If you have a new small business, it is quite likely that you know and understand that it costs money to get it up and running. Funding your startup business with a loan might be one of the first among many tools you consider. It is also one of the most critical details to get right.
While it is true that ambition and dedication are essential to the overall success of your business, these traits will not guarantee the profits that your small business needs. One thing that will help in guaranteeing those profits is a business loan.
What is a Small Business Loan?
A small business loan is commercial-based financing that qualified small businesses may obtain from online lenders, credit unions, and banks.
The small businesses that receive these loans may utilize the funds therein to cover any and all costs associated with opening, operating, and even growing their business.
Funds are commonly used to make large purchases like real estate and equipment. Additionally, many small businesses use loan funds for working capital, advertising, hiring, emergency funds, and more.
How Does a Small Business Loan Work?
When you obtain a small business loan, the lender will provide you with direct financing.
This may be through a specially-dedicated credit line or with a lump sum payment.
In return, your business agrees to repay the money that was borrowed over a set period of time, including any designated fees and interest. Loan repayment payments may be daily, weekly, or even monthly.
Are Business Loans Secured or Unsecured?
Business loans may either be secured or unsecured.
A secured loan means that the lender will require collateral. This is something that your business has of value that may be repossessed if you fail to pay according to the terms of the loan.
Unsecured business loans do not require any type of collateral. You will be required to accept personal liability for the debt by signing – at the minimum – a personal guarantee.
What is Accepted Collateral for a Secured Business Loan?
Lenders accept a wide assortment of collateral for secured business loans. Examples include real estate, the equipment used in a business, investments, or even cash.
Each lender will vary on what is accepted and not accepted. When applying for a secured business loan, you must inquire from the lender about the collateral types that they accept.
How Do I Improve My Chances for Being Approved for a Small Business Loan?
There are many measures that you may take that will allow you a higher level of success in getting approved for a small business loan. The following outlines the most common steps that you may take to improve your odds of approval:
- First, you should make certain that you have created a detailed business plan. Outlining what you will do to earn your money shows lenders that you have a plan for how you will repay the funds that they extend to your small business.
- You should make certain that you carefully manage your credit history and your credit score. If you do, lenders will see that you are capable of properly handling your finances and well. In turn, you will not only be able to get approved for a small business loan, but your loan will have better terms. In the end, you will save on interest and fees.
- You should consistently monitor your credit report. If you find an inaccuracy, you should dispute it. By regularly monitoring your credit report, you can catch potential issues before they become a serious problem. Examples include scams, identity theft, and fraudulent charges.
- You should review the financing offers by the Small Business Administration. They offer many financing options to small businesses and are often willing to work with borrowers on the terms of the loan.
- You should consult with your local bank to determine what types of loans and terms that they have for small business loans. You may discuss your situation with a loan officer at a bank and may find that they have the financing that you need and are able to obtain.
Are There Different Types of Financing for Small Business Loans?
Yes, there are different financing types for small business loans. The most common are as follows:
- Personal Line of Credit – Credit cards and home equity loans are two types of personal lines of credit. These are quite risky and should be avoided, if possible. In fact, these should only be used under dire circumstances due to the interest rates of these credit lines and the fact that in the home equity loan, your home is often required for collateral.
- Business Lines of Credit – You may be able to access a line of credit specifically for your business. In these, you are allowed to borrow up to a pre-set amount outlined by a lender. Then, you repay in installments that include an interest amount.
- Business Term Loans – If you need to make a large purchase or several large purchases, a business term loan may be right for you. These require you to repay in set installments for a certain period of time. In most instances, this time is one to three years. If you find that you need to borrow additional money later, you will be required to complete a new application process for a separate business-term loan. It will not be added to the amount that you already owe.
Keep Your Business Finances Separate from Your Personal Finances
When possible, you should always strive to keep your business finances completely separate from your personal finances. This will help you track expenses and prevent pulling from funds that are required for your personal life. Consider the following:
- If you have a personal account at a bank, you may open up a separate account for your business. Each account will be insured by the FDIC for up to $250,000.
- If you have a business bank account, you will find that you are also provided with a limited amount of personal liability protection. The catch is, the business account has to be separate from your personal account. In addition to this, you may be offered other perks for allowing the bank to handle your financial matters.
- Eventually, you may have to hire employees and require those individuals to handle business banking tasks. You will not want them to be handling funds from your personal account. By having a business account, you will find it easier to track transactions and handle any issues that may develop.
- If you have a business account, eventually you will be able to establish various methods of payment for your customers. When you do this, the money will go directly into your account. This will allow you to streamline the payments and collections processes at your business.
Contact Us Today
We here at Somerville Bank offer many services and loan options for small businesses. If you are interested in financing and/or accounts to be set up for your business, we encourage you to visit one of our many locations today to discuss your options with one of our loan officers. We enlist professionals that can help walk you through every aspect of the process. In addition to this, we offer merchant services, various types of commercial lending accounts, and consumer accounts. You may contact us online at our website or you may come in and visit at one of our locations.