If you’re starting a new business, you may need a business loan. Even if you don’t need extra funding right away, it’s wise to learn about business loans. The U.S. Small Business Administration (SBA) recommends that all new business owners answer the questions, “How much money do I need to get started?” and “Will I need to get a loan?” as part of preliminary planning for the business.
Where do you get a business loan for a new business?
There are several options for new business looking for a loan.
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Banks and credit unions
The first option is banks and credit unions. If you already have a working relationship with a bank or credit union, it might be to your benefit to consider these options first. Be aware, though, that banks and credit unions do not lend business loans easily, and their loan applications can take a long time to be approved.
Large banks only approve 20% of business loans. Smaller banks approve just over 50% of business loans (source).
The second option is getting an SBA loan. While the SBA does not make loans itself, it does provide a list of SBA-approved lenders to which the application can be made. The SBA guarantees the business loan, which makes the lenders more likely to lend. The main disadvantage with SBA loans is they can take months to process. SmartBiz is an online lender that specializes in SBA loans and has streamlined the lending process, so it takes weeks instead of months.
The SBA offers several types of loans for small businesses.
The first is an SBA Advantage Loan 7(a).
Only for-profit business qualify and they must meet the SBA size standards. These types of loans can be used for long-term working capital to pay for expenses related to operations, accounts payable, and to buy inventory. They can also be used for needs related to short-term working capital, among other uses. Qualified business owners can get an SBA Advantage Loan 7(a) for up to $5 million. There is no minimum. For fiscal 2015, the average loan of this type was $371,628.
The SBA also offers a Microloan Program. These can be used for working capital, inventory, furniture, and machinery or equipment. The loans are capped at $50,000. The SBA has a list of approved intermediaries that you must apply to to receive a microloan.
Online lenders often approve a greater percentage of loans than banks or credit unions. If your business has not been in operation very long or if you have poor credit, alternative lenders may be the best choice. They also approve loans quicker than many banks, often within 24 hours.
These lenders typically have higher interest rates than a bank, credit union, or SBA loan.
Online lenders have a sliding scale for interest rates, depending on the amount requested, the business’s history, and the business’s credit. The interest rate also varies depending on whether the loan is secured or unsecured.
A secured loan is backed by something that can be sold or exchanged should the business become unable to pay the loan back. If you get a loan for capital equipment, a lender could take the equipment back if you default on loan payments. The goods or items used to back a secured loan are referred to as collateral.
An unsecured loan is not backed by collateral. For this reason, interest rates on unsecured business loans are usually higher.
The loan details are very important. Be sure to read lenders’ materials carefully and compare the annual percentage rate (APR) you will be charged. The APR is the interest rate plus any attached fees. You should also compare the length of the loan. A loan’s length is known as its term. A 10-year loan, for example, has a 10-year term. The longer the loan’s term, the lower your payments can be.
Online lenders for new businesses include:
- OnDeck. OnDeck is the venture capital division of Google. You must have been in business for a minimum of 12 months to qualify. Your revenue must be a minimum of $100,000. OnDeck’s loan amounts begin at $5,000. The interest rates range from 6% to 98%.
- Funding Circle. Funding Circle is a marketplace that targets small business loans and connects accredited investors and institutions with small businesses. Your business must have been operating for two years at a minimum. The per-year revenue needs to be a minimum of $150,000. Loans are approved for $25,000 to $500,000. Interest rates are in a range between 5.5% to 23%.
- Kabbage. To receive a business loan from Kabbage, you must have been in business for at leat a year and a minimum revenue of at least $50,000. You can get a business line of credit for amounts from $2,000 to $100,000. Interest rates begin at 32% and go as high as 108%.
- LendingClub. Businesses that have been operating for at least two years and have at least $75,000 in annual revenue may want to consider LendingClub. Available loans range from $5,000 to $300,000. Its interest rates range from 6% to 26%.
- Balboa Capital. Balboa Capital is an independent financing firm specializing in equipment leasing, merchant cash advances, and small business loans. It requires businesses to have been in operation for at least one year and have an annual revenue of at least $10,000. Loans of $1,000 to $250,000 are available.
- SmartBiz Loans. SmartBiz is an online SBA lender. It requires applicants to have been in business for two years and to have $50,000 annually in revenue, minimum. Applicants can receive loans of $30,000 to $350,000. The interest rates range from 7.47% to 8.69%.
- BitBond. BitBond is a worldwide peer-to-peer lending platform for small businesses. Its loans are all made in bitcoins. Most users are online small businesses. You can get a loan amount for up to $10,000. The interest rate ranges from 7.7% to 25%.
What is needed to get a business loan for a new business?
For any loan for a new business, you will need financial documents. Lenders want proof that the new business is financially viable. They will also want to see the business’s ability to repay a loan.
It’s a good idea to get all of these documents together before you begin applying for the loan. Loans are sometimes delayed or even turned down because of incomplete financial information.
- Business balance sheets, for life of business
- Business profit and loss statements, for life of business
- Projected profit and loss statements
- Any outstanding loan statements
- Personal bank statement
- Personal financials (investments, real estate)
- Proof of ownership
- Any required certificates/licenses
- Income tax returns, business
- Income tax returns, personal
- Resumes of principals
- Business lease agreements, if any
- Business history
- Papers of incorporation, if any
Business plan: a useful document
Some lenders require businesses to provide a business plan. A business plan explains the idea behind your company. It details what you do, what you expect the client base to be, how you price goods, and what you expect to pay for equipment, leasing, and raw materials. It can also detail the background of the business and the key people in the new company.
Lenders want to see why you think you’ll be financially successful, in clear terms. The more successful you are, the more likely you are to pay off the loans. For a business with a long history, lenders will want to look at the profit-and-loss statements and balance sheets.
How to get a new business loan
Once you have gathered all these documents, figure out how much you can realistically pay each month in loan service. Then, determine how much of a loan you can afford. Then, decide which lenders you want to approach. It’s a good idea to get quotes from at least 2 – 3 separate lenders. That will allow you to choose the most beneficial terms available to you. Read 7 Simple Steps to Get a Business Loan for a more detailed explanation on how to apply for a business loan.
- Amount of loan available to you
- Interest rates
- Origination fees, If any
- Loan terms
- Monthly repayments
- Penalties for early repayment
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