How to Get a Small Business Loan in 2021

Mar 10, 2021 | 0 comments

A small business owner, a tailor, looks at her laptop while listening on her phone as she writes something down.

Sometimes it takes money to make money. It’s cheesy to say, but oh so true in the world of business. When you’re running a small business, having extra cash on hand can really come in handy. Whether you want some startup funding to get the ball rolling or need a little help to cover payroll while overcoming a temporary challenge, a small business loan can help you get the job done. Let’s dive into how to get a small business loan, where to find one, and what your alternatives may look like. 

Where to get a small business loan

If you’re not sure where to start when looking for a small business loan for the first time, there are a few different paths you can pursue. Small business loans are often available at banks and credit unions, as well as online lenders or alternative lenders. Each one of these sources may have different offerings and requirements, so let’s take a look at what you can generally expect when dealing with each.

Banks and credit unions 

The same financial institutions you do your personal banking at may have small business loans available. Of course, you can look outside your usual bank or credit union as well. However, if you’re in good standing with your bank regarding your personal accounts, that can work in your favor when applying for a small business loan. Both banks and credit unions tend to serve larger and more established businesses, but that doesn’t mean small businesses can’t fit into those categories. Especially, if the bank or credit union has loans backed by the U.S. Small Business Association (SBA)—these are known as SBA loans. Loans backed by the SBA lower the risk for the lender, so it can make it easier for newer small businesses to take out a loan. 

Online and alternative lenders

Nowadays, you don’t have to stick to traditional financing methods. Online lenders and alternative lenders (like peer-to-peer lenders) can offer similar products as banks or credit unions, they just do so without offering in-person access to customers. If you prefer to do your banking in person, an online lender may not be the best fit. However, a lot of online lenders offer more flexibility than brick-and-mortar banks, which can be a good fit when starting a new business. There are also peer-to-peer small business lenders that can be found online where you can connect with investors looking to support small businesses. Peer-to-peer lending typically has less stringent criteria than when working with a big bank or credit union, but because the risk level can be high for lenders, you may have higher interest rates than you would find with a traditional business loan.

Types of small business loans

There are a few types of small business loans that may be available to you. Each has their own unique benefits and downsides, so you’ll need to think carefully about which type is best for your business.

Business line of credit

A business line of credit works similarly to a credit card and you can use it to make purchases for your business such as stocking up on inventory or paying for ads. This form of credit comes with a maximum limit you can borrow and what’s helpful is that if you don’t borrow the full amount, you won’t pay interest on any money not borrowed. 

Business term loan

A business term loan provides borrowers with a lump sum, as well as a fixed term and repayment amount. Payment will include both interest and principal payments. 

Invoice financing

Some small businesses struggle with cash flow while waiting for invoices to be paid. If this is an area you struggle with, invoice financing (also known as factoring) can help by allowing you to sell your unpaid invoices to a lender at a discounted rate. 

Merchant cash advance

A merchant cash advance provides borrowers with a lump sum that is based on their predicted future sales. This form of financing typically comes with high fees and may take a cut of your sales on a daily or weekly basis. 

How to apply for a small business loan

The application process for a small business loan will vary a bit by lender, but generally you can expect to need to present the following supporting documentation during the application process. 

  • Information about your personal background
  • Resume
  • Business plan
  • Income tax returns for the past two years or more
  • Documentation regarding any past and current business loans
  • A minimum of 12 months of your personal and business bank account statements
  • Documentation that supports the cost and value of any personal or business property that you may want to use to secure the loan
  • Your plan for how you intend to use the loan
  • Debt schedule
  • Legal documents such as: licenses, leases, articles of incorporation, and contracts

It is also likely that lenders may want to run a credit check during the application process. Your credit history and score can affect how easy it is for you to get a loan, as well as the loan amount, interest rate, and repayment terms you’re offered. 

There’s a good chance your personal credit score will be evaluated, especially if you’re starting a new business, but if you have a business credit score, that may come into consideration as well. There is no one set minimum credit score that you must have to get a loan, but generally the better your credit score is, the better rates and terms you’ll be offered. 

If you have a low credit score, getting a secured business loan may be an easier path to take, as lenders will have your collateral to help lower their risk level. 

Alternatives to small business loans

If a small business loan does not feel like the right fit, entrepreneurs have a few other options at their disposal. 

Alternative online financing

Fundbox provides approved business owners with access to the capital they need to support their business, whether that be by purchasing equipment, paying bills, or overcoming cash flow gaps. 

Business credit cards

Some business credit cards offer low interest rates or a 0% introductory rate which can provide small business owners with a low or no-interest loan of sorts. Many card issuers offer six months without interest. A business credit card is only a good financing option if you’re able to pay off your purchases before the introductory rate ends and a higher interest rate kicks in. 

PPP Loan

In 2021, there are some unique options available to small businesses looking for financing help in light of the coronavirus pandemic. One such option is a PPP Loan. The Paycheck Protection Program (PPP) is a loan provided by the SBA to help small business owners and non-profit enterprises keep their workers employed during this difficult time. Currently, you can apply for PPP Loan until March 31, 2021.

This post was originally published on How to Get a Small Business Loan in 2021 on Fundbox.- Fundbox – Fundbox Forward

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Alternative Funding For Small Businesses And Entrepreneurs

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