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One of the biggest challenges of running a small business is raising the money that you need to grow your business. As a result, most business owners rely on small business loans to fund their daily business operations during the growth period.
While small business loans can be a great resource, many business owners find that the process of obtaining a small business loan is not as straightforward as they thought. Depending on your small business’ needs, there are several different types of loans that you should consider.
Here are a few things to consider before getting a small business loan in 2019.
Determine Your Needs
First and foremost, you should evaluate what your needs are. Why do you need a loan and what exactly will you use the money for? Not only will lenders need this information when you apply for a loan, but it’s important to have a clear plan of action before applying for a loan.
There are different loans for just about any situation that you might find yourself in. From purchasing equipment to buying property, there is likely a loan for your specific circumstances. Additionally, you need to decide whether you need a long-term or short-term loan.
Lastly, you need to decide how much you need and how much you can afford to repay with interest.
Common Types of Small Business Loans
As stated above, different types of loans serve different purposes. While these aren’t all of the small business loans available, they are a few of the most popular.
Term loans provide large lump sums of cash to individuals or businesses. These sums usually go toward large purchases where it would be advantageous to spread the large payment over a period of time.
These loans are great, because they allow businesses to make purchases that they would otherwise not be able to afford. However, you should be careful to avoid high interest rates and ensure that you have a plan to make each payment on time.
Business Lines of Credit
Lines of credit are open-ended, revolving loans that allow you to withdraw funds, repay those funds and withdraw funds again later. Imagine a credit card but with a much higher credit limit. These work well for cyclical cash flow problems, like short-term working capital or cash flow gaps.
The biggest advantage to business lines of credit is that you only pay interest on what you use. For example, if your line of credit has a limit of $100,000 but you only use $5,000, then you are only reimbursing and paying interest on that small portion.
Working Capital Loans
Working capital loans offer short-term loans that can be used to fund daily business operations. Working capital loans are typically taken out to keep small businesses afloat while they seek funding from other sources. In an emergency situation, these loans can be a great way to keep your small business afloat.
Keep in mind that these loans typically have short repayment periods and tend to have fairly high-interest rates.
Equipment loans can be tremendously helpful to small businesses and startups as they provide funding for office equipment and supplies. This could include anything from printers and copiers to heavy machinery.
Equipment loans are generally very easy to secure as the equipment that you purchase with the loan is usually used as collateral. Equipment loans are a great option for small businesses that don’t have the funds to purchase necessary equipment up front.
The Small Business Administration, or SBA, has several funding programs to help small businesses grow. Instead of lending money directly to businesses, the SBA partners with banks to secure funding for business owners. SBA loans tend to have very strict requirements and can be difficult to be approved for.
The SBA’s primary funding program is the 7(a) loan program. 7(a) loans can be used for equipment, working capital, debt refinancing, and several other purposes. These loans can be borrowed in amounts up to $5 million and can be repaid in periods up to 25 years -- making them a great long-term solution for small business financing.
Preparing to Apply
Whether you’re applying for a traditional bank loan or an SBA loan, you’ll need to gather much of the same information. This includes:
● Personal and Business Financial Statements
● Income Tax Returns
● Profit and Loss Statements
● Loan Application History
● Business Plan
● Ownership Records
Check with potential lenders to ensure that you have all of the required documents before applying.
Additionally, you need to demonstrate to your lender that you have a clear plan of action. Potential lenders want to see that you know exactly what you will spend your money on and how it will contribute to business growth.
Lastly, potential lenders will likely perform a credit check on you and any other owners in your business. While credit requirements vary from one lender to the next, 680 -- which is the score required by the SBA -- is a good score to aim for in order to get good interest rates.
In order to confirm that you find the best loan for your small business, you should be sure to compare rates from multiple lenders.
Securing small business financing can be a difficult process. As there are seemingly endless options and a variety of lenders to choose from, it can be hard to find the small business loan that best suits your needs. However, determining your needs, establishing a business plan, and gathering documents before beginning the application process can make finding a good loan much easier.
This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation. This is not an offer of credit. All applications are subject to approval, no guarantee of funding.