There’s almost no getting around it: When launching your small business, you’ll need a certain amount of working capital. This could be the capital needed to cover the initial costs of your startup, such as finding and securing a location, or it could be related to things your business needs in order to run and grow, such as equipment financing or auxiliary staff.
To get the capital they need, many first-time business owners turn to traditional bank loans. In fact, according to a survey conducted by the Federal Reserve, 43% of businesses applied for funding in 2018. Business owners face a different set of expectations and requirements regarding business loans compared to personal loans, though. For one, you can expect quite a bit more paperwork upfront and the evaluation of all business and personal credit.
But at the end of the day, properly funding your business is what it’s all about, and you’ll likely find a lot of opportunities to do this when you work with the right lender. Below, we’ll walk you through some of the more common loan types available to small business owners and provide examples of small business lenders proven to support fledgling entrepreneurs.
There are different loan products available, depending on your unique needs. Research shows that nearly half of the businesses seeking supplementary funding do so through a large bank, but other financing avenues are also viable. Here’s a list featuring brief definitions of more common loan types and the perks for various borrowers.
Business loans can be overwhelming due to the number of options and paperwork. With the small business lending landscape still recovering from the 2008 credit crunch, regulators often push banks to back small business loans with a lot more capital than they would with a consumer loan.
All of this results in a steeper climb to the credit you need to run and grow your business. However, you can see the light at the end of the tunnel if you keep the following considerations at the forefront of your mind:
Over-loaning and under-loaning are common in the realm of small business loans and can be equally disastrous. A smart move would be calculating as close to an exact figure as your small business needs when starting. Many banks have personalized online loan calculators that allow you to toy with numbers and estimate monthly repayments at different figures.
However, the best way to calculate what you need is to consider how the money will be disbursed and what kind of cash flow you have to pay it back. Is this an investment that will rapidly pay for itself (such as with fresh branding) or over time (such as with an energy-efficient vehicle)? The main thing to remember is never to borrow more than you can pay back in a reasonable amount of time or an amount that leaves you with high monthly payments.
Even if you are approved for $500,000, if you only need $125,000 to make the improvements you need, borrow $125,000. It’s common for competing banks to bait your business by qualifying you at a higher amount of money than you need or can afford.
By the same token, if you are qualified for significantly lower than what you need, it’s best to forgo that offer and look for financing elsewhere instead of trying to make up the difference by taking out further lines of credit, credit cards, or something else. You can end up paying more interest than principal on your credit accounts this way, and this is never a healthy bookkeeping choice.
The interest rate is arguably the most important facet of your new small business loan because it will determine a large part of how much you pay back to your lender. An interest rate is the percentage of the principal borrowed that the lender charges you for using the money.
Always shop around to compare rates so that you have an idea of the industry standard and whether lower rates are possible. Sometimes, lenders will offer zero-interest repayment terms but then hit you with an extremely high interest rate on whatever is left on your loan, making this a bad option for your business’s bottom line.
It’s also imperative to realize that your small business loan payment becomes a fundamental part of your business’s monthly expenses, possibly eating into already thin profit margins or putting them further in the red each month. Factoring this into your business plan, annual revenue, and evaluation of interest rates offered by potential lenders is crucial for financial success.
Your business’s needs from a bank will vary and change throughout the life span of a loan. With that in mind, it’s important to have reliable online access and in-person meetings with your bank. When adjustments need to be made to your financing or questions relative to your business loan arise, open communication with your lender saves time and stress.
Keep this in mind as you shop around for your business financing, particularly from exclusively online lenders. When you encounter funding institutions that don’t offer loan officers, direct lines to management/counselors, or easy access to non-digital contact, steer clear. The last thing you need is to take out a loan from an online bank that you can never get in touch with afterward. Other red flags include banks that ask for application fees and any cold call loan offers.
As the head of your startup, your personal credit score will play a large role in the loan application process and the business loans offered to you. You can utilize credit monitoring systems like Credit Sesame to keep an active engagement with your credit score and know what to expect before you start applying to borrow money for your business. This is an important step because you don’t want too many “hard” credit checks on your score.
A hard credit check is when a bank or financial institution takes a close look at your entire credit history and reports that they’ve checked it for lending to credit-reporting companies like Experian, TransUnion, and Equifax. Having too many hard credit checks in a given period can negatively impact your overall credit score and reduce your estimated creditworthiness in the eyes of lending institutions.
You’ll need to have substantial documentation gathered before you start applications for small business loans. While paperwork requirements will vary from lender to lender, there are a few items that you can expect to appear on any valid small business loan checklist. Included on this standard checklist will be your business plan, income tax returns, resume, and financial statements.
Are you trying to narrow the list of banks you’d like to start with for small business financing? Many banks issue various business loans. Below are some of the best banks for small businesses:
Although it’s one of the biggest and oldest continuously running banks in the United States, Wells Fargo is an industry leader in small business lending. Wells Fargo offers fixed term loans starting at 6.25%, unsecured lines of credit, and FastFlex loans directed at specific small business needs.
Bank of America’s options for highly qualified small business owners are excellent. In particular, the Bank of America Advantage Credit Line offers unsecured funds starting at $10,000 and low interest rates starting at 4.50% for a wide range of needs.
JPMorgan Chase has been a leviathan in lending for centuries, and its small business loan options are some of the most comprehensive. Featuring a host of different business financing options, including term loans with both fixed and variable interest rates, Chase can help you with everything from commercial real estate to trade financing. Bonuses are an emphasis on diversifying business loans into “draw loan” and “advised line” categories with flexible/creative repayment options and including 10% for those hard-to-identify business expenses known as “soft costs.”
The “C” in Capital One should stand for “customizability” when it comes to small business loans, as this is one bank you can count on for the most personalized financing. If you are a Capital One customer, you can likewise enjoy relationship discounts and rate and loan tailoring offered only to existing members. Capital One’s Business Installment Loans are geared more toward entrepreneurs who’ve been in business for a minimum of two years and have a business checking account with Capital One.
Although concentrated largely in the West and Midwest, U.S. Bank remains one of the nation’s leaders in small business lending. U.S. Bank offers business financing options that include quick, term, commercial real estate, equipment, and SBA loan types at competitive fixed and variable rates.
Business loans are necessary for most entrepreneurs because they enhance growth in a way not feasible without large infusions of capital, and they can also see your company through inevitable dry spells in revenue. It’s vital to make the right choice regarding your business finances because making the wrong one can hurt your early-stage small business.
Finding the right loan is just a matter of doing your homework on the many options from lenders and making sure you are honest about what you can afford to pay back based on your business’s current numbers. ZenBusiness can connect you with the products, services, and expert support that will help you make the smartest choice for financing and growing your small business.