To start a new business, you would need a certain capital amount to fund the expenses. The same goes for expanding an already established business. This is why, when trying to start a new, or expand an already existing business, companies often need financial assistance. The best way to get it is by taking out a business loan. Business loans are, basically, an amount of debt that companies are required to repay in a certain period of time, depending on the specific terms and conditions of the loan. Before a company even considers taking out a small business loan, it is of great importance for that company to first know the different types of small business loans, and to understand exactly how these loans work, and what the lenders require to grant a loan.
How does a business loan work?
Small business loans are an amount that a company borrows in order to pay for expenses that otherwise that it cannot afford to pay due to lack of funds. Business loans can be used in different ways. Some use them to pay wages and salaries, others use business loans to buy inventory supplies or fund business projects. Before they consider granting a loan, loan lenders require the company that is applying for the loan to provide the specific outline for how it plans to spend the amount of money. It is important for a company to make a good impression with the lenders, as it increases the chances of getting the business loan. Not putting in any effort when applying may result in a negative loan application response from the lenders.
Different types of business loans
There are many types of business loan options that companies can choose from. The most popular source of financial assistance is traditional loan lending institutions, especially banks. That, however, is far from easy to get. That is because banks are trying to tighten their policies regarding money lending, which makes it a lot more tougher for companies to qualify for a business loan and get the financial help they need.
They still, however, have other options too, such as home equity line of credit if one or more of the owners of that company own a property. Banks, however, are not the only options that companies have when looking for a loan. Small business lending companies are also a viable option for those in need of financial assistance. If you already have a running business, then look into merchant cash advances.
Small business lending companies advantages and disadvantages
Every business owner should know what options he has when it comes to taking out a loan. Whether you want to expand or sustain your business, the loan lending industry can assist you in both. The small business loan providers are operating under the United States Business Administration rules which allow them to give out loans to small businesses.
Such loans are granted to business owners who need a certain amount of money to fund an expanding business project or pay for salaries. Working with a small business lending company has both ups and downs. We’ll have a look at the advantages and disadvantages of small business lending companies so that it will be easier for you to make a choice if the time for it comes.
Small business lending companies advantages
Fewer credit Requirements
As we have already mentioned above in this article, it can be really difficult for companies to get a business loan from a traditional loan lending institution. Small business lending companies, however, give out business loans even to companies with bad credit. The interest rates and fees of such loans, of course, are going to be higher. But to small business owners who are trying to keep their companies alive, paying a higher amount of interest is not the end of the world.
Flexible terms and conditions of the loan
If the borrower is able to get a loan with longer repayment period, that will mean that he will have a monthly payment that is a lot easier to manage. Small business loans from small business loan lenders have flexible terms and conditions that allow the company applying for the loan to structure the loan payments in a way best suited for their specific financial situation. With small business loan lenders, you are usually also able to get a small business loan with no required collateral.
Small business lending companies disadvantages
A higher interest rate
Due to their accessibility and easy of approval, loans from small business loan lenders tend to have a higher interest rate and fees compared to loans from traditional loan lending institutions such as banks. While an annual percentage rate of a traditional lending institution’s loan is around 8%, the annual percentage rate on a loan from a small business loan lender can go as high as 12%.
Loans from small business lending companies are unregulated
Small business loan lenders are not regulated by state or federal governments. This allows them to conduct their business with certain freedom. Even though this gives the small business loan lenders more flexibility with their lending policies, which is often beneficial to the borrower, it can also lead to some tricky situations which you would probably want to avoid. There are still a number of rules that a small business loan lender must follow, so it would be for the best for you to find what these rules are before you sign any small business loan contract.
Frequently asked questions regarding small business loans
Here are some answers to questions that a lot of borrowers may find themselves asking when considering a small business loan:
How to choose the right loan lender?
- Every case is unique and so picking the right loan lender is highly dependent on your specific financial situation. Compare what different loan lenders have to offer. Also try to be as realistic as possible regarding your own capabilities.
What kind of information do i need to provide when applying for a small business loan at a bank?
- When you apply for a small business loan, you will most likely be required to fill out some forms and documents for the loan you are trying to get. You will also need to provide some basic information regarding you (the owner) and the business that you want to fund by taking out the loan. Such information may include:
- Financial and personal background statements
- Profit and loss statement
- Business financial statements
- Projected financial statements
- Affiliations and ownership
- Business license/certificate
- History of loan applications
- Income tax returns
- History and business overview
- Business lease
What will you need to answer when applying for a small business loan?
When applying for a small business loan you may want to be prepared to answer the following questions:
- Who your suppliers are and what assets need to be purchased
- You will need to list your management team’s members
- You will need to say if you have other business debts and to specify who your creditors are