Index | Commertial Loans | Small Business Loans

Small Business Loans

Owning a small business is a desire of many Americans. Making good money doing what you really like and what you have a passion for, having no bosses and avoiding many other issues associated with nine-to-five office routine are only a part of the benefits running your own business may provide, but it's also only part of the truth.

The truth is starting your own business involves considerable expense, time, effort, hard work and risks. Probably the most difficult task a small business owner faces is finding the money to start, develop or expand their business. Sometimes interesting business ideas fail due to lack of funding. Strictly speaking, it is quite hard to get a Small Business Loan and it takes certain preparation steps.

Lending institutions may refuse funding small businesses due to various reasons, like lack of sufficient collateral, failure to pay a sizable down payment, or absence of long track record. They take a decision whether to fund a small business or turn the loan request down based on certain risk factors.

There are no direct small business grant programs provided by federal government, however there are many state development agencies that offer direct small business grants and other types of financial assistance. Small business loans are also available from private organizations.

Supporting small business is an important part of the US government economic strategy, as over 25 million small businesses in America generate half of the country's gross domestic product, employ more than 50 percent of the private work force, and are the principle potential employers of new workers.

There is plenty of free government help related to planning how to start or improve your small business. Many states give small business grants to entrepreneurs. The largest contributor to small business loans is the US Small Business Administration (SBA). The SBA is a federal agency which does not directly offer grants but helps connect you with government sources and can guarantee small business loans up to a limit of $1,000,000. The SBA works with state and local governments, non-profit organizations, lending institutions, educational and training institutions and provides small businesses with planning, financing and advocacy assistance.

Sometimes the lender cannot fund a loan without incurring excessive risk or cannot provide the size of the loan requested. In such cases the SBA can act as guarantor of your small business loan, which means that if the borrower fails to pay back the loan, the SBA agrees to pay a portion of it to the lender. Having this guarantee, the lender then gives the loan to the borrower.

In addition, each state has an economic development agencies, consultants and associations that are responsible for administering business grants.

In order to qualify for small business loans guaranteed by SBA, you should meet certain criteria, including your own personal finances, and your credit history, your track record of paying off debts, financial soundness of your business and your ability to make the required monthly installments.

Small business loans come in a variety of shapes. Most common options for getting the loan for your small business are credit cards, personal loans, home equity loans, lines of credit and small business association loans. Each type has its benefits and drawbacks. Some loan types are easier to obtain than others.

It is important to evaluate your needs for small business loans first. Make sure you have calculated all the financial needs, the amount of money you need for your small business. Take into account any expenses related to business. You may need money to make modifications in the rented office, buy some new furniture or equipment, upgrading working capital, marketing, paying off business debts etc. Lenders will need to know the reason for the loan.

Then it is vital to consider the repayment schedule, i.e. the amount of time you need to pay back the loan and the repayment volume, i.e. the amount you can pay monthly. Lenders will need details on how you will repay the amount borrowed, as well as details of security you will be able to offer.

Depending on what type of loan you want to obtain, secured or unsecured, consider the assets you can put up as collateral. Both the assets used in the company and related to the business operation and the owner's personal assets can be used as collateral.

To be able to obtain a small business loan you will need to show your business plan, personal credit history, and prove your experience, education, and feasibility of your business projects.

Preparing a strong business plan will assure the lender that funding your small business is a good credit risk. From your business plan it should be perfectly clear how much money you need and how you will invest it, when you will repay the loan and what is your position in case of rejection. It should display your management capabilities, information about your market area, and your business type. Lenders need to see a confident and determined personality who is proud of his/her business and sure of its future success.

The lender wants to make sure that the borrower has some experience in running a similar business so that the risks are minimized. You should give a detailed explanation on how the loan you request will help your small business develop and prosper and convince the lender that you are able to repay the loan.

In order to apply for a small business loan, it is essential for borrowers to have already invested a substantial portion of capital, assets or/and cash, into their business venture. Substantial equity is one of the important credit factors for new business. The prospective small business loans lender is interested in the debt-to-worth ratio of the potential borrower and there are slim chances that the loan will be granted to a business with weak equity.

Among other aspects, the future of a business depends on effective cash management. In other words, the cash outflow must not exceed the cash inflow for a long time. Applicants are required to provide a cash flow projection, i.e. reports on their expected income. It should cover the first year after the approval of the small business loan. Lenders will also take into consideration the history of your business resource management. It is vital for them to see that you are well aware of the principles of sound financial management. You will need to present financial information, latest set of management accounts, reports on accounts receivables and payables etc.

You can increase your chances of obtaining a small business loan if you do your homework and take an informed decision. It is possible to find the lowest interest rates possible.

Choosing between several sources of small business loans, take into account their advantages and disadvantages, as well as your own financial situation. With smaller loan amounts, credit cards may be the most suitable option. You may take advantage of rather low interest rates, and sometimes even enjoy no interest for a year. Taking out loans from banks and credit unions, you will have to deal with some paper work, considerable interest rates and the necessity to pledge collateral.

In case you need larger amounts of a small business loan, consider a home equity loan. Home equity loans are secured loans giving you an opportunity to finance your business through the equity in your residential or commercial properties. The interest rate for secured business loans is lower than the rates for unsecured business loans. Home equity loans tend to have a longer repayment period. Also, they are easy and quick to process. However, there are certain risks involved as you might lose your home which is put up as collateral. Secured lines of credit are more suitable for larger financial loans. In case it is easy to get an unsecured line of credit, the interest is likely to be a lot higher than in the secured line of credit.

Always take time to read the fine print and learn all the details about the loan products you are considering, their advantages, limitations and peculiarities.

In case you have poor credit ratings, it is still possible to get small business loans. However, it is not an easy task and requires certain efforts towards improving your chances of being approved.

First off, separate your business credit from your poor personal credit. Keeping your personal finances out of your professional financial statements will allow you to keep your business credit safe from your poor personal credit rating influence.

Then, it is necessary to ask for your credit history report to be aware of your credit score, which should range between 300 and 850.

If the lender provides the amount you requested, you are expected to pay off the loan in installments along with the interest. The amount of interest that you will have to pay is determined by the maturity date of your loan and the principal amount that you borrow. Typically, repayment period for small business loans is between ten and fifteen years, with 25 years maximum term in case of real estate purchase.

Don't get discouraged if one lending institution rejects your small business loan application. The right thing to do in this case would be to ask the lender why you were turned down. As a potentially successful business owner, you will learn from the answer, and try lender after lender until you succeed and get the money for your business.