Small and medium businesses (SMB) may not employ the most people or generate the biggest profit but they provide the majority of job growth in America and employ over half of the private sector workforce. So how do these businesses get started from the ground up? Unless the owners have a large source of capital already or receive money from friends or relatives, their initial finances are usually secured through a business loan to get their operations up and running. Here are 10 things you should know that most don’t about business loans.
Federal assistance is available
The federal government has a dedicated department to assist small business owners in securing financing. The Small Business Administration (SBA) employs various programs which guarantee a portion of the loan to reduce risk to the bank and therefore, increase the chance of the loan being approved. In doing this, the business owners must commit personal assets to also guarantee the loan.
SBA loans give instant credibility
Since this business loan is guaranteed by the government, business owners are given instant credibility by those they borrow from. This opens them up to apply the new funds to purchasing equipment and inventory, financing improvements to their business, refinancing any debt they currently have, or getting a line of credit for further purchasing power.
There are different types of government backed business loans
There are different SBA loans tailor made for various business needs. A 7(a) loan guarantee program is a basic loan that can provide up to $5 million in funds. The MicroLoan Program is a short-term loan to acquire immediate needs such as inventory, supplies, or equipment. The 504 Fixed Asset Program aids businesses whose aim is to benefit their community with services or employment.
Business credit vs personal credit
Some owners attach their personal credit to their business but that is not advisable. For one, if the business experiences shortfalls or fails, it can have a negative effect on the owner’s personal credit and ruin his ability to do other non-business related financing. A linking of personal and business credit can end up sinking both. It is better to do business loans using just business credit.
Bad credit, pay more
All is not lost if the business owner has bad credit but it will cost him more. More collateral must be provided up front to offset the risk to the lender. Alternative lenders will be more flexible when it comes to the agreeable terms of the loan. Although, it will cost the owner much higher interest rates, which can become a real strain when a business is just starting out and isn’t making much of a profit.
Small business, small banks
Large banks are usually interested in well-established national companies who already have a massive stockpile of assets and collateral. There’s much less risk and a much higher payoff since larger loans means higher interest, all profit for the bank. With a small business, there is not much initial profit, and there is a high failure rate. Smaller banks are looking to expand their clientele, and are therefore, more likely to be interested in investing in a small business which could end up being successful.
Interest rates are mostly reasonable
Ignoring alternative lenders, main line banks working with the SBA are locked into maximum ranges from 3.98% to 4.54%, dependent on the loan size and amount. These lower rates are more doable for startup business looking to grow.
Know what you need
Asking for too much can make it more difficult to acquire a loan. A bank might be scared to put forward a large sum of money to something that doesn’t even exist as a self-sufficient entity yet. The smaller the amount, the greater chance the borrower will be able to get the loan.
Do your own due diligence beforehand
Before being approved for a business loan, the bank will be sure to do its due diligence to ensure its money is going to a good place. Therefore, it is best for business owners to ensure their website is up to date, they have a presence on social media, they check and follow up on any reviews written about their business on sites such as Yelp, and they double check their posts to see that they are professional and appropriate.
Acquire free professional help
First time business borrowers do not have to go into the lending process alone and uninformed. There are plenty of free resources available that provide professional help to guide you through the process. SCORE is an organization that provides free business mentors and experts in various fields of business. With over 900 locations in the United States, Small Business Development Centers, or SBDCs, can administer free advice and assistance as well.
SMB loans are an absolute necessity for most small and medium businesses just to maintain operations. Being prepared and doing the appropriate research beforehand can give you the best results. If you are looking for a business loan and want to compare rates, try Magilla Loans. It’s fast, free, and anonymous.