As a small business owner, one of your top priorities is to obtain capital for your business. But whether you’re just starting to get your business off the ground or you’re well established, it can be challenging to get the funding you need to achieve your short- and long-term growth goals.
Knowing where to start will make the journey to getting a business loan easier and more successful in the long run.
How to Get A Small Business Loan
Before applying for a business loan, it’s important to look at the factors that will be considered in order to receive financing. Lenders will use this information to determine whether you’re eligible for business financing.
Your credit score has a large impact on how much business financing you can receive. Both your personal and business credit histories may be evaluated by a lender. Unlike your personal credit score, your business credit score is calculated slightly differently and evaluates your existing and past relationships with lenders and vendors, payment history, and legal filings.
Some types of financing require you to have collateral. Collateral is something you own of value that will be pledged to protect the lender in case you fall through on payments. Examples of collateral could be equipment, customer invoices, and real estate. Having collateral may make you eligible for more types of business financing.
You should go into this process knowing how much money your business makes and how that money is allocated. If your financial history and accounts exhibit poor money management skills, a lender could see this as a liability. Showing how you pay vendors on time and manage your money to grow your business will help prove you a good candidate for a business loan. Cash flow will also allow a lender to see how well your business does and offers a projection of how well you’ll continue to do if more financing is received.
Time in Business
The longer you’ve been in business, the more likely you are to receive financing. Lenders will often only issue loans to businesses that are more than a year old. If you have a new small business and the age of your company becomes an obstacle when looking for financing, there are specific business loans for startups that you could look into.
Lenders will look at how much debt you have in order to determine whether you are a good candidate for financing. If your total debt is greater than your income, you may be less likely to receive a loan. This might be overlooked if you make consistent, timely payments on your existing debts.
Your business industry impacts your financing options, as well. Lenders may consider the likelihood of whether your industry will continue to grow as time goes on. Your industry’s competitiveness can also play a part in this evaluation. If the industry is oversaturated in your area, lenders might not want to consider your business, or if the industry is too niche, it could make it difficult to get financing.
Types of Loans
As a small business owner, there are several types of leverage you can use to build your business. Each type serves a different purpose, so it’s important to understand each and how they might help you:
This type of financing involves the business receiving a lump sum of cash upfront, which they’ll pay back in installments over a predetermined period. Term loans are often good for business owners who need to make a large, one-time investment in their business, but these loans may require a personal guarantee or collateral to be approved.
Line of credit
Instead of getting a lump sum of cash, lines of credit offer ongoing access to a revolving credit line. You can borrow what you need when you need it, pay it back, then borrow again. You’ll only pay interest on the amount borrowed rather than the full credit limit. Lines of credit can be great for small businesses that need ongoing access to capital, but they can carry additional costs that aren’t common with term loans.
Like a line of credit, business credit cards offer access to a revolving credit line that you can use, pay off and reuse over and over again. Some credit cards offer benefits, such as rewards, 0% APR promotions, and more. They can be great for ongoing working capital needs, but they can become expensive if you carry a balance, and you’ll typically need to provide a personal guarantee.
If you’re looking to purchase equipment for your business, an equipment loan is typically best. These loans generally require you to use the asset you’re purchasing as collateral, which means the lender can seize it if you stop making payments. But because the loan is secured, the interest rate is typically lower than with most other forms of business financing.
If you have unpaid customer invoices but need money now, invoice factoring allows you to sell your invoice to a third party at a discounted rate. In exchange, the invoice factoring company collects the payment from the customer. It can be a good way to get fast cash for your business, but in many cases, it can be costly.
This option is similar to invoice factoring in that you leverage your unpaid invoices to get capital. But rather than selling your invoice to a third party, you’ll simply use it as collateral to get an advance on the payment. You’ll still be responsible for collecting the payment and, like factoring, invoice financing can be expensive. But it’s another way to get some quick capital.
Merchant cash advances
This financing option isn’t technically a loan but rather an advance on your future debit and credit card sales. You’ll receive an upfront payment from the merchant cash advance provider in exchange for daily payments based on a percentage of your sales. Merchant cash advances generally have low credit requirements as long as you have consistent sales, but they’re one of the most expensive forms of business financial leverage.
When you’re just starting your business, it can be difficult to get approved for traditional business loans, so many business owners use a personal loan instead. These loans can be easy to get if you have great personal credit, and interest rates can be low. But they typically have short repayment periods, and you’re personally on the hook for repayment, even if your business doesn’t pan out.
Each type of loan has its own requirements, but by gathering your documentation before applying, you will be better prepared for the financing process. Here are a few common documents you’ll need to apply for a business loan:
Your business will need to be established with a name, address, phone number, and Employer Identification Number (EIN). Contact the IRS to get your unique business identification number. If you haven’t already, you should open a specific bank account for your business. Another way to identify or legitimize your business is to have it incorporated.
Lenders will likely request some of the legal documents for your business. These include your business license, articles of organization, trademark documents, incorporation documents, and any other documents that prove the legitimacy of your business.
Lenders may also request your previous year’s tax returns. These will further prove the legitimacy of your business, and also show that you have filed taxes and your finances are in order. The more accurate documents you provide, the more likely you will receive the funding you need.
Financial documents such as account statements, unpaid invoices, and credit card sales would be considered relevant documentation when applying for a business loan. Like your small business tax returns, these types of statements can help show the profitability of your business.
Many small businesses need financing to operate, and you can take several steps to make acquiring a business loan simple and straightforward. Knowing your options will help this process go as smoothly as possible.
How SouthEast Bank Can Help
Whether your small business is local to Tennessee or it’s expanded beyond the Volunteer State, SouthEast Bank offers a long list of financing options to help you grow your business. Options include:
- Business credit cards
- Accounts receivable loans
- Commercial real estate loans
- Equipment financing
- Facility construction and expansion loans
- Inventory factoring
- Lines of credit
- SBA loans
And more! Our team would be happy to discuss the options that may be right for your small business so you can continue to grow. Click here to learn more about our commercial loans.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.