If there is one thing that business owners always think about, it’s how and where they can get financing for their business. It can be scary to have a good idea for a business but no money to start it or continue to grow it. Until your business is up and running and making a consistent revenue stream, it’s unlikely that a bank will be interested in you. The good news is that nothing should stop you from trying.
Most lenders think that entrepreneurs who are just starting out are high-risk, which makes it hard for them to get loans. Small business loans can be a sensitive topic, so here’s an article to help you mitigate every bit of the challenge.
The Best Business Loan Options for $40K
Nav wants you to have the best financing options for your business. These options include:
- Credit cards
- Personal business loans
- SBA 7(a) Standard Loan
- SBA Express loans
- SBA 504 loans
Some great credit cards that Nav suggests for small businesses include:
Personal business loans
There’s been an emergence of online lenders in huge numbers offering business loans. These are actually personal loans, but the loan amount can be used by the individual as they please, including investing in their business. These loans contribute to your credit score. It is therefore important that you pay them as fast as possible so that you improve and have good credit reporting to avoid a bad credit score.
What is the not-so-bright side of personal business loans? Well, the interest rate might kill your interest in small business financing or other types of loans. You have to be disciplined and know how to juggle personal and business needs since these personal loans are used for business. The good thing is that this is a short-term loan that works well for new businesses whose owners have a good personal credit score.
Other options you may consider for getting a business loan of $40,000 include:
- Merchant Cash Advance
- Traditional bank loans
- Equipment financing
- Invoice financing
- Commercial real estate loans
- Cash flow loans
- Business line of credit
SBA 7(a) Standard Loan
This is a flagship loan from SBA, the U.S. Small Business Administration, where you can get up to $5 million. This makes it great for business. SBA 7(a) loans are available to startup entrepreneurs, but there is one catch. You have to ensure that you have a fantastic credit score and that your financial reputation is squeaky clean. There are cases where you will be required to provide collateral and even pay 10% as a down payment. The lender bank also requires that the business owner show proof that they have the required business management experience. SBA loans are only available to established small businesses that can provide collateral as security to the lender. This does not mean they operate like traditional banks. It is just one of the requirements of the loan application process.
SBA Express loans
The application process for an SBA standard loan can take several months to process. To mitigate this as one of the funding options, the SBA Express Loan was introduced. As the name suggests, borrowers who opt for this as one of their financing options will get a response within 36 hours. The eligibility requirements to be considered for a loan amount are similar to those of SBA 7(a) loans. The only difference is the maximum loan amount that small business owners can get, and that is $350k. When it comes to SBA Express loans for business financing, only a limited number of offline and online lenders are eligible to participate.
SBA 504 loans
It may be categorized as one of the best small business loans because it goes above and beyond working capital operations. The SBA 504 loans allow you to purchase fixed assets for your business, for example, land or equipment. This loan covers up to 40% of the asset value, and a personal guarantee is a must. A high number of regional and national small business lenders are participants in the SBA program, so before heading to the bank, why not approach SBA to get to know your startup loan options?
How to Qualify for a $40K Business Loan
Since there are different ways to finance your business, it’s important to know the qualifications you must meet before gaining access to the funds. Here are a few funding options and their eligibility requirements.
Different financial institutions will have different lending requirements, but the three major eligibility requirements are:
- Credit scores
- Time in business
- Cash flow
It’s better to adequately prepare yourself before applying for any business loan. Additional paperwork you’ll need includes:
- Business tax returns
- Personal tax returns
- Business bank statements
- A business plan
- Financial projection
- Application certificates, articles of incorporation, and relevant licenses
Having all these documents ready prior to your loan options search lessens the headaches throughout the entire process. Most traditional lenders working with the SBA will ask for almost all the things mentioned. Online lenders normally opt to check your credit status.
Determining How Much Financing You Need
A business loan is essential to many small businesses that need working capital, equipment, or to pay off their debts. Every loan comes with different annual percentage rates(APRs), terms, and loan amounts. This could also result in different amounts of monthly payments. Comparing rates and terms can be a lot to go through. Crunching complex figures is not a simple feat, hence the need to work with a good business loan calculator to be able to estimate your payments.
Some lenders or financial institutions may also inquire why you likely need the loan and how you plan to use it. The question may be whether you need the funds for expansion or are you refinancing a loan, etc. Do not be tempted to ask for more than you need. Remember, there are interest rates during repayment.
Come up with a detailed list of all the things you need to purchase and their estimated cost. For example, will you be hiring employees? If yes, then document how much each employee will be paid. Write nothing down until you have actively researched it. From this, you update your financial projections and estimate how much you need and when you will be able to pay it back.
Your loan can be used for many things your startup may need, but identifying the loan amount comes down to seeing those needs as a whole. This can also include:
- Working capital
- Marketing and advertising
- Equipment purchases
- Purchase of real estate
- Paying off debts and more
Once your expenses are in front of you, this can jumpstart looking into small business loans and their eligibility requirements. Based on the application process, loan term, and repayment schedule, you can decide the best amount that will help your business and not push you into bad debt.
Determining How Much Financing You Can Afford
A small business loan does not require an APR to be disclosed. It is also true that most business owners might not be familiar with the terminology used in lending, hence making it difficult to compare the cost of other options on the table. Once again, do consider a business loan calculator to help you translate the loan terms into figures so that you can understand if you will be able to afford loan payments.
Ensure that you also understand the following terms:
1. Origination fee
Also known as the origination point, the origination fee is the amount paid to the lender to process the loan application. A borrower will have to agree to pay this upfront so that the loan is set up.
Underwriting refers to the process where an institution takes responsibility for financial risk at a fee.
3. Repayment schedule
This allows you to identify whether you will pay back on a monthly, weekly, or daily basis. A repayment schedule is structured to fit your level of financing and is important to adhere to so that you can avoid penalties or a dip in your credit score.
4. Credit reporting
Find out how the loan will affect your personal credit. In addition, look into how to establish business credit.
The verdict remains that being consistent is the best option for obtaining a $40k loan for your business. Try all the funding options available, especially small business loans that have the criteria suitable for hitting your financial goals. One way or another, you will find what suits your business needs, and Nav is here to help you do just that.
This article was originally written on June 21, 2022.