Top Ten Questions Small Business Owners Ask
#7 How Can Small Businesses Get a Loan?
Probably the most urgent question small business owners ask is where can they get a loan for their business. Looking for cash to fund your company can be a positive or negative experience depending on why the capital is needed.
Remember that by their very name, business loans need to be paid back according to preset terms you agreed to with your future cash flow.
When you should get a loan
It is very natural for startup entrepreneurs to look for funding for their business. This makes sense before you have customers. Other small business owners need cash to expand their business and want to make investments to do that before they have customers. However, you need to have a plan as to how and when the money will be paid back and will the company have the cash flow to do it.
When you should not get a loan
When your company is losing money and is short of cash, getting a loan to fill in this hole may not be wise if you don’t know when and how the money will be able to be paid back. Getting a cash loan just delays the inevitable and the entire business model should be examined instead. Shutting down the business must be an option to be examined.
Where to find a business loan
Friends and Family: They are your best early source since they will give you money not because of your great business, but because they love you. But beware, make sure your loan is documented with a legal interest rate in case there are any misunderstandings later.
SBA loans: The SBA guarantees loans to 90% to your local bank so these are easier to get. Just remember, these need to be personally guaranteed and take can take three months to process. This may be quicker in a “Coronavirus Economy”.
Private Microloan Programs: Nonprofits such as Accion USA and Grameen American give out small loans to businesses (under $25,000) to boost the local economies. As a result, these organizations are not totally profit oriented.
Community Banks: These small local banks did stay away from some of the riskier loans in the Great Recession. They are a good place to go for your loan since they are usually serving customers in your local area and you can get to know the loan officer.
Peer to Peer Borrowing: Try Prosper.com and Lending Club to tell them about your small business and what you need to the loan for. Private individuals fund your venture by bidding for your loan at a suggested interest rate over a certain period of time.
Online Lenders. Try Fundera, Kabbage and PayPal. These loans are easy to get but can carry a high interest rate that needs to be paid off in a short period of time. Make sure your cash flow shows you can afford this.
Credit Card Companies. Organizations like American Express are starting to offer working capital and merchant loans for their current members. Depending on your credit history with the company, these rates can be competitive.
Factoring. This is where you sell your accounts receivable for a discount to get cash now instead of waiting 30 days. This can be expensive and dangerous unless your receivables and sales are growing rapidly.
When looking for a business loan, it is important to get the cash from the right source for the correct purpose (and be able to pay it back).
Want to read the other top 9 questions small business owners ask?