When considering small business financing in general, there are generally two options available to aspiring or existing entrepreneurs. The first of these, known as equity financing, is the selling of ownership in exchange for capital. This way, owners can obtain the capital required to begin or run their business without relying on a financial institution, yet must sacrifice a share of ownership and degree of control. On the other hand, there is the option to borrow money and pay it back over a set period of time. This is known as debt financing, and typically comes in the form of a small business loan.
Why a small business loan?
The main advantages of a small business loan:
- The main plus point of picking a small business loan, or debt financing over equity financing, is that the owner does not have to sign away a portion of their ownership in exchange for startup capital.
- This also means that the owner will typically retain full control over how the business is managed without any applied constraints from those who have invested, with full entitlement to any profit the business generates.
The main disadvantages of a small business loan:
- Loan repayments, along with the bills one would typically associate with a small business, can be difficult to keep up with.
- Failure to make these loan repayments or adhere to the details of the loan can result in the forfeiture of assets that have been offered as collateral.
- The process for obtaining a small business loan can be difficult and the credit checks stringent; all listed owners must undergo a credit check, and even then they may only qualify for high interest loans or those that require collateral.
Where to get a small business loan?
While aspiring or existing entrepreneurs may seek financial aid in the form of a loan from friends of family, the typical source of a small business loan will be a financial institution: banks, credit unions, etc. However, another option to consider would be a Small Business Administration loan. The SBA is not a lending entity but a government agency that partners with banks and private lenders to fulfill small business loans. The former will lay out guidelines and the latter will provide the capital. SBA loans are often more lenient with better rates than regular small business loans via a bank.
“The main plus point of picking a small business loan, or debt financing over equity financing, is that the owner does not have to sign away a portion of their ownership in exchange for startup capital.”
How to get a small business loan?
Since the financial crash of 2008 and lingering credit crunch, it is much more difficult these days to obtain a small business loan, yet this type of lending is rebounding somewhat. While credit rating is a major factor, there are certain steps that should be regarded and things that must be considered if one is to embark on the successful application for a small business loan:
- Credit is of vital importance so the credit report supplied must be detailed and up to date. This should include the personal credit details of all named business owners, and be comprised of all available financial information, both on the company and the personal background of those involved.
- Similar attention to detail should be given to how exactly the requested funds will be implemented, if attained, and how much is required to accomplish your objectives. For example, if a portion of the borrowed money will go towards new equipment, provide quotes and exact costs, as well as how this new equipment will benefit the business in general.
- It is important to consider more than one source when looking for a business loan. Research must be made into several different lenders, rather than just the one that suits you or can offer the best deal. One must continue to apply, even if declined, and continue to shop the market for the best rates even if accepted.
- Similarly, one must learn and adapt from these applications. Don’t be afraid to change your approach or alter your proposal depending on how a particular application was received.
- While the SBA should be initially consulted when seeking a small business loan, there may also be local lending institutions to consider. Community lenders are often better equipped than national lenders when it comes to understanding local businesses and their environment.