How To Get A Small Business Loan
So, you need some capital to get your business started or to grow your existing business and you want to know how to get a small business loan.
First, let’s be clear: a big part of a lender’s decision to give you a small business loan is based on your personal credit history. Unless you are an established business with a long credit history and sizable revenues and cash flows that can clearly support debt repayment, the lender assumes that the loan is as much to you as it is to your small business.
What are the implications of the lender believing that they are lending to you as much as they’re lending to your small business?
Most importantly, the lender will look to see that you have a good credit score and credit history. Before giving you a small business loan of any size, they want to see that you have a history of responsible borrowing and repayment.
Also important though, is that you understand that the lender is likely to want you to provide not just your personal guarantee on the loan, but they will also want you to promise as collateral specific assets that you own outright or have substantial equity in. This could, and often does, include putting your home up as collateral for your small business loan.
Next, you need to understand that by lending you money, typically the lender’s only real upside is that you pay them back the principal that you borrowed, plus the interest that you owe over the period of the loan. Since they’re not equity investors in your business, unless there is some kind of equity “kicker” on your loan (such as warrants to purchase shares of stock in your company at a certain price), the interest you pay to the lender on your small business loan is the only “profit” they’ll see from the deal.
So, if the lender is not going to see any upside other than the interest you pay, and your startup or otherwise “small” business is considered a fairly (or very, depending on the situation) risky investment, you can assume that you will be paying a relatively high interest rate to borrow money. That said, if you can obtain an SBA loan (a loan that is largely — usually 80% — guaranteed by the Small Business Administration), which greatly reduces the risk to the lender should your business default on the loan, you will typically enjoy significantly lower interest rates.
Finally, for now, realize that going to a large bank, such as the one where you likely have your checking account and possibly your mortgage loan, is not necessarily the best route to go to obtain a small business loan. While it may work out fine for you, you will likely go through a much more stringent and time-consuming underwriting process, with a lower probability of success in obtaining the loan. The situation may improve a bit if you are seeking an SBA loan, as some of the larger banks tend to be big players in that space and for certain SBA loan programs may even have a streamlined application process.
Often though, it may be more efficient and effective to make the initial foray on seeking your small business loan by looking to online lenders. Such an approach may lead to higher interest rates, so be careful to completely understand what all the costs of your loan will be (origination fees, closing fees, interest, collateral at risk, etc.) before you sign on the dotted line. That said, the requirements of online lenders are sometimes not quite as stringent as those of the larger “brick and mortar” banks, so if your credit or other underwriting factors are not as strong as they could be, an online lender may be your only choice. The list of such potential lenders for small business loans is long. At present, it includes the following lenders, among many others:
For more information on SBA small business loan programs, check out:
https://www.sba.gov/starting-business/finance-your-business/loans/sba-loans
Whatever loan programs you consider and whichever lenders you investigate, make sure you do your homework and make sure you very clearly understand the terms and conditions of the loan fees and repayment schedule and costs you are committing to! This is a very important decision for the future of your business and for your financial future, so you don’t want to overlook key details in a rush to get the loan funds in the door.
Also, realize that there are other ways to fund your startup or existing business, besides small business loans, so before you commit yourself to a particular funding source, make sure you have explored and understand all your options for raising capital.
