Many people have the desire to open a small business, but are unsure of how to come up with the money to do so. One of the best ways to procure capital is to obtain a small business loan. Small business loans are loan agreements between a lender and a borrower. The borrower is typically the business owner. The borrower agrees to pay back the lender the originally loaned amount, plus interest. The size of the loan will vary between lenders, depending on the amount each individual lender is willing to loan.
Small businesses may take out a business loan for a multitude of reasons. The most common reason is simply the lack of money to actually start the business. Other reasons, for already established companies, include renting office space, purchasing computers and other office supplies, or investing in equipment that will ultimately cut costs while bringing in more profit. An already successful company may even want to expand to a new branch or bring on more experienced staff.
Small business loans are not too difficult to get. As long as the business owner has solid credit (720 or higher is ideal), has stable income, and a good business plan, they should be able to qualify for the loan.
There are several different ways to obtain a loan. Small business owners can get loans through the bank, the government, and even alternative lenders, which are online lending services. The type of loan you pursue really depends on your needs. Be very clear in what you’re looking for. Know exactly what you need the money for, how much you need, about how long you think it will take you repay the loan, etc.
One of the most common loans small businesses apply for is through the government, which offers a Small Business Administration (SBA) loan. The government itself doesn’t loan the money directly to the business. The SBA sets certain guidelines for loans that are made by its partners (such as banks). Businesses have a variety of loan types to choose from with an SBA loan, but each loan comes with stringent rules on how the money can be used and when it must be repaid.
Banks are typically the source for the government-backed SBA loans, but they are also very often the direct lenders of the conventional loan. The major benefit of going directly through the bank rather than the government is that the bank’s loans allow the borrower much more freedom with their money. The terms for using the capital are not as narrow with the bank, versus the government, which requires a very specific plan.
As previously mentioned, there are alternative lenders out there. If a borrower doesn’t have a great financial history, alternative lenders may be a solution. Loans can often be applied for and accepted online, instantaneously. The one downside to alternative lenders is they typically charge a very high interest rate, which can be unaffordable for many new businesses.