The reality of using money to get money is not something new in the world of commerce, regardless of the size of the company. And so, if a potential owner wants to open a store, there is a universal way for many people, to obtain loans for small businesses.
However, most of the time is when potential new companies encounter the bitter reality they learn that to make money, they must invest some finances in the company to work, in most cases, entrepreneurs only have one Idea and nothing more.
This is quite true even in well-established corporations that need complicated tools, human power and location of operation, among other needs. But even smaller companies, such as coffee, will demand a significant capital investment before starting to get tangible results.
Small Business Loans
But what is your understanding of a small business loan? Are you aware of how it works? And do you know the ways to obtain funds to start your own company? To get the answers to these questions and more, scroll down.
The definition of a Small Business Loan
When I did a Google search on “the meaning of a small business loan”, you will see different definitions, but there are some aspects that will be highlighted in all those definitions. One is the owner, the money and the lender.
In a nutshell: a small business loan is a loan taken from a lender by an owner or a joint group to start a business or use it in the expansion of an already established small business. The value received is generally paid within the agreed time, along with the fees generated during that time.
A company is called small if the number of employees does not exceed 500. Therefore, if a company with less than 500 workers is operating, that means it belongs to the small business class.
How to get loans for small businesses
Obtaining a loan for small businesses is the main obstacle for companies due to the “unrealistic” obligations established by credit institutions, usually banks. However, obtaining external financing is essential when starting a startup, as it helps to grow it by covering daily costs.
While applying for and obtaining a loan for a small business turns out to be a nightmare for most beginners, if you do everything right, you will have a better chance of getting approval. So, here is a step-by-step procedure on how to obtain small business loans:
1. Set your clear expectations about why you require the loan
Wherever you are going to apply for small business loans, potential financiers will be interested in knowing how you will invest the amount in question. Therefore, you must be subjective from the beginning on the purpose for which you want the loan. The reasons will be included in the following categories.
- To start a new company.
- To meet the daily costs.
- To grow your company.
- To reserve some cash for unforeseen incidents.
2. Know the ideal loan for you
After deciding why you want the income, you are now in a better position to know the type of business loan you should apply for.
If you are starting a new business, it will be difficult to receive a loan from the bank the first year. When you submit the application, banks will ask you to provide evidence of cash flow to know that you will not fall into bad debts. As such, most financial companies disqualify new businesses from any type of support.
Now, since the first option has failed, you will have to resort to credit cards, small SACCO loans, family members, friends, unsecured loans or crowdfunding.
However, if your company has been operational for more than a year, you can provide some necessary financial statements to the lenders, such as cash flow. Therefore, you have many different financing options that you can opt for invoice factorization, SBA credits and commercial credit lines, among others.
3. Choose an ideal type of lender
Many sites offer loans for small businesses, such as online lenders, banks and microfinance institutions that are not designed to make a profit. Lenders grant different types of lower risk loans, as well as accounts receivable funds, the term of small business loans, etc.
Do you remember how you approached that showroom when you were buying your first car? Well, that’s the way you should see commercial credits. Once you reach an option to take a particular loan, compare it with other options. Loan terms and charges are the main aspects that should concern you, so you should see them as the main comparison indexes. At this point, you will want to choose the lender that offers the lowest APR, but make sure you can support the monthly payments on those loans.
You can use this commercial credit calculator to visualize the value of your monthly installments.
Consider the banks when:
- Have a good credit rating.
- Do not require money quickly.
Applying for small business loans from conventional banks is not as easy as it seems. The small business loan requirements established by these institutions can be daunting and, to make things more difficult, it is not guaranteed that you will receive the credit after going through this long and intimidating procedure. Banks generally evaluate many things, such as their ability to pay off loans, the company’s cash flow and sales capacity. However, these establishments can go further to request guarantees such as your home. All these factors combined make it almost impossible to obtain a small business loan from banks. Even when they are approved, obtaining funds is slow compared to other financing options. Nevertheless,
Use non-profit microfinance institutions when:
- You have been rejected for a bank loan since your start is small.
The goal of micro-lenders is not to create profits. They give loans to small businesses of up to $ 35,000. However, they charge a higher annual percentage rate compared to that charged by banks. To obtain these credits, you can request a plan b, an explanation of what the credit will be used for and, in addition, you can request financial reports. This makes the process somewhat longer.
While the figures are not as large as what you would receive from conservative banks, they can be quite useful for small businesses that may not be appropriated by banks due to bad credit, lack of security or less operating time.
Consider lenders online when:
- He wants the funds quickly.
- It has no security assets.
- A new company is starting.
Online lenders offer credit lines and business earnings ranging from $ 500 to $ 500,000. The APR for online creditors is impulsive, starts at 7.5% and reaches up to 110%. However, this proportion is determined by the financier you choose, the value of the credit, the term and the credit rating of the taxpayer, and whether or not the loan guarantee is desired.
However, online lenders are more likely to approve their loans, and their financing is faster compared to traditional banks. Wait to receive the amount applied within one day after submitting your request.
4. Pre-approve yourself: be eligible
To anticipate the outcome of your small business loan, there are important things to consider. First things first: evaluate your motives in terms of solvency. This is an important factor when it comes to determining your convenience to obtain loans. You can recover it from these credit agencies: TransUnion and Experian. By studying your credit report, you will discover how attractive it is for bankers to trust their finances.
In addition to credit evaluation, credit institutions will be interested in indicating the duration of their active operation. For a significant percentage of lenders to think of you, they require that your company be in operation for more than twelve months. One year for online commercial loans and more than 2 years for regular banks to take it into account.
Most fans will want to know how much their annual income is. They generally expect their company to raise between $ 55,000 and $ 250,000. Find out how much you earn and don’t stop there. Know the demands of the lender you are working with.
You must be sure that repayment of the loan is not difficult for you, but that you can settle it comfortably. Evaluate your cash flow and establish a reasonable amount that you can borrow and find it convenient to pay.
5. Put your financial documents in order
He has done most of the preliminary work, as well as assessed his status for the loan. You have also selected the right lender and the nature of the loan you want. Therefore, it is an opportune moment to execute the plan: make your request.
You must submit several forms. But here are some main documents to collect:
- Personal statements and new company.
- Personal and company tax returns.
- Financial statements of your new company.
- Authorized business forms, example, Articles of incorporation, etc.
Loan requirements for small businesses
Unlike other typical loans, small business loans are more doubtful for the lender. Because of this, to qualify for small business loans, potential owners are forced to observe a very rigorous and detailed small business loan criteria to measure their ability to pay the funds. Lenders usually accumulate a lot of tax and personal information from borrowers to evaluate before concluding. Here are the small business loan ratings that the lender trusts to accept your application:
If you plan to approach a lender to borrow some money, the key aspect you might be worried about is the interest rate you will be charged if you receive a green light. That shouldn’t scare you as long as you have an excellent credit rating that is a good rating for small business loans.
Banks use it to determine how much they will pay as interest rates. A lender will evaluate the commercial and personal credit rating. And if you are establishing a new company, there is no doubt that the only credit rating at your fingertips is your personal credit rating. Therefore, the lender uses it to determine if you can qualify for a small business loan. For an initial loan to be approved, many lenders require an average rating of 600 or more.
Income and cash flow
This shows the lenders if they can execute the loan repayment without financial problems. Therefore, it may work against you or in your favor. In general, you will need a constant cash flow to convince lenders that you will not evade payments. Cash flow generally shows the health of your company.
The years he has been in commerce
According to a study by lenders, 20% of new small businesses collapse in their first year. That explains why almost all banks and other financial institutions make it mandatory for your company to be in operation for more than a year so they can accept your request.
If your company has not operated for the past 2 years, it will be impossible for the common bank to authorize the loan. However, don’t give up yet, you can consider online lenders that will help you even without any company history.
Debt to income ratio
Lenders will want to know what your burden is in terms of monthly debts. How much of your monthly income goes to pay debts? In most cases, you want to keep your debt-to-income ratio of less than 40% to be considered for a small business loan. As expected under normal circumstances, everyone would be worried about giving a loan to someone struggling to pay off debts.
To reduce your debt-to-income ratio, pay off your debts without fail and do not take loans with high interest rates.
In most cases, many lenders want to secure their loans and, to do so, request a permanent asset that they can recover if you do not pay the amount borrowed. That is typically what is called a guarantee.
When you apply for small business loans, you will find lenders that request individual and commercial security. That is deceptively scary, exclusively for new businesses. However, not everything has been lost: some small business loans do not require guarantees. Some qualifications for small business loans are daunting.
How do you plan to use the loan
Some lenders will ask you to provide a plan for how you plan to use the loan. Some impose limits on how you can use money. An example is a credit financing team. This limits him to use the income only in the purchase of equipment. Anything outside of that use, and the request will be rejected.
The type of company in which you want to invest is also useful in deciding whether to obtain a loan or not. Often, lenders are not willing to accept loans for ventures that are considered risky. Small businesses with an unstable cash flow may not get financing from lenders very easily.
Small business loans without credit check
You may have accessed several lenders to earn profits from a small business, but all your efforts have been useless for one reason: your credit rating scares them, since they are not sure if you will pay your finances. Or possibly he already knew that his credit rating is very low, and he foresaw the shame of rejection. Therefore, he decided to seek a loan for small new businesses with bad credit. Well, here we will explain.
Where to get loans for small businesses without credit check
If you expect to get loans for small businesses with bad credit, you may encounter a momentous surprise, since that will not happen. Lenders never move on to the next stage before verifying their personal credit rating. However, not many of them are ready to give credit to new companies with only four months in the market. Therefore, the loan for new small businesses with bad credit is generally not obtained. But does that make everything lost? No.
There are options that you can use if your credit rating is low and you need small business loans without credit check to start or develop your business.
Some lenders, such as Fundbox, provide invoice financing without credit consultation. But since you need a pending invoice to finance, it may not be very helpful if you are starting your business without execution orders. To be an alternative, it must be operational for at least three months and have an unpaid invoice.
Working capital with PayPal
If you use PayPal for most of your financial transactions, you may qualify for PayPal work funds. This could be an excellent idea since your approval for the credit depends entirely on the total transactions and the sales you make, where the credit rating is not considered. For the first time, you can apply for up to $ 97,000 and up to $ 125,000 for successive loans.
Crowdfunding (Collaborative Financing)
Crowdfunding has seen unprecedented growth, especially among new companies. It allows you to get help from your colleagues, relatives and clients, as well as to raise the money required for your small business.
You can access crowdfunding sites such as GoFundMe, Indiegogo and many others and organize a virtual campaign where you can use social networks such as Facebook and emails to communicate with potential funders. Again, it allows you to get more ideas from the masses that you can use to improve your business idea.
Subsidies for small businesses
These are the best, since you don’t have to worry about shaking monthly fees. They are given for free. All you need is quality, remember that it is not easy. There are many grants for small businesses offered by the government. You just need to go to their websites and choose the one that corresponds to you.
Microcredits and non-profit organizations
If you belong to a minority group and want to get a loan to start a small business, you can consider microcredit or help from a nonprofit organization. In general, nothing will stand between you and get a loan from a microcredit or a nonprofit organization, including your terrible credit history or lack of business history.
Family and friends
When everything seems to go wrong, remember that you have the father and mother bank. Seriously, if you have an idea where your family and friends can see it done, they will be more than willing to bet on their last coin to materialize it. They are the best alternative for small business loans without credit check or even free cash.
Commercial Credit Cards
If you really don’t have any credit history and your credit rating is terrible, and you know well that looking for loans from banks would be a waste of time, then you should consider getting a commercial credit card.
Many start-ups will rarely consider this as a possible financing of emerging companies, especially if their credit history. However, for new businesses, commercial credit cards are an excellent option. Business credit card issuers typically use the applicant’s personal credit rating instead of company information as a key determinant of approval.
So, while this option may not seem so attractive, especially for a small business owner who is looking for a small business loan without credit check, commercial credit cards are more viable and available than many people think.
In such a competitive market where more than 20% of small businesses fail in a year due to financial difficulties and huge competition, small business loans are the savior that will not only safeguard your company from bankruptcy but also facilitate its growth .
Present a solid business plan, do your homework thoroughly with potential lenders and the types of loans they provide and apply for a small business loan without credit verification with confidence.
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