How to Get a Business Loan

How to Get a Business Loan
Caitlyn Rose
on December 18, 2016
Read in 4 min

Working capital is the life-blood of any business, whether it is a one-man operation or an enterprise with hundreds of employees. If you are just beginning the adventure of operating a retail store, restaurant or other undertaking, you might need an infusion of cash that you can count on.

Friends & Family

The first place a fledgling entrepreneur often looks to for financial support is friends, family and other personal contacts. These are the individuals who truly believe in you and the potential of what you have to offer. They may be willing to take a risk on you without all the official paperwork, and without the promise of a big payoff.

However, these advantages come with a cost. Should problems arise with your business and you find yourself unable to repay the loan, more than your credit will be at stake. In many cases, conflicts over money have broken families and friendships apart. So be sure of yourself before putting your personal relationships at risk.

If you have a strong personal credit score, you might want to consider applying for business loans from a traditional bank or an alternative lender. We’ll go over a handful of loans that are popular for start ups and how you should go about getting them below:

Business Lines of Credit

A business line of credit is very similar to the personal credit cards you probably already have. The only difference is that the credit line is tied to your business. These methods can be an excellent vehicle to help you get your business up and running since they usually do not charge you any interest for the first 9 – 15 months.

No collateral is required for these loans; however, your credit score must be 700 or more. You will only begin to make payments after you have charged items to your line of credit. Once interest charges begin to apply, your rate could be anywhere from 7.9 to 19 percent, but you will only pay interest on the funds you are actually using.

For instance, if you take out a credit line of $50,000 and charge office equipment that costs only $10,000, you will only be required to pay interest on the $10,000.

Equipment Financing

Another type of business loan that is handy for start ups is equipment financing. With this arrangement, you can make use of the equipment while paying it off. At the same time, the lender sustains slightly more risk at a lower interest rate.

As with a business line of credit, you must have an excellent credit score of approximately 700 or more. When applying, you will need to produce a detailed credit report, a narrative describing how you intend to use the equipment and complete information about the vendor from whom you want to make the purchase. As the equipment depreciates over the next few years, you can use this as a tax benefit.

The term of the loan generally extends for the life of the equipment that you purchase. While interest rates can be high, equipment financing is a reliable way to get costly equipment you need to hit the ground running.

The most important requirement for getting small business loans such as these two types is an excellent personal credit score. In general, the maximum loan amount is $150,000 over a period lasting anywhere from six months to four years. Interest rates vary widely from 8.9 – 19.9 percent, and most business owners can expect an answer within 2 weeks.

SBA Loans

Another way to gain access to capital for your company is via a Small Business Administration (SBA) loan. Contrary to popular belief, the SBA does not directly hand out money; instead, this independent federal body provides partial guarantees that reduce a lender’s risk in providing the loan. SBA loans are reserved for companies with under $7 million in tangible net worth and under $2.5 million in net income.

Although there are several SBA options, the most popular for small businesses is the 7(a) program, which can help you get up to $750,000 from a local lender. With a 7(a) loan, you can obtain working capital and purchase assets necessary for the running of your business. All parties with a 20 percent or more stake in the company must personally guarantee the loan.

The LowDoc Program

One particular 7(a) loan is the Low-doc program, which is designed for entrepreneurs borrowing less than $150,000. Intended to reduce paperwork, this program’s application is only one page long. The SBA will respond to your Low-doc loan application within 36 hours.

Crowdfunding

Finally, a discussion of business financing would not be complete without at least a nod to non-traditional vehicles. Perhaps the most interesting of these is crowdfunding. With crowdfunding, an entrepreneur raises funds among peers with an online platform like Kickstarter or GoFundMe. You create a representation of your project, offer incentives for early investors, and collect small investments from many contributors. Many a successful start up owe their beginnings to crowdfunding platforms.

The site manages the fundraising process. Usually, those who contribute to the cause are given some type of reward or incentive. The advantage of this innovative loan method is that no single lender needs to bear a large burden of risk. At the same time, a business owner who may have been turned down by traditional lenders can still get the funds he or she needs to transform a dream into a reality.

As you can see, obtaining funds can be done in a variety of ways. As a budding entrepreneur, it is up to you to determine the path you wish to take in order to secure your financial future. Do you want to go the traditional route with a line of credit or equipment financing loan? Or perhaps one of the popular SBA loans might be your speed. Don’t forget about the innovative newcomers to the lending arena either; they may give you just the boost you need.

Whatever the source you choose, start up financing will carry your enterprise through those difficult beginnings.

 

Caitlyn Rose Finance Journalist

Caitlyn is a small business consultant and editor for LendGenius with an intimate understanding of business finance.

She’s an entrepreneur at heart & supports local businesses whenever she can.

Featured

2018 Tax Audit Triggers Business Owners Need to Know

by Amy Fontinelle on January 12, 2018
While the overall risk of an individual tax audit is low, the odds go up when you file a business… Read more

How Your Tax Strategies Can Affect Getting a Business Loan

by Caitlyn Rose on January 3, 2018
Traditional banks are increasingly wary of lending to small businesses because it's simply not profitable enough. Instead, they go after the… Read more

Low-Interest Loans & Where To Find Them

by Dustin Clendenen on December 15, 2017
Sometimes we fall behind on our credit card payments, and those high APRs can start to take a real toll… Read more

How to Get a Loan In 2018 (The Easy Way)

by Rebecca Hosley on December 6, 2017
Applying for a loan can be confusing if you've never done it before, or if it's been a while (technology… Read more

9 Techniques for Managing Seasonal Sales Fluctuations

by Jackie Lam on September 8, 2017
If you’re a small business owner whose cash flow is affected by seasonal sales — we’re talking seasonal companies like… Read more

Amazon Lending – A Comprehensive Resource on Business Loans from Amazon

by Caitlyn Rose on August 14, 2017
The Amazon Marketplace has quickly become a go-to channel for both large and small businesses looking to develop an online… Read more

7 Basic Business Loan Requirements – Know What Lenders Are Looking For

by Rissa Ann on August 5, 2017
There are more ways than ever to fund a business launch, expansion, or unanticipated expense, but business loan requirements can… Read more

The 5 C’s of Credit Deciding Your Business Fate

by Amy Fontinelle on May 8, 2017
When it comes to small business loans, success is spelled with the 5 c's of credit. We know, applying for… Read more

How to Sell to Millennials in 2018 – What is a Millennial Person Thinking?

by Brenna Lemieux on May 5, 2017
With Gen Y collapsing under it's own debt, learning how to sell to millennials may not be your highest priority for… Read more

5 Types of Grants For Women-Owned Businesses

by Caitlyn Rose on December 29, 2015
If you are a woman thinking about starting a small business, you are part of a growing trend. Since 1997,… Read more
Join For Free & Start Browsing Loans