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Five Questions to Prepare You to Borrow Capital with Confidence
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January 5, 2024
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Access to capital is an issue for most small business owners, whether they’re in the startup or growth stage. While entrepreneurs can get money for their businesses in various ways, one of the most popular is to apply for a small business loan.

That can seem intimidating, so let’s demystify the process by answering common questions about how to get a small business loan.

How do business loans work?

Essentially, there are nine major components to applying and getting approved for a small business loan.

  1. Identify your needs: Deciding what you need the money for helps you determine how much money to apply for.
  2. Research lenders: There are numerous lenders to choose from, including traditional banks, credit unions, community banks, online lenders and government-backed programs. Some banks are more open to lending to small businesses, so be sure to compare offerings.
  3. Apply for a loan: Most loan applications ask for basic information about the business, its financial history, credit score and the purpose of the loan. Many lenders also require a detailed business plan.
  4. Credit check and evaluation: Before approving the loan, lenders conduct a credit check and evaluate the company’s financial health. They’ll assess the applicant’s creditworthiness, business viability and ability to repay the loan.
  5. Loan approval: If your application is approved, the lender will specify the terms of the loan, including the interest rate, repayment period and any associated loan fees.
  6. Acceptance and documentation: Once the business owner agrees to the terms, they accept the loan offer and provide additional documentation, such as financial statements, tax returns and legal business documents.
  7. Funding: Once the lender reviews and approves the documentation, they disburse the funds. The borrower can use the money according to the agreed-upon terms, such as for working capital, equipment purchase, real estate acquisition or other specified purposes.
  8. Repayment: The loan will be repaid according to the agreed-upon schedule. Repayment terms vary, with monthly, quarterly or annual payment options.
  9. Interest and fees: Small business loans typically accrue interest and often have additional fees. Before the business owner agrees to the loan, it’s vital to understand the total cost of the loan, including interest rates and any fees.

What type of small business loan should I apply for?

Here’s a rundown of the types of small business loans available.

  • Term loans are a common type of small business loan where a lump sum of money is provided to the business and repaid over a set period of time, plus interest. Term loans are used for various purposes, such as expansion, equipment purchase or working capital.
  • Small Business Administration (SBA) Loans reduce the risk for the lender because the SBA guarantees a percentage of the money borrowed in case of borrower default. They come in various types, including 7(a) loans, 504 loans, microloans, and like term loans, can be used for multiple purposes.
  • Business lines of credit come with a predetermined credit limit and a preset time limit. Businesses can borrow up to their limit, repay as required, and tap the line again. Lines of credit are useful for managing cash flow fluctuations and short-term financing needs.
  • Equipment financing is specifically designed for purchasing equipment, which typically serves as collateral for the loan.
  • Merchant cash advances are a lump sum of money lent to a business in exchange for a percentage of its daily credit card sales, plus fees. These loans are well-suited for retail and hospitality businesses.
  • Invoice financing (accounts receivable financing) uses a company’s outstanding invoices as collateral for a loan. The lender advances a percentage of the invoice amount to the business.
  • Microloans are small, short-term loans typically offered by non-profit organizations or government agencies.
  • Commercial real estate loans are for businesses looking to purchase, renovate or refinance commercial real estate.
  • Startup loans are designed for new businesses with a limited financial history. They may require personal guarantees or collateral and are typically difficult to get.

How much money will the bank lend me for my business?

A common question most small business owners ask is, how much of a small business loan can I get? Generally, there is no set amount of money a bank will lend to a small business. The lending limit of a small business loan depends on several factors, including the company's financial strength, revenues and profitability, the purpose of the loan, how much collateral a business can offer (if required), the creditworthiness of the borrower and current market conditions.

Of course, you should shop around and compare loan rates and limits.

Please keep in mind that SBA loans do come with limits. The maximum amount for a:

  • 7(a) loan is $5 million.
  • 504 loan is $5.5 million.
  • SBA Express loan is $500,000.
  • Microloan is $50,000.

When do you start paying back a business loan?

The repayment timeline for a small business loan varies depending on several factors, including the type of loan, the loan amount, the financial health of the business, market conditions, and the lender’s specific requirements.

There are some general business loan repayment guidelines:

For short-term loans:

  • Line of credit: 1-3 years.
  • Merchant cash advance: 3-6 months.
  • Invoice financing: 30-90 days.

For long-term loans:

  • SBA 7(a) loan: 5-25 years.
  • SBA 504 loan: 10-25 years.
  • Commercial term loan: 3-10 years.

Are you prepared to apply for a small business loan?

Before approaching a lender for a small business loan, your business fundamentals must be solid. This includes a business plan, a marketing strategy, a budget, business financial statements (including cash flow projections), and accurately prepared tax returns.

If you are not sure you’re ready, or you need help preparing to get a small business loan, do not hesitate to leverage a SCORE mentor, who can provide guidance and share their expertise

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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.

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