How to Get a Small Business Loan

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Most entrepreneurs require a small business loan to get the money they need to start a business or to finance capital improvements in their existing business. 

The U.S. Small Business Administration (SBA) will go a long way to helping small businesses get the loan or venture capital they need. They have very strict requirements for eligibility that are based on how the business receives its income, where it is located and the character of its ownership.

Many banks want to give small business loans, but they also have strict standards for borrowers, and the more organized an applicant is, the better chance they have of getting the loan. 

Some things to consider before applying for a loan are:

• The small business needs to have made a profit for the last three years to qualify for an SBA or bank loan. The credit history of the business also needs to be good. 

Most banks require the owner of the business to personally guarantee the loan, but if the business has enough collateral to cover the principal of the loan, the lender will most likely not require a lien on the owner’s home.

• The small business owner should clearly express why they need the loan. It’s important for the borrower to tell the loan officer about future prospects, if their industry is experiencing growth or if they are planning to join with a successful partner in the near future. 

They need to make their case to the loan officer. This will give him or her a better picture of the risk of giving the loan as well as an idea of the determination and enthusiasm of the borrower.

• Even though it may take longer to get the loan because of bureaucratic paperwork, it’s worth looking into getting help from the SBA. They offer a program where 80 percent of the loan is guaranteed by the government, which will make a bank much more likely to give a loan. It is also recommended to ask for a loan from a small community bank rather than one of the huge national bank.

• If the business owner doesn’t have the required three years of profit or enough collateral to cover the amount of the loan, they may not be considered for a business loan by any bank or the SBA. In this case it may be advisable to find alternative financing.

Factoring and asset-based lending are two ways to get money, but the interest rates on these types of financing is much higher than on a regular business loan.

The SBA offers six steps for getting a small business loan:

• When selecting a lending institution, the borrower should look at the criteria of the institution for making a loan. There are different standards, but most banks require that the loan be for sound business purposes and not for gambling or speculating.

The business owner and the partners must be of good character with good credit history and be personally invested in the business, and the business must show the ability to repay the loan.

• The information that most lenders require is business and personal credit history and financial statements as well as a good business plan, at least one year of cash flow projections and the personal guarantee from the owner and partners.

• Borrowers should be well prepared before submitting a loan application. They should select the best lending institution, choose a bank that already knows them, consider community banks and credit unions, talk to a lending officer before starting the process, and make sure they bring everything the lenders require.

• Borrowers should have a good idea of how large the loan needs to be to be beneficial for them and also within the lending limits of the lending institution. Loans can range from $5,000 to $250,000. The SBA loans range from micro loans of $5,000 to the largest guaranteed loan of $5 million. The average loan is about $371,000.

• Start-ups have the most difficulty getting funding because most lenders want to see a history of profits, which is why many start-ups look for funding from family members and friends.

However, if the owner’s credit is good, and he or she has a good business plan as well as personal resources and collateral, there are community banks and credit unions may consider giving a loan.

The best place to start looking for a loan is the SBA website. They have a wealth of information for small business owners from every industry and may be able to offer an 80 percent guarantee for a loan that will make it much easier to get approval from a bank.

They have several programs such as microloans, real estate and equipment loans and disaster loans to help small business get on their feet and make a profit.

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