What is a Small Business Loan?

A small business loan is a funding option specifically designed for small businesses. These loans allow existing or startup companies to borrow money from various lenders. Different types of loans are available to help entrepreneurs achieve various goals, and the specifics of how each loan works depend on its type.

Here are some common types of business loans:

Term Loan: This is a standard bank loan where you receive a lump sum of money and repay it over time with interest.

Equipment Financing: This loan allows businesses to acquire equipment upfront and pay it off over the lifespan of the equipment, helping businesses grow by gaining the necessary tools and machinery.

Accounts Receivable Financing: If you have outstanding invoices, you can borrow against them using the invoices as collateral. This type of financing typically offers lower rates.

Merchant Cash Advance: This loan is based on future credit card sales. You repay the lender by giving them a percentage of your daily credit card sales, so the payments are automatically deducted.

Business Line of Credit: Similar to a credit card, this loan provides a flexible line of credit. You only pay interest on the amount you use, giving you financial flexibility for various business needs.

Requirements to Apply for Small Business Loans

When you’re looking to secure a small business loan, there are several key factors that lenders typically consider. While specifics can vary, here’s a general overview of what’s required:

Credit Scores

Your credit score plays a significant role in determining the loan amount you can qualify for. Lenders will want to see the credit scores of all business owners, as well as the overall business credit score. It’s a good idea to check your credit report for errors before applying and work on improving your score if it’s near a higher threshold.

Business Banking Records

Lenders will examine your business banking records to gauge your financial stability and determine how much you can borrow. To improve your standing:

• Maintain a steady balance with regular deposits to show consistent revenue and sound financial management.
• Avoid overdrawing your account and set up overdraft protection.
• Consider getting a bank reference from your business’s bank to bolster your application.

Most lenders prefer businesses that have been operational for at least six months. They will evaluate the following metrics:

• Gross margin
• Cash flow
• Debt-to-equity ratio
• Accounts payable and accounts receivable
• Earnings

Monthly Sales Volume or List of Collateral and Assets

Some lenders require collateral, while others do not. Typically, they will ask you to list your company’s assets on the application. This helps them understand what could cover your obligations if you cannot repay the loan. Alternatively, providing proof of sufficient deposits into your business bank account can assure lenders of your ability to meet loan payments.

Benefits of Small Business Funding

Are you wondering, “Where can I get a small business loan for my new business?” Small business loans can help you achieve various goals. They allow you to maintain control of your profits and business, avoid complications from loans from family or friends, and protect your personal assets.

Your capital needs may range from short-term financing for purchasing equipment, buying new inventory, or making leasehold improvements, to more extensive, long-term loans for expansion projects and growth. Sometimes, you might need a simple line of credit to purchase products and services, meet payroll, or finance accounts receivable. According to CB Insights, 29% of businesses fail because they run out of cash, despite new options for small business loans.

Steps to Getting a Small Business Loan

1. Gather Required Documents

Having these documents accessible when applying will expedite lender approval and determine the loan terms and amount:

• Social Security number or Tax ID
• Business licenses and filings
• Tax filings
• Profit/loss statement, balance sheet, bank statements
• Review individual lender requirements for additional documents

2. Understand Different Small Business Funding Options

Traditional Bank Loans: These loans typically provide a fixed amount that must be repaid in monthly increments. The most common loan for an existing business is a line of credit, which allows access to funds from the lender. These loans have lower interest rates but require higher credit scores.

Revolving Lines of Credit: This type of credit allows you to borrow up to a limit, and as you repay, the credit limit resets. A credit card is a common form but is suitable for small purchases. Other forms of revolving credit are better for larger needs.

SBA Loan: These loans are issued by private lenders but are guaranteed by the Small Business Administration, reducing the lender’s risk.

Gotham Capital Funding offers many more business financing options. Please view our full list of business financing options.

3. Apply

With your research complete and documents ready, you can take the necessary steps to secure funding. It’s advisable to apply before the need becomes urgent to ensure access to vital funding.

Still unsure which loan is right for you? Complete a 1-minute application with Gotham Capital Funding and consult with a Business Financing Advisor.

What Are Average Small Business Loan Rates?

Understanding the various loan types and rates is essential for maximizing your business funding.

Loan rates depend on the type of loan, the amount needed, and the specific terms. Rates from alternative lenders are typically higher than traditional bank loans, but they may be an option if you don’t qualify for traditional financing.

Average small business loan interest rates: 2% to 13%
SBA loan interest rates: 3.5% to just over 11%
How to Get a Business Loan Without Collateral

If you need a small business loan without collateral, consider the following steps to improve your chances:

1. Improve Your Credit Score

Without collateral, your credit score and reputation are crucial. One way to improve your score is to lower your credit utilization ratio, which can help you get a loan even with bad credit.

2. Determine Cash Flow Projections

Demonstrate your ability to repay the debt with clear cash flow projections. This will help convince lenders of your repayment capability.

With everything in place, you can explore lending options that secure your financial future. Many lenders are ready to help you get on the right track.