Small Business Loan
What are Small Business Loans?
A small business loan is money borrowed from a lender by a small business. Like traditional loans or mortgages, financial institutions make their money on small business loans by charging fixed or adjustable interest rates on the total amount borrowed for the term of the loan. Business owners typically seek small business loans to run or expand their businesses. Traditional financial institutions will loan to small businesses, but rejection is a popular outcome when it comes to funding.
Seeking a small business loan requires a business owner to have good credit, a strong business plan, and collateral. It is important to have collateral, in the form of tangible assets, prior to applying for a small business loan. Small business loans are granted based upon the owner’s personal financial status and not the status of the business. Therefore, lenders focus on personal finances to minimize as much risk as possible.
Small business loans are not for startups. Lenders in a small business loan are more interested in assisting established businesses run or expand. Lenders view a small business loan as a greater risk compared to investing in a larger business, which is why they usually charge higher interest rates. Larger businesses may be more established with more tangible assets, so to level out the risk, the cost to borrow in a small business loan is more expensive.
Example of a Small Business Loan
Borrowing from a bank for instance is one option available to small businesses, but keep in mind all lenders will complete their own version of due diligence to approve a borrower. Let’s say you have a small business and are planning on applying for a small business loan. You will want to ensure you can demonstrate the following criteria to a bank or lender:
- A Healthy Credit Score: Banks will go as low to consider a score of 680 if the applicant can demonstrate other healthy business criteria. Typically, you’ll see banks accept a score of 700 or higher when evaluating an applicant’s credit score.
- Securable Collateral: A typical small business loan will require an applicant to secure a loan with collateral. The most common forms of collateral in a small business loan are homeownership or ownership of other property. Other high value items are accepted as collateral, so long as the bank can sell the items if the business cannot make good on their repayment of the loan.
- Business Longevity: All lenders are interested in a borrower’s experience and track record. How long the business has operated may not be the deciding factor, but it could be a tipping factor if an applicant has some shortcomings with any of the other requirements.
- Business Plan: You will want to demonstrate your organization, mission and financial projections to a lender. A lender is most concerned with the success of the business. If the business succeeds, then the borrower’s ability to repay the loan is likely. A strong demonstrated business plan can go a long way.
- Financial History: Information on previous lines of credit, other loans, balance sheets and tax returns will assist a lender see that you, as the business owner, are running a financially healthy business. Even if your business has not been established for very long, financial diligence can go a long way.
It is important to keep in mind that some lenders will vary in the way they evaluate your company. If you follow the above basic criteria, and are prepared when the time comes to meet with a lender, then your chances of securing a small business loan are favorable. It is important to consider that lenders in a small business loan application are not interested in providing seed or startup money, their goal is to ensure they lend money to a borrower who can realistically repay the loan plus interest. If you currently have an established business, and are looking to grow or expand, a small business loan may be right for you.