Today, small business lending is at its peak due to two factors – the current overall strong economy and relatively low interest rates.
Four Reasons for Small Business Lending
- Big banks give a higher rate for loans
Big banks approved many of such loans.
- Small banks are processing SBA Loans
Processing of SBA loans alleviates lender’s risks. Consequently, big banks are motivated to grant small term loans to startups and entrepreneurs even those with a long history of poor credit payments.
- Institutional investors
The activity of institutional lenders in small business lending includes family funds, insurance companies, pension funds and other non-bank lenders.
- Capital provided by alternative lenders
Non-bank lenders provide working capital for companies with poor credit ratings including those with poor credit scores. Credit unions are another source of small business finance.
Before applying for small business lending
- Steps 1 – Search for an option that you find affordable
After deciding on the amount of loan needed, keep your eyes open for a lending company that you can afford.
- Step 2 – Know the standing of your credit score
Your personal credit score is one of the most important factors in determining your eligibility for a loan. So always handle your personal finances in the best way you can.
- Step 3 – Figure out what you qualify for
Three other factors that lenders consider when determining your eligibility include the length of time the company has been in business, yearly revenue and average balance of money in your bank.
- Step 4 – Look around for options available for small business lending
Two lending options offered to small business owners are traditional small business lending from a banking institution and non-traditional small business lending such as online lenders.
- Step 5 – Choose the right small business lender
After shopping around for your business lending options, you have to submit your application.
Traditional banks and non-traditional small business lending options
- SBA Loans
Small Business Administration of the United States is not considered a direct lending agency for business owners, but a small part of the principal guarantees a partial loan by applying to intermediary lenders. This is offered as an added incentive for small business lenders. In case your bank loan application is denied, you can apply for an SBA loan. There are advantages of SBA loans: its terms are longer, bigger loan amounts are granted and rates are lower. You can use SBA loans to make a major expansion of your business, as added working capital or add more to your investments.
- Traditional Term Loans
After applying for a specific business loan with a purpose, you can borrow a fixed amount of money and pay back the loan over a fixed term with a fixed interest rate.
- Business Line of Credit
Similar to a credit card, once you established your business line of credit, you can now set the amount of dollar that can be drawn to buy your needed inventory, or assistance to handling season cash flows, to pay off other outstanding debts, or a solution for your other business needs.
- Financing for invoice
After 80% of the total amount is sold, you immediately receive cash advance that is a portion of the 20% balance back and in proportion to the amount collected by the company after the finance invoicing company has collected payment on those unpaid invoices.
- Financing for equipment
If you need funds to purchase equipment for the company such as computers, machines, or vehicles, this type of loan is the exact fit. Just like getting a car loan, it uses the car as your loan collateral so you won’t be asked to put up another collateral.
- Merchant Cash Advance
A lump sum payment made to the capital and offered to a business in exchange for an agreed percentage of the future credit card sales of the company is called merchant cash advance.
Documents needed to apply for a loan
In the application process of your loan, lenders require debtors to submit some documents as proof of the financial standing of the business.
- Business Plan – Business plan consists of your introduction to the lenders telling them who you are and what your business is all about. It gives them your mission and goals, as well as the roadmap towards your successful plans.
- Balance Sheet – This presents an overall picture of the financial standing of your business.
- Sales Forecast – This document is essential for newer businesses to provide a sales forecast including profit and loss statements.
- Business Debt Schedule – This document shows all your existing debts, total amounts and payments made.
- Personal Tax Return – Your lender will ask to see your most recent personal tax return to verify your income.
- Business Tax Return – If your business has been ongoing for years, submit 2 to 3 years of the most recent business tax returns to show your long-term revenue history.
Fees to pay for a small business loan
- Application Fee – lenders need to pay charges of running credit checks and the payment is given for underwriters to process application of loans. Some lenders will offset the cost by charging application or processing fee.
- Origination Fee – This covers the costs incurred by lenders every time they approve a loan.
- Guarantees Fee – Specifically applicable to SBA loans, this fee is partially “guaranteed” by the government to assist lenders every time they approve small business loans. But this cost is sometimes passed along to debtors in the form of a guarantee fee.
- Check Processing Fee – Most lenders will ask you to make loan payments through Automated Clearing House (ACH), an electronic network for financial transactions in the United States. You may need to pay an extra fee if you prefer to pay by check as the processing fee for the check.
- Late Payment Fee – This one good reason to pay your loan on time as every delayed payment will be penalized.
- Pre-Payment Fee – If your cash flow is fine, it is better to pay off your small business loan early. This is the best way to avoid a penalty or extra charges on your loan.
Why lenders want collateral?
To secure the risk of you losing their money, some lenders will ask for collateral or a personal guarantee on the loan amount. In some cases, these guarantee can even help you qualify for a more affordable loan, because this is the only way lenders can recoup the loan when payment is not paid. Usually, you will be asked to offer your house as collateral for your loan. If you do not pay, the lender files and seek a judgment against you and he will be able to claim the title of your home or other property as repayment for the loan.
Offering a Personal Guarantee
If you have no collateral to offer, you still have an option. You can sign a personal guarantee instead. This guarantees that your lender can seize any of your current assets as repayment if you fail to repay your loan. Lenders will dig into your savings, retirement accounts and even the college funds for your kids. However, the loan amount you received may not huge to seize all of those assets. So you should know what you’re agreeing to! Signing a personal guarantee is a big risk — the reason why it is preferred by lenders to safeguard their business. Knowing what you have to lose will make you pay on time.
How long is the loan application process?
The time varies depending on the type of loan product you’re applying. SBA loans take a long time to process. It may take several weeks or even months since they need approval from the SBA and intermediary lenders. Some term loans require a number of weeks to process depending on the lender.
However, if you need speed, online alternative loans, for example, an equipment loan, finance invoicing or merchant cash advance, the process is only a short time even as little as 24 hours and you will surely have the cash in hand within two days or 48 hours.
Of course, you need time to file an accurate and complete application. Any discrepancy or missing info and documents can be the reason for substantial delays, so make sure to have your papers are complete before submitting.
Do your homework and submit a stellar application, and you’ll be happy with your final borrowing choice.
Repayment of your loan
It is incredibly important to pay back your loan as keeping a good credit score is important. Remember how valuable personal credit score when it comes to small business lending. That’s why you need to make sure to keep track of your payments following the loan amortization schedule. Set up an alert on your phone to remind you for payments and manage your finances to avoid delayed payments and damaging your credit score.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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