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How to Apply for and Finance a Small Business Loan

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How to Apply for and Finance a Small Business Loan
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Some 30.7 million small businesses exist in the US, and small businesses also help to create 1.5 million new jobs each year. They are a fundamental part of the US economy.

Those numbers are impressive and big. But as a small business owner individual, you have to worry about caring for your own business, keeping the doors open, and minding your craft. It takes some real determination and grit to start a small business and keep it running.

No matter your size or level of success or struggle, one thing common thing small businesses need is capital. A small business loan might be necessary to stay afloat while you get going or to grow your business too. So, what does it take to get a small business loan?

Read on to learn all there is to know about small business loans and how to apply.

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What Is a Small Business Loan?

Often a small business will need start-up money or money once they are going as a business. A small business loan is one type of loan specifically for this group of business owners.

Small business loans are intended to help small businesses do several things, including:

  • Start out as a new small business
  • Purchase an existing small business
  • Bring money into an existing small business

Many people know a business will need funding to get started. Yet, many small businesses find they want to seek funding once they are up and running. Waiting until they are working as a business allows them to show a financial institution that they are established and can be accountable for a loan.

Getting a loan also allows small businesses to have some operating capital. There’re a variety of reasons to seek a loan for a small business. Some of them include:

  • Obtain a property for their new business or expand their location
  • Buy additional equipment
  • Hire more help
  • A business opportunity that allows the business to grow
  • Obtain more inventory

Getting a small business loan also helps the business establish credit for the future, which can be especially important as it grows or has financial needs.

Types of Small Business Loans

There are a variety of things to consider when seeking a small business loan. One of the first things is what type of loan you want to get. Loan types can vary greatly, and so, too, the terms of the loan. It’s important to research the types of loans available for a small business and choose the one that will work best for your business.

Let’s take a closer look at some of the types of small business loans available.

Working Capital Loans

A working capital loan is a type of loan that a business will seek to help them manage daily operations. The loan might be used to manage when there are fluctuations in how much revenue there is coming in than the expenses going out.

A business might get involved in a big job where they won’t get paid until in full until the job is complete. Meanwhile, they need to continue operating, keep the lights on, so to speak, and pay employees. The working capital loan helps with those expenses while they await the flush of revenue.

Working capital loans are relatively common for seasonal businesses that make most of their profit in a short window of time. They can use the working capital loan to operate while they don’t have revenue coming in.

Equipment Loans

The truth is the small businesses need equipment to operate. Yet, many of them will struggle to get enough capital in one lump sum to buy the equipment they need.

Another type of small business loan specifically works to finance equipment needed for a business. Typically they are set up like this:

  • The loan requires a down payment of the purchase price of the equipment
  • The loan gets secured by the equipment being purchased
  • Typically, interest on the loan is paid monthly
  • The principal of the loan is usually amortized over a several-year period
  • Accrue interest at either a fixed or variable rate

It’s not always ideal to pay interest on a piece of equipment that might decrease value as you use it. Often it’s a necessary loan for a business to get the equipment they need to operate.

Account Receivable Loans

An accounts receivable loan is one that’s secured using the accounts receivable of the business. Often businesses will need money while they await payment from an account. The loan acts as a kind of line of credit while waiting.

The loan gives the business the necessary cash flow as needed, and that can get paid back as accounts receivables come in. These loans usually have variable interest rates, something to watch out for.

Small Business Terms Loans

Term business loans allow a business to borrow a set amount of money for a period of time, the term. Over the loan term, the business makes loan payments of the principal and interest from the loan.

A term loan is one you want to research the terms on carefully as they can vary greatly. Some are secured and require a form of collateral, while others can be unsecured. Lenders will also do both variable and fixed rates for interest.

A business might seek a term loan to use for business operations, capital expenditures, or expansion. This type of loan makes sense if a business has a one-time large expenditure that they want to pay off over time.

Small Business Administration Secured Loans

Like FHA or Veteran’s Affairs might secure a home loan, the US Small Business Administration (SBA) will work with lenders to secure loans for small businesses. You don’t actually get the loan from the SBA instead of from a lender who works with the SBA. The SBA just provides a guarantee for the loan.

This type of loan is very desirable for small businesses. Often the loans have lower interest rates because the SBA secures them. They also offer more favorable repayment options than some other types of loans available for small businesses.

The downside? There can be some strict requirements put in place by the SBA, and because they’re involved, often processing the loan can be time-consuming and take longer than other types of loans.

Unsecured Loans

An unsecured loan is a loan that the small business gets based on its own creditworthiness. They don’t have to provide collateral to secure the loan.

The business would get the loan based on their credit history and appearance of the ability to pay the money back. Often these loans are for smaller amounts than secured loans.

Line of Credit

A small business line of credit works like a home equity line of credit a person might take out on their personal home. The lender gives a cap amount that the business can borrow. The business can access the funds as they need them. If they don’t need any money, they just leave it alone.

If they find they need some cash flow or have an unexpected expense, they can access the funds and draw on the line of credit.

Lenders will usually charge to set up the line of credit. Then the small business pays interest only on the funds they have drawn, not the whole amount available. Then the business can make monthly payments on the balance and interest.

Some lenders do require the business to renew the line of credit and pay the fees each year. If the business didn’t opt to renew, they might have to pay their balance due. This is something to check when setting up the line of credit.

Reserve Credit for Business Account

The reserve credit is a small type of credit that a lender would connect to a business checking account. It allows the business some cushion in their banking if, for example, they have an overdraft on their account. This type of account protection helps with cash deficit problems.

The business could transfer from the reserve credit to cover deficits in the business checking account. Then they would make monthly payments on the transfers.

To get a reserve credit, the business would need to talk with the bank where they have the business checking account.

Business Credit Cards

A small business might opt to get a business credit card. In a way, this can work as a line of credit for the business. Some small business owners may feel reluctant to open a credit card, but they can help handle expenses or offer short-term cash flow issues.

Often lenders offer special small business credit cards with special features like 0% interest for a period of time. The terms of the credit card will depend on the borrower. Often the lender will require the business owner to secure the credit card.

The terms of the credit card will depend on the creditworthiness of the business owner and the business. This will determine the amount available on the account along with its interest rate.

Paycheck Protection Program

The Paycheck Protection Program (PPP) is another SBA type of loan. It is offered to small businesses struggling because of the pandemic. It allows businesses to get a loan from the SBA. The business must agree to continue to pay employees and keep them on the payroll.

A small business could use the PPP for a number of things beyond payroll, including:

  • Rent
  • Utility payments
  • Operations expenses
  • Property damage costs not covered by insurance
  • Costs of protective equipment, such as masks

There are several criteria to qualify for this type of loan, including showing a significant loss in revenue (likely due to the consequences of the pandemic). A unique and desirable feature of the PPP loan is that it’s forgivable. Businesses can apply using a loan forgiveness application to get the loan balance forgiven through the SBA.

Small Business Administration Disaster Loans

The SBA also offers disaster loans to businesses that have suffered from a disaster. The Covid pandemic is included as a disaster that has caused damage to a business. The loan can be used for:

  • Working capital
  • Normal operating expenses
  • Continuation of health-care benefits
  • Rent
  • Utilities
  • Fixed debt payments

SBA disaster loans typically come with loan interest rates and long terms to pay them back in an attempt to give the business time to get back up and running. The difference between these and PPP loans is that these are not forgiven and will need to be repaid by the business over time.

Lenders for Small Business Loans

It used to be that to get a small business loan, and you needed to visit your local brick and mortar banking location and hope they’d be willing to fund your loan application. Now small businesses have a variety of options when looking to get a loan.

Because there are now so many different types of loans, there are also many different types of lenders too. Once you consider what type of loan might be the best fit for your business, you want to consider what lender to use.

The many different lenders also give businesses some room to shop around for the best terms. Let’s take a closer look at the lenders that might be available for your small business loan.

SBA Loans

The SBA has a variety of loan options available, as mentioned above.

Some of the loans like the PPP and disaster relief loans, you finance directly through them. In other cases, they back the loan through your own lender. This backing will almost always get you more favorable terms.

Community or Local Lenders

Small community banks or even local credit unions are a good option for many small businesses. Because the banks are local, they are invested in helping other small businesses in the area.

Often credit unions will provide favorable terms too if you also do banking with them.

Large Commercial Banks

The large commercial banks are all the names you might recognize in banking. Some include:

  • Wells Fargo
  • JP Morgan
  • Citibank
  • Bank of America

They will often work with the SBA, so they have those backed loans available. You might also be able to get a little larger sum in your loan. The downside? These lenders are often slower and require more hoops to get your loan processed and approved.

Online Lenders

This group of lenders is newer to the lending options than other traditional options. Yet, they offer some valuable options for small businesses to get funding. Many online lenders offer options like

  • Small business cash advances
  • Working capital loans
  • Short-term loans

Be sure to read the terms carefully, as some lenders will have less favorable terms than others.

Private Funding

Private funding options can be desirable if you can find them. Often this means having a private investor who’s willing to provide some financing or cash flow for a small business.

Hard Lenders

Most loans you seek will be based on the creditworthiness of the business and borrower. A hard money loan, it’s based on what collateral you can offer. The hard money lender will consider the value of the collateral and use a loan-to-value ratio to calculate how much funding you can get.

Hard money loans should really be a last resort for businesses when they can’t get loans other ways. Often the interest rates are higher and other less desirable terms.

What Lenders Look at for Small Business Loans

As you prepare to apply for a small business loan, lenders will consider a variety of things as they assess your application. Of course, they consider your creditworthiness and the risks associated with lending to you. They will also want to take a close look at your business’s aspects to see if it’s maintainable and worthy of the loan.

They will want you to provide in-depth information about your business. Some things they will consider include:

• Credit score
• Business assets
• Financial statements
• Years in business
• Existing Debt
• Cash Flow

Be prepared to show documentation and business records to back up the above information. It’s likely you will also need to provide information on stakeholders in the business and information about insurance coverage for the business.

Speak the Small Business Loan Language

There are a variety of terms you’ll hear as you navigate getting a small business loan. You need to be familiar with these as they can impact the type and terms of the loan you get.

Balloon Payment

A balloon payment may be a term some lenders want to include in your loan. Many SBA loans don’t allow them, so watch for this in loan terms.

A balloon payment means you have a large lump sum due at the end of the loan term. In most cases, you’ll make smaller loan payments over the course of the loan, then have a large lump sum due at the end of the loan.


A default is when there is a failure to meet the terms of the agreement. Often a default happens when payments on a loan are not made on time.

Financial Covenants

Financial covenants is a term to describe the financial terms of an agreement. In this case, the terms the borrower agrees to when signing for the loan.

Loan-to-Value Ratio

Loan-to-value ratios are used when considering collateral for a loan. The lender will consider the collateral value and use a percentage of that value to establish the amount available to borrow.

Personal Guarantee

Often to secure a small business loan, the owner will need to provide a personal guarantee on the loan. This means that they are personally separate from the business, acting to secure the loan. It’s almost like they act as a co-signer for the business to secure the loan.

What Might Keep You From Getting Approved for Your Small Business Loan

While there are many different types of small business loans and places to secure them, they are not always easy to get. A business will need to jump through a series of hoops in hopes of securing one. Some things might keep you from securing a small business loan.

One of the biggest factors is creditworthiness. A lender will look at your individual credit history as the owner of the business. They want to see if you have been responsible and show a strong sense of responsibility related to finances.

Cash flow is another factor in whether a business gets a loan. It’s often a catch 22 situation. A business needs a business loan to help with cash flow yet can’t secure one because they don’t have enough cash flow. It makes sense to closely monitor your cash flow situation as lenders will want to see you’re able to repay the loan.

It would help if you were prepared for a lender to want to see a business plan. Seeking funding when you don’t have a solid business plan in place is sure to get you declined. They want to know you have a business model and have carefully laid out your business plan. This shows a sense of responsibility often necessary to secure funding.

Small Business Insurance Needs

As a small business working to be successful, you have many needs. On a daily basis, you’ll make decisions on how to proceed with your business and how to protect your business.

One important component of that is considering what insurance you need to protect your business. You want your insurance coverage to be a part of your overall business plan and budget. In addition to health care insurance considerations, you also need to consider your needs. What insurances does a small business need?

Property Insurance

You will need to have comprehensive commercial property insurance for your actual business location. You also need liability insurance to protect against accidents at your business.

Disability Insurance

Most states require a business to carry workers’ compensation and disability insurance. This protects the business, especially small businesses, from being stuck with huge medical bills if an employee gets injured on the job. It also protects the employees to make sure they get the coverage they need in the event of a workplace injury.

Life Insurance

As a business owner who has worked hard to protect and grow your business, you also want to protect your family. Life insurance protects your family if you are no longer around to do that, especially if they aren’t equipped to carry on with your business.

Everything You Need to Know About Getting a Small Business Loan

Often securing a small business loan is a necessary part of running a business. The more knowledge and research you put into the loan process, the more successful you’re likely to be. Do your research, then work carefully to prepare the information you’ll need to secure the loan.

It might seem like more work, but in the end, it will help you to get the funding your business needs successfully. If you need help with your business insurance needs, that’s one thing we can take off your plate and help you with.

We offer a wide range of commercial insurance coverage and would be happy to help make sure your business is protected. Contact us today to set up an appointment to go over your insurance needs.

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