Small Business Funding: How to Get a Business Loan

The old adage that “it takes money to make money” often rings painfully true for small businesses struggling to grow and prosper. From overhead to inventory, the expenses required to run a business often seem staggering. Thankfully, plenty of funding is out there for small businesses in every sector.

Where can I find small business funding?

When it comes to loan offerings, small businesses have a number of possible entry points:

• Banks: Traditional banks are still an excellent place to start, with a large menu of loans backed by the Small Business Administration and other financing options available.

• Small Business Administration: This government agency can direct you to specific lenders interested in financing small businesses.

• Online: NerdWallet has more information here.

• Credit unions: Credit unions are often overlooked when it comes to funding. However, like banks, they offer SBA-backed loans and other financing options.

Am I eligible to take out a small business loan?

To qualify for a small business loan, you’ll need to prove you are a good risk. For non-SBA loans, eligibility may vary by individual lender, while SBA loans have specific requirements. Once you’ve met the criteria as a qualifying small business, the SBA wants to see enough cash flow to make your payments. In addition, the SBA also requires applicants to demonstrate good character by filling out a “statement of personal history.” This information shows whether you’ve paid previous debts and obeyed the laws of your community.

If your history has a few blemishes, don’t panic. While solid credit and a clean record are strongly preferred, the SBA personal history form clearly states that an arrest, conviction or record doesn’t necessarily disqualify you. Even a previous bankruptcy won’t automatically rule you out. Some lenders approve SBA-backed loans after bankruptcy if you’ve repaired your credit in recent years.

Be prepared to back up your commitment for most SBA loans. Generally, 7(a) loans are fully secured, although when all other factors are favorable you may still be approved with insufficient collateral. If you own 20% or greater equity in your business, you’ll also be expected to personally guarantee your loan.

How much can I borrow?

Small business loan amounts vary depending on the needs of a particular company, that company’s size, and its projected growth. The average SBA loan is about $371,000, but they may range from microloans of $5,000 to the maximum guaranteed amount of $5 million. The median non-SBA loan offered through the banking industry is around $130,000 to $140,000.

If you apply for a business loan financed through a credit union, be aware that federal regulations only allow them to lend the lesser of 1.75 times their net worth or 12.25% of total assets. As such, the amount available to borrow through their individual offerings may be limited. You can still finance SBA loans of up to $5 million through credit unions.

Types of business loans

Business loans may be secured, unsecured or even take the form of lines of credit. Some sort of collateral, such as real estate, investments or other valuable assets, is required to back a secured loan. If you default on this type of loan, the lender can seize that collateral. Unsecured loans don’t require any sort of collateral backing. In this case, the lender can’t take your property if you’re unable to pay, but the tradeoff is generally higher interest rates. A line of credit is an agreement between a borrower and lender that allows the borrower to draw funds as needed, up to an agreed-upon limit.

The Small Business Administration offers four primary types of loans:

• 7(a) loans: This is the SBA’s most common loan program. Funds may be used to start a new small business or to acquire, run or grow an existing one. Within this category are special-purpose loans, including export working capital, international trade, and pollution control. Veterans enjoy special incentives that make the Express loan program especially attractive.

• Microloans: These are short-term loans of up to $50,000 for small businesses and nonprofit child care centers.

• Real estate and equipment loans (CDC/504): These loans finance large fixed business assets.

• Disaster loans: In the event of a declared disaster, these funds can be applied to repair or replace damaged machinery and equipment, inventory, real estate, business assets and personal property.

The SBA also offers lines of credit to help meet the short-term needs of businesses with a demonstrated positive cash flow. Some other general types of small business loans include:

• Professional loans: Available to lawyers, doctors, dentists and other professionals starting their own practices.

• Franchise start-up loans: These loans service those opening up a franchise of a recognized business.

• Start-up loans: Specifically designed to get new small businesses up and running.

• Equipment loans: These funds are used for the purchase or lease of machinery, computers, copiers, tools and other necessary equipment to run a business. This equipment can then be used as loan collateral.

• Business diversity loans: Provide funding to women, minorities, veterans or disabled individuals.

• Merchant cash advance: This loan structure allows for borrowing against regularly occurring monthly cash receipts.

• Commercial real estate loans: These funds are used to buy business property.

Navigating the loan application process

Planning will help you get through the loan application process with a minimum of stress. Before applying, you will make sure your business qualifies as a small business under the SBA’s criteria, and be prepared to demonstrate good character, decent credit and the ability to pay back your loan. Seek out institutions that are open to lending to small business owners. Often, if you approach banks or credit unions that already are familiar with you as a customer or community member, you’ll have a better chance of approval.

If you submit an incomplete loan application, your small business loan may be delayed or denied. Before meeting with a lending officer, ask exactly what documentation is required so your application will be in perfect order. Although individual lenders have their own requirements, here’s a general idea of what you’ll be expected to provide at your loan interview:

• A detailed business plan explaining what type of business you are in, long- and short-term goals and how you plan to meet them
• Personal information such as bios, education, and licenses held for you and any business partners
• Personal and business financial statements
• Projected business financial statements and cash flow projections for a minimum of one year
• Personal and business credit history for you and any partners
• Guarantees from all business owners

Start-up considerations

Start-up loans are one of the hardest types of small business loans to acquire. If you’re starting a new business, you’ll improve your approval chances by showing excellent credit, a strong business plan, some personal resources of your own to invest and solid collateral. Smaller banks, credit unions, and community financial institutions may be more likely to take a chance on you than a large national or international bank.

Need more help or advice?

For more information and guidance concerning small business loans, contact any of these organizations:

• Senior Corps of Retired Executives (SCORE)
• SBA district/branch offices
• Women’s Business Centers
• Small Business Development Centers

Originally posted on NerdWallet.