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Finance & Accounting, Small Business Loans

7 Things to Know Before You Get a Small Business Loan

get a small business loan

It seems as if the term “loan” tends to scare everyone these days, especially small business owners. But don’t be afraid! Last year alone over $50 million was lent out to small and medium sized businesses per day in the United States. The Small Business Administration has made it simpler than ever before for alternative lenders and banks around the country to lend to small businesses. In fact, lenders are eager to lend to small businesses and are offering more and more programs and resources to help small business owners start, manage, and grow their businesses! Check out the small business loan information below before you get your first (or next) small business loan.

What You Need to Know Before You Get a Small Business Loan

Myth: Getting a SBA loan will take forever and will require a ton of paperwork.

Truth: If you find the right qualified lender, getting an SBA loan shouldn’t take longer than a conventional loan. There are also express programs like the Celtic Express SBA Loan. These loans are fully amortized with no access fee per transaction. The automated process provides fast turn-around times. These express programs were designed to reduce paperwork and make the process much easier for you.

There are also online lenders like Kabbage small business loans that can approve you for a loan in less than seven minutes! Kabbage’s fast, flexible business line of credit is always there when you need it. Draw against your line as often as once a day for anything you need to grow.

Banks can take weeks to decide if you qualify. Kabbage approves businesses by looking at real-life data, not just a credit score, to provide funding in minutes. Just link any or all of the online services you use to qualify instantly. No paperwork, faxing or waiting in line required. It’s that simple!

Myth: I can get an SBA loan directly from the SBA, so why use a bank?

Truth: The SBA does not lend money. A lot of people think the SBA provides grants to small business owners, but that is not true. The SBA is a government guarantee program that issues guarantees to decrease the risk to the bank when lending to small businesses. An actual lender such as a bank, credit union, or non-bank lender will be issuing the actual loan. The SBA guarantees between 50 and 80 percent of each loan depending on the program the loan goes through.

What this means is that if one lender declines your application for a loan, you can still try many others. Small business loans are not under one umbrella program; instead, the SBA is there to make sure lenders are loaning ethically to small businesses by guaranteeing loans they see fit. Lenders are still required to take collateral and a blanket lien on all company assets when making a 7(a) loan because the government is guaranteeing such a large percentage of the loan.

Myth: You need perfect credit to get a SBA loan.

Truth: Low credit scores do not necessarily translate to no loan. In fact, since the recession, lenders are approving more loans with less than perfect credit scores than ever before. It is true that in the past bad personal credit created many restrictions when it came to small business loans, but no there are so many alternative options to traditional lending from banks. These alternative lenders base their lending decisions on a multitude of factors besides just your credit history. In fact, Kabbage likes to get a good picture of your whole business and how it runs rather than base your loan solely on FICO score.

Although you do not need perfect credit to get a small business loan, you must have a good business plan as well as positive cash flow and an average credit history. The SBA provides small businesses with help when their own collateral doesn’t meet lending standards. This means that the SBA guaranty helps overcome some of the challenges associated with lower credit scores.

Myth: SBA loans have high interest rates and fees.

Truth: The SBA actually works hard to keep fees and interest rates low for SBA loans. Typically, the SBA only charges guarantee fees between two to four percent of the guaranteed portion of the loan, depending on the amount of the loan. The SBA also monitors interest rates. A borrower can get either a fixed or floating rate and the SBA limits how much interest a lender can charge on a loan, as well. All of this is not saying that getting an SBA loan is free. There is a cost. Lenders typically charge packaging fees in addition to the SBA guarantee fee. These fees can be financed over the term of the loan.

When it comes to interest rates, however, the SBA oversees and limits how much any lender can charge to any borrower. As a borrower you can also look into flexible payment options, no balloon payments, and lower down payments.

Myth: My business is doing well, and we are on the road towards success; therefore, I don’t need a small business loan.

Truth: More and more small business owners have begun to use small business loans to help them grow and thrive. If you are on the path to success, chances are your business will be undergoing a lot of positive change, which could mean that you will need more funds to help fuel the growth.

Benefits of getting a small business loan include longer terms (Seven years for working capital, 10-15 years for equipment, and up to 25 years for real estate) as well as lower down payments, increased cash flow, and flexible repayment options like monthly installments of principal and interest and no balloon payments.

Myth: The best way to obtain a loan for my business is through a bank.

Truth: Traditional lenders like banks and credit unions are not the only or best place to get a small business loan. In fact, if you are looking to borrow a relatively small amount (between $500 and $250,000), banks are less likely to lend to you. Turn to banks if you are looking for a larger amount of working capital over a longer period of time because you will end up with a lower interest rate.

Alternative lenders on the other hand can provide lines of credit and working capital much quicker with much less hassle. With just an application, a few bank statements, and proof of identity, you can have cash in as little as seven minutes!

Myth: If you ask for more money, you are less likely to get approved for a small business loan.

Truth: The amount of money you are asking for when it comes to securing a small business loan is not the deciding factor when it comes to getting approval. In fact, what matters is how organized and educated you are on your business, what you need the money for, and what risks are involved. You should always apply for what you need and for how much you can afford to pay back each month. The biggest thing a lender looks at when deciding whether to approve or deny a loan application is if the borrower can afford to make their monthly loan payments.

Despite common misconceptions in the United States, small business loans are on the rise due mostly to the work of the SBA. There is a lot of information out there, so make sure to do your research before applying for a small business loan so that you can be fully prepared. Small businesses are bigger than ever in today’s economy, so now is definitely the time to look into helping your small business grow with additional funding.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.