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A Quick Guide To Small Business Loans – The Things You Need To Know

A Quick Guide To Small Business Loans - The Things You Need To Know
Small businesses are the backbone of national economies from around the world. They form a growing market that continues to create jobs and revenue at an increased rate. Any company that has fewer than 500 employees falls under the small business category.

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According to the latest studies, small businesses account for more than 99% of all US-located businesses. There are more than 100,000 tech-related companies currently registered in the US. These companies alone provide employment for over 2 million citizens and contribute a little over 7% to the national GDP.

Unfortunately, approximately 30% of all small businesses fail within the first two years, 50% fail within 5 years, and only 30% will still be around after 10 or more years.

Research suggests that the number one cause for small business failure is cash flow. Bad finances account for more than 80% of failures.

If you want your company to be successful, you have to take precautionary measures. The 3 biggest issues that you must plan for are the possible decline in customer spending, market fluctuation, and employee health insurance.

Knowing that bad finances are your biggest threat, you should make it a top priority to be prepared for anything. In order to do so, applying for a small business loan could be the quickest and most effective solution.

A small business loan may come in various forms and from various lenders. Don’t be intimidated by the available variety. A varied portfolio means you’ll surely find what you’re looking for.

Learn about the potential lenders

Thanks to the growth of the small business sector, more types of lenders are willing to offer their services to small business owners like yourself. A simple online search can result in hundreds of pages of potential lenders. Knowing which one to pick is the first step towards obtaining your first small business loan.

  • Commercial Banks – naturally, the biggest players on the loan market are the large banks. However, for small business owners like yourself, opting for a bank loan might not be the best solution. Not only will you have to pass a more scrutinous process than with other lenders, but you may not be able to access the loan that you need. The main reason for denial would be the low profit that the bank would make in the case of loans that are smaller than $1 million.
  • FinTech Companies – hundreds of online lenders are at your service when it comes to small business loans. A recent study suggests that more than 60% of all small businesses are looking for loans smaller than $100,000. The main advantage of these companies is that they treat each small business as a unique client. This allows for a more personalized offer. Anything from SBA loans, equipment financing, and short-term loans can be acquired with little to no hassle if you approach the right FinTech company.

Know the type of loans available to you

You now know the type of lenders that you can approach. It’s time to understand the type of loans that are available to you and your company. Due to the high diversity of small businesses, the loans are also quite diverse. Your options will vary based on the needs of your company, the length of the loan, and specific terms and conditions which apply.

  • SBA Loan – short for small business administration loan, an SBA loan is by far the most popular and most common type of small business loan. It can be used for nearly anything and, depending on the lender, the loan amount can easily exceed a few million dollars. You can use an SBA loan as your working capital, to purchase equipment, to pay other debts, acquire new assets, and so on. As long as it’s business-related, an SBA loan has your needs covered.
  • Equipment Financing – long gone are the days when you had to pay for business equipment out of your own pocket. A dedicated equipment loan is exactly what you need to cover this issue. Whether it’s more powerful servers or new laptops for your office, an equipment financing plan is your best solution. Companies offer as much as 100% of the equipment value. Usually, the payments are calculated based on the expected lifespan of the purchase.
  • Short-Term Loan – this type of loan is perfect if you need less than $500,000 and you need it as fast as possible. Thanks to the “small” amount of money and the short payback period, this type of loan is usually approved within 24 hours. The payback period will vary based on the loan value, and can range anywhere between 3 and 18 months.
  • Personal Loan for Business – sometimes you only need to top up already-existing capital or you need a bit of extra cash for a purchase. This is where the personal loan for business comes into play. If your financial needs don’t exceed $35,000 – $50,000, this is the loan you should be opting for.

Put your finances in order

I can’t stress this enough: all of your financial statements and records have to be perfect. There’s no room for error or incomplete documents.

Your chosen lender will thoroughly analyze a part, if not all of the following: balance sheet, cash flow statements, EBITDA (earnings before interest, taxes, depreciation, and amortization), gross margin, and debt-to-equity ratio.

If, by any chance, the lender company finds issues with any of these statements, you may lose your eligibility for the loan. Plus, if your choice is a FinTech company, you must either have a good online presence or have a realistic growth plan. Start with Facebook, Instagram, and Twitter, and move from there.

Your best option is to hire a certified public accountant, or CPA. There are two approaches to this practice: you can request an audit or a review. An audit is a longer and more costly process, while the review is faster and cheaper. Depending on the value of the loan, you may want to opt for an audit, as it will increase your chances of getting the said loan.

Final words

In an ever growing market where more than 50% of all small businesses fail within the first 5 years due to financial problems, small business loans represent a safety net that can not only protect your business from bankruptcy but also help it grow in time.

Create a strong business plan, thoroughly research the potential lenders and types of loans they offer, and don’t be afraid to apply.

Guest Author: Stefan Paulo is a young entrepreneur. He is passionate about digital technologies and trying to implement them in the sphere of education. He observes all the news connected with online tools and is always ready to discuss them.

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