- Many small business owners turn to small business loans when they need business financing to start or grow a business, increase working capital, or improve cash flow.
- There are a number of different small business loan options, including those from the U.S. Small Business Administration (SBA), business term loans from banks or credit unions, real estate loans, short-term loans, working capital loans, equipment financing, and more.
- The type of small business loans you consider for your small business will depend on your eligibility and what a lender is willing to give you, as well as your industry and business model.
- It’s important to understand how your credit scores and other factors can affect the types of loans you can get, how much you can borrow, interest rates, and repayment terms.
- Read on to learn more about how small business loans work.
How Can a Small Business Get a Loan for a Beginner?
Entrepreneurs who are trying to start a new business may consider several different types of business loans. It can be more difficult to get traditional loans or SBA loans as a startup or beginner business owner because many of these loans require you to have been in business for a certain amount of time to qualify (at least six months, in most cases).
Online loans may be easier for a startup or small business without much business history to get, although they tend to come with higher interest rates and shorter repayment terms. Online lenders tend to have a shorter application process and quicker funding times, and they may not consider your credit report as much as more traditional loans. Microloans, crowdfunding, and grants are other ways that a new business may consider getting funding, too.
How Are Small Business Loans Paid Back?
Understanding repayment is a big part of knowing how a business loan works. A small business loan is paid back in much the same way any loan is paid back: Usually the business pays a set amount each month, which will cover the premium (the original amount they borrowed) plus interest. These monthly payments continue until the entire amount is paid off over the term.
Some loans or other types of financing may have other repayment terms, such as merchant cash advances, which are paid back daily from credit card receipts. There may also be fees or other payments that the borrower will need to pay. All of this will be set by the lender and agreed upon by the borrower when the loan is originated.
Can I Get a Business Loan With No Money Down?
You can get a small business loan with no down payment or money down. Generally these secured loans will require you to offer collateral, but not always. They will probably also have higher interest rates, shorter repayment periods, and may include other fees, so it’s important to understand the terms fully before you agree to take one out.
How Much Will the Bank Loan Me for a Business?
Banks have different qualifications to determine how much they’ll be willing to lend to a business. The loan amount that an individual borrower can take out in a business loan depends on a number of factors, including:
- Personal and business credit scores and credit history
- Business history, including time in business
- Annual revenue
- Other debt or liens
- What kind of loan it is (SBA loans vs traditional loans vs short-term loans)
- The business plan
- The business industry
You will probably need to supply your bank statements, tax documents, and other information during the business loan application process so that the bank can determine what you qualify for. Credit scores are by far the most important way that most financial institutions determine your creditworthiness — which is basically a rating of whether or not you’ll be able to pay back the loan — but financial statements, tax returns, and a business plan can also show your company’s likelihood of being profitable.
What Happens When You Can’t Pay Back a Business Loan?
Being unable to pay back a business loan is a scary prospect for any business owner. Depending on the type of loan and the type of lender, as well as your business structure, you may be personally liable for any unpaid business debts. This means that the bank or lender can go after your personal assets, such as your house, car, and what money is available in your personal bank account or even retirement savings. This type of asset seizure will happen if you default on a secured loan, meaning you put up personal collateral to get the loan. For an unsecured loan, the bank will still go through the collections process to try to get some of their money back, which is when your personal assets can come up for the taking, even if you supplied a personal guarantee to get the loan.
Having a loan in default can also tank your credit scores, including your personal credit score. While most financial institutions don’t report most business transactions or events to the personal credit bureaus, the types that they do report tend to be negative, such as missed payments or defaults. Bad credit can limit your ability to fund a new business, get business credit cards, or even get personal financing for mortgages, cars, or other assets.
However, if you are struggling to pay back a business loan, the best thing you can do is talk to your lender. Most banks and other financial institutions would rather renegotiate your payment and get some money back than have you default.
Even with SBA loans, which are backed by the federal government, the financial institution will try to get their money back from the borrower before they call in the guarantee. Banks will always follow their normal procedures on collections, meaning they’ll try to get as much of the borrowed money back from the lender before seeking other routes.
What Are the Easiest Loans to Get Approved For?
There are a number of different loan programs that may be easier for you to get, depending on your business needs, than a traditional loan. Some financing options you may consider include:
- Business line of credit
- Short-term loan
- Business cash advance
- Invoice factoring
Many business lenders who provide these types of financing have lower requirements, such as a lower credit score, annual revenue, or time in business requirement.
The easiest way to get approved for any business loan is to have good credit, so it’s a good idea to learn how to establish business credit and start building it today. You may also consider business credit cards, which can help you improve your cash flow while also building your credit.
Can a Bank Ask Where You Got Money?
When you apply for a small business loan, you’ll have to answer a lot of questions about your business finances, and yes, a bank can (and in most cases, must) ask where your money came from. If they can’t tell from your tax returns, financial statements, or other business documents where money came from, they need to know that it isn’t part of a money laundering or other suspicious transaction.
If you’re looking for small business financing, Nav can help you find the loans and other financing that you’re most likely to qualify for. Use Nav to find out how a small business loan works, determine your eligibility for different financing options based on your business’s data, and apply with confidence.