Small businesses have excellent growth potential with suitable financing options. So, how do you, as an entrepreneur, know if applying for business loans for small business is the right move?
Before you apply for a small business loan, it is essential to understand the different types in order to get the best one for your business needs.
Keep reading to understand how small business loans work and the advantages they offer to small businesses.
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Understanding Small Business Loans
Small business (SMEs) loans are a type of financing specifically designed with flexibility in mind. This is what makes them beneficial for small businesses. You may take advantage of customised loan amounts and adjustable repayment terms.
Small business loans work similarly to other types of business loans in that a lender delivers a lump sum of money that a borrower must repay over a given time. The loan is either secured or unsecured, and there are usually fees, extra costs, and an interest rate.
Small business loans are available for most types of businesses, independent contractors, and suppliers to small businesses in a variety of industries.
Small business loans are crucial for ensuring the growth and sustainability of small businesses. Otherwise, small businesses have a more challenging time applying and getting approved for traditional loans.
Before applying for a loan, consider your business’s needs and the purpose of the loan to apply for the correct type. Typically, you may use the loan for the following:
- Maintaining seasonal fluctuations
- Managing steady cash flow
- Funding business expansion
- Purchasing equipment and inventory
- Hiring additional staff
- Maintaining daily expenses
- Marketing and promotions
Types Of Business Loans For Small Businesses
Term Loans
The first type of small business loans is term loans. They vary depending on the period in which you will need to repay the funds borrowed. Term loans can be either short-term or long-term.
Short-term loans usually have repayment terms that are usually from 3 to 18 months. Short-term loans are accessible faster and easier for small businesses to receive approval.
In contrast, long-term loans provide businesses with a lump sum plus interest that they repay over a set repayment period. Long-term loans can have repayment schedules from a year and over.
Business Line Of Credit
A business line of credit is a common financing option for small businesses. A business line of credit works as a credit card, and it often enables you to borrow a set amount of funds annually.
The money you borrow is with interest that you have to pay based on the amount you withdraw. Similar to a credit card, it is essential to stay within the credit limit.
Business lines of credit are suitable for small businesses that need readily available capital for:
- Growth opportunities
- Offset seasonal fluctuations
- Cover unexpected expenses
Invoice Financing
Invoice financing involves using your unpaid invoices as collateral and receiving the funds you need without waiting for your customers to pay their overdue bills. With invoice financing, you sell the outstanding invoices to a lender in exchange for advancement on the payments owed to you by clients.
Merchant Cash Advances
This type of financing is referred to as cash advantage and a specific provider funds it based on your business’s future credit card sales. You will use future transactions to repay the funds you borrow in addition to the fee charged for the loan.
Microloans
A microloan is a small business loan that aims to empower entrepreneurs. Typically, microloans range from around $100 up to $50,000. Microloans help grow small businesses.
Benefits Of Business Loans For Small Businesses
With small business loans, small businesses get the chance to acquire the funds they need without worrying about being declined. While it is challenging for small businesses to apply for traditional loans, small business loans are easier to apply for and get approved.
With a business loan for small businesses, you may expect the following benefits:
- Providing capital for growth and expansion
- Managing cash flow and covering operational expenses
- Investing in equipment, technology, and infrastructure
- Taking advantage of business opportunities
- Building business credit for future financing
Considerations Before Applying For Business Loans For Small Businesses
- Lender reputation – when applying for a small business loan, it is crucial to consider the lender’s reputation to ensure you get a fair offer without hidden fees.
- Eligibility criteria – ensure that you meet the requirements. These usually include being an Australian citizen, having a minimum of six months in business, having an active ABN or ACN, and having a minimum monthly revenue based on the lender’s requirement.
- Loan fees and costs – small business loans may come with origination fees, application fees, and prepayment penalties. Before signing a contract, make sure to understand precisely what you will need to repay.
- Impact on the credit score – another consideration is how the loan may impact your credit score if you are unable to repay it on time. To avoid this happening, apply for a loan amount you are sure you can repay on time.
Documents To Prepare For Business Loans For Small Businesses
When applying for a small business loan, you should prepare the following documents:
- Financial statements to show business revenue and minimum monthly turnover
- Proof of identity
- Business plan
- Bank statements
- Balance sheets
- Tax returns
- Accounts receivable and payable
- Active ABN or ACN
- BSB and account number
After you collect the documents, review the loan application to ensure that everything is up to date before submitting it.
Frequently Asked Questions
How can I improve my chances of getting approved for a business loan for a small business?
If you want to improve your approval chances, ensure that you meet the eligibility criteria and prepare all the documents beforehand. Plus, make sure to apply for a loan amount that you can repay.
What are the most common reasons for a small business loan denial?
Common reasons for getting denied for a small business loan include incomplete documents, lack of preparation, not meeting the eligibility criteria, and applying with the wrong lender.
How does my personal credit score affect my ability to obtain a business loan for a small business?
A low credit score may affect your small business application depending on the type of loan you are applying for. Some lenders may be reluctant to lend you funds if your credit score is too low.
Conclusion
By applying for business loans for small business, you seize an opportunity to grow financially and expand your operations.
As we mentioned, there are several financing options when it comes to small business loans. So make sure to apply for the one that is best suited for your business’s needs.