Money is a common aspect, from entrepreneurs to small business owners, even industrialists. It’s very common that small businesses often require loans to ensure a smooth transaction within the organization. For example, a startup business has to deal with startup costs, operation expansion, purchase equipment, or manage cash flow during challenging times; a small business loan is all they need.
When getting a loan, any individual needs to choose the right loan plan. It is crucial to meet specific business needs and to ensure long-term success. Fortunately, small business owners have a wide variety of loan options to consider. Different loan plans come with different features and benefits.
According to reports, there are over 5.51 million SMEs around the UK and almost 99.9% of them are owned by private sector businesses. While there’s no lack of banks and financial institutions offering a wide range of business loans, you need some ideal history to be eligible for them.
So, if you need some fuel/money to run your newly launched startup business, you can consider plenty of alternatives. Let’s explore them in detail –
- Traditional Bank Loans
One of the very popular funding options for small businesses is traditional bank loans. Secured ( collateral ) loans and unsecured (credit) loans are the two categories in traditional bank loans.
Secured Business Loans:
A secured loan is when some form of collateral guarantees the money. Collateral can be property, equipment, or other valuable assets.
Benefits of secured loans
- Comes with lower interest rates compared with unsecured loans.
- Bigger loan amounts are common.
Disadvantages:
- If you take a loan and do not pay it back, the lender will seize your collateral.
- Approving the loan can be a time-consuming process. Because collateral has to be evaluated first.
Unsecured Business Loan
The unsecured business loan on the other hand refers to business financing that does not require the borrower to commit any collateral. In other words, you can get an unsecured loan without any assets as collateral. This means your loan will not require an inventory, real estate or equipment. Typically, this unsecured loan is solely issued on the borrower’s creditworthiness.
Benefits:
- The processes are faster than secured loans.
- No risk is associated as no collateral.
Disadvantages:
- Subprime lenders pay higher interest rates due to the increased risk borrowers carry.
- Generally, loans can be much smaller than secured loans.
How to get a bank loan:
- Calculate your financial requirements and the limit of the loan in hand.
- Write a full-fledged business plan with projected revenue and market research.
- Check your credit score and correct it if it is wrong.
- Collect all the necessary documents, such as tax returns, financial statement,s and collateral proof.
- Compare loan options from many banks, and do research.
- Submit a written loan application along with all supporting documents to the bank.
- See an officer of the bank if required to attend interviews or meetings.
- Take special care, when you sign the loan agreement read it carefully.
- Small Business Administration (SBA) Loans
A SBA loan is a type of government-guaranteed financing for small businesses. When traditional bank loans don’t cover your business, SBA can save you. With SBA The government provides loan guarantees and other financial instruments.
Benefits:
- Provides access to affordable financing
- Comes with lower interest rates
- Provides longer repayment terms
- Higher chance of getting loan approval
How to get an SBA Loan:
- Check your eligibility based on SBA requirements
- Choose which SBA loan type is best suited for your business (7(a), 504 or Microloan)
- Prepare your necessary documents, such as your business plan, financial statements, and credit history.
- Contact with SBA-approved lender or intermediary
- Fill up the SBA loan application form and submit all necessary files.
- Collaborate with the lender to answer any additional Q/A or ask.
- Upon approval, sign the loan agreement and review.
- Online Lenders and Fintech Solutions
Online lending platforms and fintech solutions have amazing loan plans for small businesses. Their plans are mostly without collateral requirements. There are many modern platforms now available that leverage technology to provide fast, flexible, and convenient financing options. Their specialized services cater to the dynamic needs of entrepreneurs.
How to get Support From Online Lenders and Fintech Solutions:
- Start by reviewing different platforms and find one that suits your business needs. Closely check interest rates, repayment terms, and eligibility requirements.
- Most online lenders require a minimum credit score, annual revenue, and operational history. Ensure you meet these criteria.
- Fill out the online form and provide the basic details about your business and financial status.
- Upload necessary documents, such as bank statements, tax returns, and proof of identity.
- Once approved, review the loan terms carefully, including interest rates, fees, and repayment schedules.
- Sign the agreement electronically to finalize the process.
- Business Lines of Credit
For your small business, you can consider a business line of credit loan. It’ll provide you with access to a fixed amount of funds, similar to a credit card, which can be withdrawn as needed.
Other than a traditional business loan, a line of credit allows the borrowers to repeatedly borrow and repay up to the pre-fixed limit. Once the borrowed amount is repaid, the approved credit limit is replenished. The versatility of a business line of credit makes it an ideal choice for short-term expenses, working capital, and managing cash flow.
Benefits:
- Provides a limit on over-borrowing
- Comparing credit cards it offer lower interest rates and higher borrowing limits.
- You get to pay only the interest on what you borrow, not on the total limit
How to get a Loan with Business Lines of Credit
- Choose one between a secured and unsecured line of credit
- Research what the lenders will require from you to get a business line of credit
- Choose a lender and apply for your loan
- Equipment Financing and Leasing
Equipment Financing is a type of business loan that helps businesses to buy equipment and machinery on credit. At the end of the loan term, the equipment is owned by the business. Equipment financing is a type of debt.
On the other hand, equipment leasing is more flexible in that the monthly payments can be less than with financing. Leases are usually longer term, sometimes many years long and include the purchase (retailer price) of equipment at lease end.
Benefits of Equipment Financing and Leasing Loan
- The process of getting a loan from online lenders is fast (typically takes two business days).
- Since these loans are secure, you will get them with lower interest rates.
- With a fixed payment rate you can spread the total costings.
How to get an Equipment Financing and Leasing Loan
- Find out the equipment you need and ask for a quote from sellers.
- Look for financing with your equipment lenders
- Get ready for documentation/source code of your business.
- Hire funding with your proposal of purpose and return on investment from equipment.
- Check the terms and conditions of the loan before signing.
- Get the equipment if you get approved, either by buying or leasing.
- Microloans for Startups and Small Enterprises
A microloan is a very tiny loan, sometimes as little as one thousand dollars, for a small business. It is specifically for entrepreneurs or small business owners who are unable to get bank loans or are rejected by traditional lenders. Businesses can use this loan as working capital for their inventory, equipment, etc. Microloans are often provided to new small businesses by non-profit organizations or by specialized lenders.
Benefits of Microloans:
- Support for competitive interest rates
- Provides flexible repayment structures
- creates jobs and plays an important role as a source of overall economic improvement.
How Can I Get Microloans for My Startups and Small Business
- Research the banks that microloan providers like Accion or Grameen America.
- Make sure you meet the eligibility criteria.
- Prepare brief documents of your business plan along with a statement of purpose.
- Submit your application with the required documents.
- Co-operate and meet with the lender to address any follow-up queries.
- Finally, upon approval, you will get access to your funds.
- Crowdfunding and Peer-to-Peer Lending
Crowdfunding is a way of raising money for a project, business or initiative by asking individuals to contribute small amounts of money over an extended period usually on an online platform. Capital from sources like your friends and family can be a great alternative option to traditional lenders.
Benefits :
- Funds without taking out loans or paying interest
- Create an army of supporters, and increase brand recognition.
- Before going full throttle with a new business product or idea – business accelerators
Types Of Crowdfunding
- Rewards-Based Crowdfunding: Contributors get rewards (products, services) in the form of exchange for their contributions.
- Equity Crowdfunding: Businesses give investors equity or stakes in business in return for the money they contribute.
How to Get a Loan Through Crowdfunding:
- Choose the Right Platform: Select a platform that aligns with your funding goals and business type.
- Create a Campaign: Develop a compelling campaign that clearly outlines your business idea, funding goal, and how the funds will be used.
- Set Rewards or Terms: For rewards-based crowdfunding, offer attractive incentives for backers. For equity crowdfunding, define the investment terms.
- Promote the Campaign: Share your campaign on social media, through email newsletters, and through other marketing channels to attract backers.
- Engage with Backers: Respond to questions, greet the contributors, and keep them updated on your progress.
- Use Funds Responsibly: Allocate the funds according to the campaign goals and provide updates to your supporters.
Crowdfunding allows businesses to gain financial support and market validation simultaneously, making it a powerful alternative to traditional financing.
8. P2P (Peer-to-Peer) Loans
How to get a small business loan? A P2P loan can be an option. A rather modern way of borrowing, P2P lending is growing in popularity. It has a unique financial model wherein individuals and businesses can borrow and lend money directly to one another via online platforms.
It is the responsibility of the P2P platforms to assess the creditworthiness of the borrowers through various means, including financial assessments, credit checks, and risk scoring. However, it is generally seen that the credit score requirements of these platforms are not as stringent as traditional lenders.
Tips for Choosing the Right Loan Option
Here are some tips that could help you improve your credit score –
Pay Bills on Time
If you have existing debt, ensure you repay the same on time. Even if you use credit cards, make timely payments to improve your credit score gradually.
Avoid More Credit
A credit-hungry behaviour negatively impacts your credit score. If you’re already repaying a loan and using credit cards, avoid taking more credit, as it could further lower your credit score.
Avoid New Credit Enquiries
If you’re looking for a small business loan and your application is being rejected, it is natural to visit a few different lenders to try and get it approved. However, multiple credit inquiries within a short period are not good for your credit score.
Try to Renegotiate Existing Debts
If you’re struggling to repay an existing loan, it’d be wise to renegotiate the repayment terms with the lender. You can try to get the instalment amount reduced by increasing the repayment tenure so that you can afford regular repayments. If you ever stop repaying the loan, the lender will inform the credit bureau of the same, which will negatively impact your credit score.
Finding the best business loan with a bad credit history can be challenging, but it is far from impossible. As you can see, there are several alternatives you can consider if you’re unable to get a business loan because of poor credit score.
Look for a reputable business loan aggregator and discuss your requirements to get a tailored loan offer from the best lenders. Last but not least, keep working on your credit score, as it’ll boost your credit score, helping you get more financing options and better terms in the future.
Conclusion
Getting a loan for a small business owner is one of the crucial steps. To secure a small business loan, you can explore options like traditional bank loans, Small Business Administration (SBA) loans, business lines of credit, business credit cards, microloans, crowdfunding, and peer-to-peer lending. With each of the ways, there will be certain rules to follow. Small business owners must decide on an efficient loan based on repayment terms, business needs, and financial situation.
