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When starting a new business project, be it in real estate, construction, or otherwise, you need the right funding to succeed. In other words, understanding what the best small business loans are for you can ensure your project remains sustainable in the long term. First and foremost, you should determine what your funding needs are. What kind of project are you looking to fund and for how long? An example project can be looking to purchase distressed commercial property, for instance.
By and large, your needs will determine what loan will work best for you. There are numerous types of loans for small businesses. One of the most common types of loans is the SBA 504 and 7(a) loans. When considering these loans, there are a variety of SBA loan requirements that business owners should assess before applying. If your project is time-sensitive, there are other loan options to consider. For example, business owners can take advantage of short-term bridge loans compared to longer SBA loans. In the end, understanding more about small business loans, and your funding needs can make it easier to find the right funding. For more information on how to make beneficial investments, review the following on the best small business loans, where you can find them, small business loan lenders, and other crucial loan information.
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Before committing to a lender, you should make sure to evaluate all the available options you have. Below, we go in-depth into places that you should look at when trying to get a small business loan. Note that not every loan may be the perfect choice for you, and like we always say, do not commit to a lender too early, browse all the options because you might be losing a great opportunity.
Traditional entities such as banks are still one of the best options when considering small business loan lenders. When looking to borrow the largest amounts of money with a not-so-high interest rate. Usually, banks also offer longer repayment terms if needed. A downside of traditional bank loans is that these loans require a lot of collateral and can be hard to secure. The application and approval can also be intimidating. You will have to complete a giant amount of paperwork, put down up to 30%, and possibly wait for months until to see any money, even if you did everything by the books.
The SBA or Small Business Administration is not a direct lender, but it provides government backing so businesses with a lower credit score or that could mean a riskier investment can get financing through partner banks and credit unions, which are assured to receive a portion of their investment even if you default. The SBA has more than one program, but the most common is its 7(a) Guaranty Loan Program. One of the SBA 7(a) loan’s strongest points it’s that its fees are lower and terms are usually longer than their non-SBA Loan counterpart, but what makes it so attractive are its flexible requirements. It is possible that you could encounter drawbacks such as lower caps and stricter requirements on the use of the loan.
Small business owners who are having a hard time getting a loan through traditional channels have a growing number of options with online small business lenders. In some cases, online lenders directly lend money themselves, while others use a P2P model (peer-to-peer), allowing individual investors to fund your request. In both cases, the most significant advantage of going online for a loan is speed. Most lenders can get you your money in a week or even less and usually, applications are much less time-consuming as well.
Needless to say, the biggest disadvantage for small business owners that acquire a loan from an online lender, is that the interest rate will be higher. Small businesses usually secure bank loans with single-digit APRs (Annual Percentage Rate). While that’s possible online, double digits are more the norm. You will also have to personally guarantee the loan, meaning you will own assets and credit, not just those of your business. It could be at risk if you default on your payment.
Many credit unions are issuing small business loans and are approving requests at twice the rate of big banks. Since credit unions are nonprofits with less overhead, the interest rates are lower and more competitive. One of the requirements is to be a member, though they are often simple, such as living in a specific area. It is worth mentioning that although credit unions may be more flexible than traditional big banks, they primarily lend to established businesses.
Small business loans take a lot more work compared to personal loans. You’ll need to be organized, know your needs, and be tenacious if you’re turned down. To help your search for funding, here are some tips on how to apply for small business loans:
Tell your lender exactly what you need, don’t be secretive. If you want a large amount of money from your lender, be clear and specify exactly how much you need and why you need it. Present your plan for the future and explain to the lender how its funding fits into your plan. Stay organized: you’ll need a wide range of documents, from tax returns to bank statements. Make clear what makes your business a better investment option than others. This is of great importance if you don’t feel like a strong candidate. Remember, for your business to sell, you have to sell your business first.
When trying to get a loan for a growing business, your credit score is as important (or sometimes more important) as it is when you’re applying for a personal loan. Your lender will perceive you as a greater risk if your credit score is low. Try to increase your credit before applying for loans. This is not a quick process, but it will save you time, money, and frustration in the long run. If you are starting a new business, or if said business is very small, you may want to take a personal loan to use for business purposes. This will mean that your financial health will be the only thing evaluated. The loan amount will most likely be smaller, but so will the lending criteria involved.
For established businesses, lenders also consider your business credit history. You can check here how to check your business credit score.
Lenders have a strong position when it comes to small business loans, but you should still shop around and browse all the different options before you start a lengthy application process. The very first option you should consider is trying your bank, especially if you have a long, responsible relationship with that lender. A bank that knows your backstory might be more sympathetic to your needs.
Also, consider credit unions, they might be willing to listen to your case and provide a more flexible plan for you. Online lenders will match you up with lenders who are down to make you an offer. After you answer questions about your needs and your business needs specifically, you’ll receive the names of lenders that might be a good fit, all of that without picking up the phone. If you are targeting online lenders, be sure to compare eligibility requirements and interest rates. Small business loan calculators found online will help you make sure you’re comparing apples to apples.
Small business lenders require detailed documentation to evaluate your loan application thoroughly. Be prepared to present a comprehensive business plan outlining your goals and financial strategy, along with financial statements like profit and loss statements and balance sheets. Include both business and personal tax returns for the past 2–3 years, bank statements that demonstrate cash flow and financial stability, and relevant legal documents such as licenses, leases, or articles of incorporation. Having these ready ensures a smoother and more efficient loan application process.
Assessing your collateral is a crucial step in applying for small business loans, as many lenders require assets like equipment, real estate, or inventory to secure the loan. Begin by identifying the assets you can offer as collateral and accurately determining their market value. This not only strengthens your application but also demonstrates preparedness. If you lack sufficient collateral, consider exploring unsecured loan options, which often rely on strong financials or creditworthiness instead of physical assets. Understanding your collateral options ensures you choose the loan type that best aligns with your financial position and business needs.
Most online lenders stand no chance with the low AORs that big banks can offer. But they make it easier for small businesses that might have been ignored by big-name banks to get funding. Regardless, you’ll still want an interest rate that you feel comfortable with, transparent terms and fees. Here are the major factors that you should consider when picking the best loans for small businesses.
AVANA Capital is a leading hotel financing company with over 20 years of experience in the CRE sectors. We meet the varying financial needs of CRE and Hospitality entrepreneurs by providing a variety of loan products—commercial construction loans, bridge loans, and SBA 404 loans. We have launched programs that help CRE entrepreneurs accomplish goals like brand acquisition, brand repositioning, and brand conversion. At the same time, our team assists them in completing CRE projects in a timely way by working with their engineers, contractors, and vendors.
We have refreshed the content of the blog in November 2024 to make it more suitable for our readers.