Every day, business owners across America need small loans to help keep their business running. Sometimes these are short term loans, just to get the company through cash flow troubles for a few months. Conversely, some need small personal loans or auto loans to help improve the business and take things to the next level.
If you’re a small business owner and you’ve been thinking about securing a small loan, there are plenty of places where you can turn to for help.
Why Might Your Business Need Small Loans?
Before looking at short term loans, you need a clear understanding of your needs and financial situation. Borrowing money is a normal part of running a business. However, to get the short term loan you need is often based on your credit, collateral and financial statements.
Depending on your situation – including the length of time your business has been in operation and your cash flow – some funding sources might not be feasible. That’s why, when it comes to finding the right funding situation for your needs, it is essential that you consider all options.
It helps to have your financials, credit history, business plan and reasoning as to why you need the loan on hand, so that you can get a full idea of all of your options. Also, as you do your research, be aware of added costs including origination fees, interest rates, and late fees on installment loans so you have the full picture as you move forward.
Many small business owners turn to banks and credit unions to secure small loans. Often times, one of the first places to look is where you currently have business banking and checking accounts.
Banks also offer a variety of financing options, from short term loans to auto loans and small personal loans to lines of credit. The issue many small business owners run into with financial institutions, is meeting their strict lending standards.
Typically, banks will require you have good credit and collateral – at the minimum – as well as a demonstrated source of cash flow from the products and services your business offers. Any problems there and you’ll likely be denied.
Time can also be a factor. Securing small business loans from banks and credit unions can take anywhere from approximately two to six months. If your business has more immediate cash flow needs, you’ll want to take that timeframe into account. Another thing to take into account is that many banks will not provide loans below a certain threshold, as the return for much small loans is not enough of a profit for them.
Small Business Association
The Small Business Association (SBA) is a department run by the Federal Government specifically there to help small business owners throughout the country.
There are a few popular SBA loan options. The most common is the SBA 7(a) loan program. In this case, the SBA doesn’t provide funding for entire loan amounts, but does agree to guarantee a percentage of it. That guarantee encourages lenders to accept your application.
Also, the SBA has options for short-term microloans, which offer funding up to $50,000 and have slightly more flexible terms. These are often run through Community Development Financial Institutions (CDFIs), as well as some local non-profit organizations.
One thing to note about SBA loans is, like traditional bank loans, they tend to take longer to process. These loans also have specific terms and conditions to pay attention to as well. So, if you’re in need of quick cash, take that into consideration if you apply.
Today, banks aren’t the only alternative when it comes to lending for small loans. Online lenders also provide funding for cash flow and other small business loans.
Often, online lender guidelines aren’t as strict when compared to traditional financial institutions. This can benefit small business owners, especially if the business is still growing, you lack a lot of collateral, or your business has a shorter credit history.
In terms of loan options, online lenders sometimes offer traditional small business and SBA loans, as well as lines of credit. For a lot of small business owners, a line of credit is an attractive alternative. Some of the issues that usually slow down an application process – including poor credit – are not typically used as a final deciding factor with online lenders. Plus with a line of credit, cash is often quickly accessible.
Online lenders also offer a bit more flexibility, especially when it comes to loan sizes (some will provide financing in amounts as little as $5,000), terms, timing, and repayment options. Most small business loans can be approved in a few days versus a few months. Plus, monthly payments or installments can be based on your business’ existing cash flow.
If your business is in need of a small short-term loan, microlenders could be an option. As mentioned above, many banks tend to believe loaning such small amounts unworthy of their bottom line. Microlenders often provide loans up to around $35,000 for small businesses that’re in particular areas or serving specific community needs.
Even though microlenders loan smaller amounts, they generally require detailed information about your business. That can include financials, credit history, cash flow, and business plans. The loan application process is based on the amount of information required, so it’s usually not an option for fast funding.
For business owners who are in the process of upgrading or lack collateral and only need a small amount of cash, this is another alternative.
Crowdfunding and Peer to Peer Lenders
Alternative funding has grown in popularity over the years. Two of these alternatives are crowdfunding and Peer to Peer (P2P) lenders. Although the terms are often used interchangeably, there are differences.
Crowdfunding is a way for a small business to raise money by asking people to provide funds in exchange for equity or future repayment. Equity crowdfunding is when a business sells a share or percentage of the business to investors. This type of crowdfunding is often used by businesses that grow quickly. Repayment, or debt crowdfunding, follows a similar approach to traditional small business loans. Here, the business owes money back to the individual lenders at a set (agreed-upon) interest rate for these deals.
P2P lending most closely follows the debt crowdfunding model. It’s a way for investors to provide cash flow. The business will pay the funds back, with interest, over a set time frame.
More established businesses with a steady cash flow to repay the debts monthly can consider these alternatives.
Business Credit Cards
While it’s not exactly a traditional-style loan, you might also consider getting a credit card for your small business. If you need only a small amount of cash relatively quickly and have the cash flow to pay your card’s balance down, it’s another option.
Many cards offer low introductory rates or balance transfers from other cards for a set period – usually up to 18 or 24 months. Sometimes, these cards have special perks or membership benefits and discounts that you can apply to your business.
Using a business credit card is another way to help separate your personal finances from your business finances. Additionally, it could help build up positive credit reports for your company. After all, having a strong business credit score can be the deciding factor when it comes to loan approvals.
You Have Options
Securing a small loan (or any size loan for that matter) is usually stressful for a business owner. However, it’s important that you understand there are a variety of options out there. Just because you might not fit the traditional requirements for lending, doesn’t mean it’s not possible to get the funding you need to help your business grow.