Every business, no matter how big or small it is, needs a little financial help from time to time. As a business owner, you understand it is not easy to start and run a business. You have to take care of a hundred things at a time.
So whenever you need additional funds, small business loans are a great help. During the global pandemic, small businesses have been significantly affected, and they are looking for additional funds to keep the operations running. So, obtaining a small business loan is a great idea when you lack funds.
What is a small business loan, and how it works?
Are you looking for funds to expand your business or launch a new venture? You should apply for a small business loan. Small business loans are borrowed funds from online lenders and commercial banks. Financial institutions lend their money to small businesses to help them grow. They, in return, charge interest on the borrowed money.
In simple words, when a small business gets a loan, it has to pay it back within a specified period along with interest. If the borrower fails to repay the loan on time, the lender has the right to seize the asset which the borrower has provided as collateral.
There is a risk of losing collateral in a small business loan. So, make sure you pay the principal amount along with interest on time. It is suggested to take a loan only when needed.
Once you have obtained a loan, you can use it to:
- Purchase inventory
- Launch a small business
- Generate additional income
- Meet business expenses
- Purchase equipment
Some people think that the small business loan is the same as the startup loan. But it is necessary to understand that not every small business loan is a startup loan. Though some borrowers use the term interchangeably, it is highly important to understand the difference.
Who can apply for a small business loan?
Now you may be thinking about who can apply for a small business loan. Well, it is true that you have to fulfill certain requirements to obtain a loan, but anyone who is able to fulfill those conditions can apply for a small business loan. Bear in mind that the loan application’s approval depends on several factors, and requirements vary by lenders.
If you have a small business or plan to start a new business, you can apply for a small business loan. But to apply for a small business loan, you must be 18 years old or above. You must have a business in the approved industry to qualify for a loan.
If your business has the ability to generate profits, then you can apply for a loan. You must use the borrowed funds for business purposes. In fact, you must tell the purpose of obtaining a loan in your loan application.
To get a loan, you must have verification of the existence of your business. If you are starting a new venture, then you must have proof that it is in the process. Anyone who has a plan to start or expand a business can apply for a small business loan. All he has to do is to meet the certain requirements set by the lenders.
Qualifications to apply for a small business loan:
Now you know that anyone can apply for a small business loan. But you may be thinking about whether I am eligible to get the loan or not? Well, if you fulfill the conditions required by the lender, then you are eligible to get a loan. Start the process by determining what your lender considers a small loan.
You should ask yourself if you really need a loan. Bear in mind that you have to repay it with interest, so take a loan when you actually need it. There are several factors that affect your eligibility to apply for a loan.
Your credit history is an important factor that affects your eligibility for small business loans.
Businesses with poor or no credit history have fewer chances of loan application approval. Well, the lender has to make sure that his money will not be wasted and he will be able to get it back along with interest, so he prefers to lend his money to established businesses with good credit history.
How long have you been into the business? Many moneylenders prefer at least one to two years of operations to provide a small business loan. If your business is still in the initial stages, it must have the potential to generate profits. Your personal credit utilization must below. If you give an asset as collateral, you have more chances to get a loan.
The reasons why you apply for a loan:
You know who can apply for a loan and what conditions you have to fulfill to get a loan. But why you need to apply for the loan in the first place. Well, every business, irrespective of its size, needs additional funds sometimes.
It is tempting to rely on your savings, but when your business needs urgent cash, you have no option other than applying for a loan.
Here are the reasons why you should apply for a small business loan:
Meet your business expenses:
You have your personal savings, that’s good. You can use them to meet your business expenses; after all, it’s your own money, and you can use it the way you want to. But it is not rational to drain your saving account. You have other living expenses too, and it is better to keep the business expenses separate.
If you need additional funds to meet your business expenses, then applying for a small business loan is a great idea. You can use the loan amount to cover your business expenses, and your personal savings account will not drain.
Low-interest rate:
It is true that you have to pay high-interest rates on many small business loans. But there are a few small business loans that are available at a low-interest rate. When you put an asset as collateral, you pay low interest on borrowed money.
Use the borrowed money as you wanted:
The best part of obtaining a small business loan is that you can use it the way you want. But it is suggested to use small business loans for business purposes only. You can use the borrowed money to buy machinery, purchase inventory, hire and train staff, and make payrolls, etc.
Most small business loans are restriction-free, which means you can use them as per your choice. Just remember that you have to pay the loan back, so make sure you use the borrowed money to grow your business.
Borrow what you need:
When you apply for a small business loan, there is no hard and fast rule about how much you can borrow. You can take as much money as you need. Just remember that every business’s needs are different, so you should determine how much money you need.
You should never get a loan more than what you need. Since you have to pay it back with interest, it can become difficult for you to pay it back on time.
Tax benefits:
When you obtain a loan, you pay it back with a predefined interest. Since you are paying a huge amount, you enjoy some tax benefits as well. The amount you are paying as a loan is exempted from tax.
Replace outdated machinery:
You may need funds to replace outdated or broken machinery. The new machinery can increase productivity, and as a result, you will be earning more profit. So, getting the equipment loan is a great idea if you want to buy new equipment.
Pros and cons of small business loans:
Small business loans are a great help for businesses when they really need funds to operate. But everything has its disadvantages so are small business loans. Let’s have a look at a few pros and cons of obtaining a small business loan:
Pros:
There are different types of small business loans, which means you can get a loan according to your specific needs.
You can use the borrowed money the way you want to. There is no hard and fast rule to use the loan amount. However, it is suggested to use it for business purposes only.
It is convenient to obtain a loan. Whenever you need additional funds, you can turn to a commercial bank or online lender to get a small business loan.
Cons:
The process of applying for a loan may take some time.
You may have to pay a high-interest rate if you need urgent cash.
There are the chances of losing collateral in case you fail to repay the loan amount.
In the case of an equipment loan, you may have to pay more than the asset’s worth as the asset depreciates.
Is it a good idea to get a small business loan?
There is a general perception that you should never get a loan. Well, this is partially correct. If you have some other way to meet your business expenses, then that is well n good. But when you are in dire need of cash and have no other option, then getting a small business loan is a great idea. You will be repaying the loan amount with interest, but it will help you keep the business operations running.
Getting a business up and running takes money. Your business needs funds does not mean you should drain your personal savings. A small business loan is the best way to fund your business and get out of the troubling situation. All you have to do is determine what type of loan is the best for your business needs.
Requirements to apply for a business loan:
You understand that applying for a small business loan is not an easy task. The lender is lending his money at great risk, so he has to make sure that he will get his money back. So, the lender will verify all the information you provide to him.
To apply for a small business loan, you need to have a good credit score. Businesses with good credit scores have a better chance of loan approval. Having a low credit score reduces the chances of loan approval. But it does not mean that they cannot get a loan. Some lenders provide loans to businesses with poor credit history. But they have to pay a high-interest rate.
The lender asks you to provide your bank statements to find out how you manage your cash, and you would be able to pay the loan back or not. Typically the lenders ask for four months statement, but if you are applying for an SBA loan, they may ask you even more.
Moreover, you have to tell him the reason for applying for a small business loan. Tell him in the statement that you need funds to purchase inventory, train and hire staff, or purchase equipment. If you are looking for funds to start a new business, you must have a great business plan. Your business must have the potential to earn profits. Your business plan must be solid enough to convince him to lend you money.
Final verdict:
Small business loans are a great help for business owners who need funds to start or expand. They provide them with an opportunity to turn their dreams into reality. However, applying for a small business loan can be daunting. If you do not fulfill the conditions to apply for a loan, the chances of the application being rejected increase.
Low cash flow and poor credit history prevent small businesses from securing fast small business loans. You can work on improving the credit score to get a loan.
Have a great business plan? Then don’t waste your time to apply for a small business loan and fulfill your dream of becoming a successful entrepreneur. So, are you ready?
