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Small Business Loans: A Quick Guide
Having a clear vision of your business and the funding you will need is essential for getting your small business loan approved. Once you can define what type of loan and repayment plan will be best for you, finding funding for your small business shouldn’t be too big of a problem. But first it is important to compare the types of small business loans available and choose the right one for your situation.
Types of Small Business Loans
The type of loan you choose to take out will depend on the amount you need to borrow, the length of the repayment term, the frequency of payments, and if you require a loan for specific purchases or investments.
- SBA loans are loans granted to small businesses that are backed by a specific set of government guidelines. According to SBA Loan Stats, these types of loans include 504 loans for expansion and refinancing, 7(a) longer term loans for up to $1 million, and mirco loans for small business owners. SBA 504 approval volume grew 39% or $1.9 billion in 2011.
- Lines of Credit can be used to finance your small business as a type of business loan. Credit lines should only be used for relatively small purchases, however, and should be paid back regularly to avoid credit card debt. Revolving lines of credit automatically renew once the amount is paid in full.
- Specialized loans can be granted for specific types of purchases such as equipment financing, agricultural expenses, or construction or real estate financing.
Getting Your Loan Approved
Your personal credit is the first benchmark a financial institution examines when deciding how much of a risk your loan would be to finance.
Make sure your personal finances are in order before approaching a lender by paying off old debts and getting your FICA score up, so that you can get the best rate possible. Be sure to get your credit report from at least three major online credit score providers, and be sure they don’t contain any errors or inconsistencies.
Your business plan should be well written and you should have a thorough understanding of its contents. A lender wants to lend to someone who is not only knowledgeable, but also passionate about their business venture. Knowing your business plan gets both of these points across. Be sure to include a detailed summary of what you intend to spend each dollar of the loan on, and how you are planning to pay off the loan through revenue. Include relevant projections and detail about how you will save for when the market isn’t as strong.
Don't give up! Just because you get rejected once for your business loan, doesn't mean someone won't give you the money eventually. Small bank lending approvals were at 47.4% in July 2012 and alternative lenders approved 64.5% of loan requests according to Biz2Credit Small Business Lending Index. Ask for the specific reasons why you were turned down and adjust your pitch your future meetings.
Questions to Ask Yourself
- What is my personal credit score? If you're not sure, you should get a free credit report with one of our qualified reporting vendors and find out. You may need to do some cleaning up before applying for a loan for your business.
- Do I have a plan? Make sure you can provide a complete business loan to present to the lender that includes all of the details about your business.
- What repayment terms am I comfortable with? Make sure you know your limits and what you are able to repay per month.