Small business loans are a great way to support your startup or a running SME. Here we will discuss why you should apply for a small business loan and how you can get it.
If you are applying for a small business loan when you first start your business, you may be hesitant to complete the process again. Getting a start-up business loan can require a 20% to 30% down payment, and lenders typically conduct a lot of review of your business plan. But if your business has a track record of success now, this process may be much easier.
What is a small business loan?
Small business expansion loans are for mature businesses. Funding for expansion loans can allow you to expand your business or keep pace with growth.
“The requirements for a startup loan are not that difficult,” said John Fleming, director of the Delaware District of the US Small Business Administration. “A lot of times, you can get an expansion loan without any cash injection.”
Before you begin the process of finding a lender, however, you must have a cash plan and make sure that borrowing is a good idea. In this article, we will discuss the benefits of using loans for businesses and the popularity of this type of startup financing.
Why apply for a small business loan?
Easy to arrange.
Large banking organizations have long-established a procedure for obtaining a loan for business. To receive funds, you will only need to collect the necessary documentation package and wait for the bank to make a decision; this usually takes up to three days. More in-depth inspections of entrepreneurs are not usual.
It is convenient to apply for loans.
It is no longer necessary to personally visit the bank’s office, fill out the application on the official website of the credit institution and wait for prior approval.
Long term loans.
It depends on the purpose for which you are applying for a loan. The extension of term is maybe because of a decision adopted by a banking organization.
If you have the property that can act as collateral, then the interest rate on loan will decrease to 12-15%; this is significantly lower than with conventional consumer loans.
Retention of title
Some startups collaborate with private investors who inject money into these projects to accelerate the growth of companies in exchange for participating in their capital. With equity financing, the owner of the company ceases to be its full owner and independently control his business. Another thing when it comes to the use of credit. This option allows you to maintain ownership of the company.
Final repayment option
A bank loan is a debt. This financial liability is temporary and ends after full repayment of the loan. However, if you resort to equity financing to pay off an existing loan, you will have to share future profits with your investors until you buy back their shares.
Minimum Legal Formalities
Did you know that the procedure for issuing a loan to refinance business is simpler than the procedure for registering startup equity financing? Equity investor involves compliance with many formalities. These include issuing shares, holding regular shareholders meetings, and regular correspondence with all your investors.
Working capital increase
A loan for the development of a startup taken from banks or any other credit organizations is repaid in monthly installments, which simplifies the planning of an enterprise.
The absence of other participants in the capital of the company allows its owner to manage all profits single-handedly. Lending allows you to gain time and significantly accelerate the development of the company. You, being the sole proprietor of the company, yourself are reaping the fruits of your success in the form of profit received from the investment of credit funds.
How to ensure a business loan is a good decision
Your reasons to apply for a loan should always be smart. Understand your motivation. Just because you can borrow money for your business does not mean you should.
Make sure you can manage growth. Even if your expansion idea is profitable, it is important to be clear how you will manage your new product line, location or team. If you are the sole business owner, you may need to hire a partner or someone with management skills to avoid burdening yourself.
What to Consider?
Every company, large or small, needs extra money in specific periods in its life cycle. One of the alternatives you have is to go to the banks to request new funds.
There are many good reasons for a small or medium business (SME) to request a business credit or request the extension of your credit line.
However, before making the request, it is good for the SME owner to evaluate the status of various aspects of his business, since the financial institution will request documentation and proof that the company is working well, such as:
- Accounting and tax statement
- Annual results
- Growth projections
- Market situation
- Business flows
Many times, SMEs apply for loans while in situations of financial loss or over-indebtedness, and this decreases their chances of obtaining the loan.
Here we explain the factors that an SME must take into account before requesting a loan:
1. Credit history.
If the owner of the SME has a valid credit and pays it within the stipulated deadlines, his “financial life history” will play in his favor when he goes back to a financial institution to request another loan.
However, if the payment of the debt is normally out of time, with delays, partially, breaching the conditions, etc., this damages the financial history.
Although the person has been in the bank for years, or has requested many credits and has paid them all, it is the habit that counts.
Therefore, a bad credit history will pass the account the next time you ask for a loan. Switching to a new financial institution or going to another executive who does not know this background is a temporary solution that will only prolong the problem.
2. Current credit.
SMEs that already have credit lines or business credit cards must assess the status of these available funds, the associated guarantees and backups, and ability to pay before applying for a new loan.
Normally, companies go to the bank when they have already collected the credit card or their line no longer gives, or they are late with payments on their current debt.
If this is the case, the first thing the institution will do will be to evaluate the financial history (point 1) of the company and how many debts it has.
In case the bank evaluates to consider the possibility of lending it money again, it will request new guarantees that it will be able to repay the new loan; this includes equipment or other assets of the company. This point is very important: if the SME cannot fulfill the guarantees of the new loan, it risks an embargo in case of non-payment.
An additional fact: sometimes, the owner of the SME asks for another loan because he can no longer pay the debts of others; dependents, associates or partners. The bank is unlikely to risk giving money on these occasions.
Many times, SMEs apply for loans while in situations of financial loss or over-indebtedness, and this decreases their chances of obtaining the loan. When it responds to impulses, the SME does not make a sufficient capital contribution for the purchase of this investment and seeks to finance everything through credit. Normally, this is evidence of the poor financial organization of the company.