 3 – Get all your documents in place

Documents differ per lender, but there are some documents they all require. Prepare your loan application package submitted in order to apply for a loan. It generally includes:

  • Personal and business credit history.
  • Personal financial information including three years of tax returns.
  • Personal and business financial statements for existing and startup businesses and as well as a projected financial statement (Profit & Loss, Balance Sheet, and Cash Flow Statements).
  • A strong and detailed business plan including business owners’ resumes.
  • Personal guarantees from all principal owners of the business.

Step 4 – Be prepared

Even before you start gathering and organizing the information required by lenders to consider your application, you should educate yourself regarding business loans so you can understand and discuss intelligently with the lending officers when the time comes. Be prepared, thorough and truthful:

  • Choose your lending institution carefully. Larger banks tend to shy away from small loans as they are less profitable and take the same amount of underwriting and servicing. That doesn’t mean large banks do not make small loans; it is just more difficult.
  • Approach banks or lending institutions you have worked with or are a customer of
  • Explore community banks and Credit Unions
  • Talk to a lending officer and find out exactly what documentation they require
  • Be thorough, bring everything they ask. Many loan applications are denied or face unnecessary hurdles because of incomplete applications.

Step 5 – Decide the size of your small business loan

Small businesses come in many sizes, from a start-up of a one-person company to hundreds of employees, and their financial needs vary accordingly. That said, in the banking industry the median small business loan is between $130,000 and $140,000. SBA small business loans range from about $5,000 (micro-loans) to $5 million (largest guaranteed) with the average loan around $371,000. Most small businesses don’t ask for a large enough loan. Underestimating the amount of money can lead to problems with a lack of working capital sooner than planned. Overestimating can make lenders question the business owner’s assumptions and credibility. Make sure to come up with a sound financial plan to determine which loan fits your small business best, supported by financial projections that is reasonable and shows that the research was done.

Step 6 -Where to start finding a Lender

  • Commercial banks: This is best for traditional loans that fall into the strict parameters discussed.
  • Non-bank lenders: These are increasing in record numbers for lenders looking to get a higher return. Help can be located using sites such as Fundera.
  • Region-specific lenders: Local community banks and other lenders that have an interest in economic development in a certain geographic or industry area.
  • Micro and alternative lenders: Crowdfunding sites like Kickstarter and IndieGoGo can be helpful for capital needs under $10,000. Personal loans can also be sourced from peer to peer sites like Prosper and The Lending Club.

Start-ups are probably the most difficult ventures when it comes to securing financing. Many start-up businesses seek financing from family, friends and credit cards.  If the credit is sound, the business plan strong and you have enough personal resources to invest and collateral to guarantee, smaller, community banks and other community financial institutions and Credit Unions may consider lending you money. If you are not sure, begin by visiting SBA’s website , where you will find a wealth of information not only on how to secure a small business loan but equally importantly, other services and training opportunities to help you succeed.

Step 7 – Apply and waitSmall Business Loans for Startups

Send in your application online or visit the bank. Expect to get an answer within two to four weeks. Check in each week for a status. It is typical that the lending institution will need additional documentation.

Small Business Loans Mistakes to Avoid

Many small businesses make the same mistakes when they apply for a small business loan, below the most common mistakes so you do not do the same.

  1. Credit reports are one tool lenders use to determine a borrower’s credibility. If your credit report shows a lack of past diligence in paying back your debts, you might be rejected when applying for a loan.
  2. A careless attitude may help you attract certain types of people, but it certainly won’t help you woo lenders. Having a plan and sticking to it is much more attractive than spontaneity in the finance world.
  3. An inability (or unwillingness) to pay your credit card bills certainly won’t impress lenders, but the thing that will really send them running in the other direction is a lack of cash. Insufficient cash flow is a flaw that even most alternative lenders can’t afford to overlook.
  4. Small businesses often make this mistake: They over-anticipate the revenue that they’re going to get.
  5. Being disorganized when applying for a loan. When it comes to approaching potential lenders, business owners should have their act together. That means having all the paperwork you’ll need for your loan application on hand.

The Best Sources For Small Business Loans

The SBA works closely with a large network of partners that leverage SBA resources and are just one phone call away and ready to provide extensive help.

  • SBA District/Branch Offices– at least one in every state
  • SCORE– (approximately 300 chapters nationwide)
  • SBDCs – Small Business Development Centers; (approximately 900 locations nationwide; associated with higher education institutions (colleges and universities)

Small Business Startup Loans

Here’s a roundup of some ways to get a small business loan as a startup, aside from getting a loan such as SBA-backed loans, to finance your business.

Credit Cards Loans

Credit cards are a major source of financing for small business owners, with statistics even showing that more than 65% of small businesses using them on a frequently. It’s a popular approach, but you should be sure to do your research to determine if it is the right one for you. Here some tips from Entrepreneur to help:

  • Unless your business is incorporated – so if yours is a sole proprietorship, for instance – you are a guarantor of all debts. So if your sales are slow and you fall behind on payments, you risk your personal credit rating and ability to borrow.
  • It varies by state, but your credit-card issuer might still require that shareholders with significant ownership guarantee the line of credit – even if your business is incorporated.
  • Potentially bringing on partners? Make sure your agreement states that they’ll accept personal guarantees on all existing business debt. You need to address this specifically because in many states, new partners aren’t automatically responsible for previous debts.
  • Read the fine print. Don’t accept an offer without checking into the details, understanding the terms of use and evaluating risks. Don’t hesitate to ask a professional for guidance.

Friends and Family Lending

Asking friends and family to borrow funds to help finance your business sounds like it could get awkward, but it doesn’t have to. Treat the process just as professionally as you would engagement with a bank. If you did right, you can potentially gain quicker access to the cash you need and jump through fewer hoops. Think about these highlights as you consider this option:

  • Think carefully about who you’ll approach and make sure they understand the risks and rewards of getting involved. Keep in mind if your business doesn’t work out and you can’t repay your obligations, relationships could suffer.
  • Be realistic about how much money you need. Instead of asking for the maximum, consider what you need to get you to a certain point in your business plan. Once you show you can repay that initial investment, you’ll be in a better position to ask for more money if you need it.
  • Write it down. You might think a verbal agreement with your friend or relative is sufficient given the personal relationship, but this is business.
  • Communicate. Show your business progress and share updates along the way, even if it’s correcting mistakes you’ve made with your business strategy. Checking in and sharing information shows that you’re taking seriously the role others are playing in your venture and demonstrates professionalism.

Crowdfunding for Start-ups

Crowdfunding is becoming increasingly popular to get startup financing for their businesses. It works through the collective cooperation of people who network and pool their money and resources together, usually online, to support efforts initiated by others. So it gathers multiple, smaller investments as opposed to a single source of funding. Here 3 things to consider from Entrepreneur:

  • Begin working on your crowdfunding campaign six months before you want to launch your project. When your campaign starts, you should’ve already made a significant effort in letting people know about it collecting email addresses so you can really hit the ground running when you open the gates for your campaign.
  • Set your funding goal as low as you can manage because some crowdfunding platforms, like Kickstarter, are “all or nothing.” For instance, if you set a goal of $1,000 and you meet it, then you get the money. If you raise only $500, you won’t get anything. Read the fine print about the platform you choose so you can be strategic about your funding request.
  • Don’t forget to award your donors. You’re asking people to take a risk on your business venture – there are no guarantees. So thank them and show your appreciation by offering your product or service at a discount when the time comes.

Small Business Loans for Women

According to the National Women’s Business Council (NWBC), there were 7.8 million businesses owned by women in America in 2007. Of these, about 11.7% employ full-time workers, generating average annual receipts of over $1.1 million. The total revenue generated by all the women-owned businesses across the country (not considering farm-based business) has increased to $1.2 trillion. Women-owned businesses make up about 52% of all the businesses in the social and healthcare assistance arena.

Small Business Loans for Women

The SBA has designated different loan programs specifically for women. The Office of Women’s Business Owners (OWBO) sets out rules that are mostly the same for every loan or grant: you’ll need a good business credit report (with any of the three business reporting agencies) and a solid business plan that instills confidence in the lender. But what is life without a little risk? Some of the best companies in the world were started on shaky ground, right? True, but it’s also true that a low-risk business venture has a better chance of obtaining a coveted small business loan.

More Advice on Small Business Loans for Women

In order to help women, various organizations operate day and night, with the sole purpose of helping them realize their dreams and ambitions. Moreover, these organizations provide complete information regarding various loan programs, and how to apply for them:

Get your Small Business Loan

Any business venture requires you to be well informed about the competition, such as the number of similar ventures established and their success-to-failure ratio. The way to convince lenders who provide small business loans is by showing them that you possess the drive to overcome adversity.

Do not be hesitant to ask for advice and make sure you are prepared. Do thorough research and present yourself well. Having that fighting spirit for your business, combined with a solid background, experience, and credit status is what is going to matter and get you that small business loan.