Small business loans or commercial loans are for entrepreneurs in need of immediate financial support for their business. There are several ways that these loans can be obtained. How to procure small business loans? It depends on several factors such as the amount of the loan, the relationship between the lender and the borrower. The loan is sanctioned based on several criteria.
Types of Business loans:
- Small Business Administration Loan: The greatest advantage of this loan is that the federal government takes responsibility for 85% of the amount borrowed if the borrower defaults. It reduces the risk for the lender. It is the most affordable loan but the cons associated with the loan is that the borrower must hold a high personal credit score and the loan process is long and takes several months to complete.
- Working Capital Loans: are sanctioned to meet the daily financial needs of a business such as buying equipment, ram material, paying salaries, etc. They are short-term loans with one year tenure. It is a non-secured loan and does not require collateral. The loan amount varies from client to client and the bank decides on the loan amount.
- Term loan: is a loan where the borrower receives a certain amount for a particular term and pays a fixed amount every month for a certain number of months until the loans are paid. These loans are sanctioned if the borrower has a guarantor.
- Line of credit helps you borrow money as the need arises and interest is paid according to the money borrowed. There is no lumpsum money involved and the bank fixed your credit limit and you can borrow till the limit is reached. It functions somewhat similarly to a credit card.
- Microloans are small loans that come with small or almost non-existent interest rates. Repayment is within a short term.
Advantages of small business loans
These loans are handy to start or expand a business and are supported by the federal government. These loans came in handy during the pandemic when several corporates especially startups faced a crunch for money. It is attractive to the borrowers for its long payment terms and low fixed interest rates. The loan has a long process where the lender verifies your credit score history and sets that mount that you are eligible. It will also take into account how much your business needs. It needs an extensive amount of supporting documents such as details of all partners. Business plan, tax returns, bank statements.
What the borrower must look for while taking a loan?
- The different available loan options. Research on the different loans before you decide on the funding agent.
- The kind of loan that suits your business. Consider a term loan, line of credit, or SBA loan which will suit the needs of the business.
- Make sure that you secure the loan amount that you need from the lender.
- Estimate your repayment abilities, so that the amount you repay every month is within your financial limits.
- The interest levied against your loan is reasonable and affordable.