Small business owners are often in need of capital when setting up their businesses. While turning to the bank for a loan may seem like an obvious choice, many banks can be quite hesitant to lend to new businesses. When looking for a small business loan, it is important to know a little about how they work and what your options are, as well as what documentation may be required of you. Typically, a small business owner will be asked to provide some form of income documentation, such as bank statements, and a credit check will usually be necessary. In most instances having challenged credit will reduce some of the options available, but often there are ways to get financing even with bad credit. Getting a new loan can also help start the credit rebuilding process.
There are a few of the ways a small business can gain access to capital:
CLOSED END TERM LOAN:
Closed end loans are offered in a variety of lengths but they are particular popular ranging from two to six years. With these loans the business owner receives all the capital at signing and makes scheduled monthly payments which contain both principal and interest back to the lender every month until the loan has been paid in full. Nowadays most loans don’t carry a prepayment penalty, but those that do penalize the business owner from trying to pay off the loan faster to save on interest costs. Avoiding a prepayment penalty is obviously preferable since business owners then have the option to pay off the loan sooner without incurring an additional fee if the capital has served its purpose and is no longer needed.
BUSINESS LINE OF CREDIT:
A business line of credit is a very popular option for many business owners because it provides access to capital when needed, but doesn’t require the business owner to use it until it’s needed. Much like a credit card, the line of credit can be used and paid back, and then used again an unlimited number of times as long as it remains open. This flexibility helps business owners avoid paying interest on money that isn’t be used, and also allows for capital to be access again after it has been paid back without having to apply for a new loan.
The Small Business Association (SBA) has provided avenues for small business owners to apply for and be approved for loans. The SBA is an initiative by the federal government which encourages banks and lenders to approve loans for small businesses by offering to help cover loses in the event of a loan default. Small businesses that qualify for this option can get access to the funds they’re looking for at competitive rates.
Determining what form of financing best fits the needs of your business is an important step before taking proceeding. When applying make sure to ask if there are any other forms of financing your business is eligible for and weigh those opportunities out against each other to consider which will best accomplish the objectives of your organization.