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Everything You Need to Know About Getting a Small Business Loan

Everything You Need to Know About Getting a Small Business Loan

Sometimes, no matter how successful your small business is, it makes sense to acquire a little extra capital or funds for various improvements, debt payments, and more. One of the more common financing options is to take out a small business loan.

It is a remarkably simple and smart financial move for small or medium sized businesses and new enterprises. Why? You retain full control over your business, goods, and services. Furthermore, the only obligation you sign-on for is the repayment of said loan either by a certain date or over a limited period of time. Compared to equity financing, it’s easier and less resource intensive to acquire, because you don’t have to raise capital and provide ownership in your company or organization in return.

Since the market is improving, it’s more viable for new and small businesses to seek financial support. Throughout 2017, the U.S. economy saw remarkably solid growth, with unemployment reduced to four percent, record highs for the stock market, and an increase in year-over-year holiday spending.

Personal vs. Small Business Loan

 There are two types of loans available to small or new companies. A personal loan is one you take out in your name, where you provide your own collateral and assets as good faith. A small business loan, on the other hand, separates your business and personal finances, which helps limits your personal liability.

The difference is, business loans can often be more difficult to obtain or gain approval for. Your organization must have an established record, with its own proof of credit and success. Often, traditional banks will compare your personal credit history, as well, and if it’s less-than-stellar they will deem you more of a risk. This makes it a difficult process for new businesses, and fairly new small brands that have little to no history to share.

When applying for a business loan, financial lenders will consider your personal credit, business credit and experience, business plan, and a variety of other market and situational details. With a personal loan, however, the lender simply looks at your personal credit and history. That doesn’t make one particular loan worse or better than the other. It simply highlights the difficulty between acquiring each type.

It should be noted that with personal loans, even though the banks and lenders may look at your history and collateral, the debt remains unsecured. This means you’re not staking collateral to acquire the loan, and if there’s an issue with payment you won’t lose your personal assets, including your home or vehicles.

While both can be equaling troubling should your business experience failure, they also offer considerable breathing room for the start and initial growth process of any business.

Option Three: Non-Traditional Lenders

 Qualifying for a bank loan can be tough, especially when you have no reputation or history to show. That’s why various third-parties known as alternative or non-traditional lenders have begun to crop up. This includes companies such as Kabbage or Funding Circle.

While they make it easier to acquire a loan — thanks to less stringent criteria and restrictions — their financial contracts do involve much higher interest rates. Repayment plans are also more limited in regards to total borrow amounts and repayment times. Loan totals tend to be smaller, with much shorter spans for repayment. Commonly, they will offer anywhere from $100,000 to $500,000 with terms ranging from one to five years.

Even with the shorter time spans, the total cost can add up, thanks to the higher interest rates. So, non-traditional lenders should always be used as a last resort, if at all.

What About Crowdfunding?

 Other forms of capital and venture gain have appeared in recent years, known as crowdfunding platforms. Generally, they are meant for smaller teams, with an idea or conceptual product already drawn up, and when funds for production and distribution are scarce or non-existent.

As of April 2018, 397,598 projects have been successfully funded and launched via Kickstarter.

To participate, you must come up with a proposal or business plan, similar to what you would present to a traditional lender for acquiring a loan. Except, the money comes directly from your customers or audience, who choose to support your vision.

Crowdfunding can be incredibly risky, even if you successfully raise funds, therefore we do not recommend it as a financial option. The risk comes from the fact that you use a non-traditional finance source, and you alone are responsible for anything and everything that goes along with the development and distribution of said product. It’s only a viable option if you already have every single party, partner and vendor, strategy, and process in place.

If you fail or cannot deliver, it tends to harm your company’s reputation much more because you directly affect your audience, as opposed to middlemen and lenders.

Securing Financial Support

 No matter which option you choose, you will need to have your ducks in a row before coming up with a proposal or approaching said lender(s). That means getting a business plan in place, coming up with conceptual designs and prototypes, and offering whatever history or reputation you have available to prove your potential for success.

Good luck!


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by Nathan Sykes // Nathan Sykes writes about business and technology at Finding an Outlet.

Opinions expressed by contributors are their own.