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How to get a small business loan: guide to different loans


This guide outlines how to get small business loan solutions for your needs, and explains the different kinds of  loans for each purpose.

When it comes to debt-based financing, there are basically two kinds of credit and loans out there. Personal loans and credit cards, and then business loans and credit financing. For consumers, applying for loans or credit is pretty simple usually not involving much more than a credit check and income verification. Business loans can involve that, but they can involve more than that depending on what you’re looking for. Here is a brief guide to understanding small business loan types for startup entrepreneurs.

1. Types Of Small Business Loan

Some small business loan types are secured, which means assets you have will be used as collateral, while others are unsecured and usually depend more on the borrower’s business or personal credit. Some business loans are designated for specific business purchases, while others can be used for a variety of costs.

-Asset-based Loans

These loans generally are used to purchase equipment for a business. They’re secured either by the assets to be purchased, or by more liquid assets the borrower already has.

-Micro Loans

These are loans that are usually issued in smaller amounts, and they’re usually intended to help startups that may not qualify for a larger bank loan like an SBA loan. These kinds of small business loan are often found with online lenders that are either peer-to-peer lenders or otherwise privately financed. According to the experts at Lantern Credit, “Microloans cannot be used to pay off existing debt or buy real estate.”

-Merchant Cash Advances

A merchant cash advance isn’t quite a small business loan as it’s not quite financed the same. But it is a form of financing that can work if you have steady credit card sales and can find an MCA lender with favorable terms.  Merchant cash advances can be paid through smaller but regular payments which won’t greatly affect your small business sales.

2. Applying For Loans And Credit

It might take a little while to find the exact mall business loan you want, but if you know how much you want to borrow and know which kind would be right for your business, it’s much easier to compare small business loans. Some business loans take a while to qualify for and get approved for, but some can be approved even if you haven’t been in business that long.

But you should definitely get a business checking account before you apply for a small business loan, and it’s advisable to have your financial documents in order as well. You’ll want to make sure your personal FICO score is at a number somewhere between 650 and 850 because it is important for getting the lowest interest rates possible.

3. Paying Your Small Business Loan Off

The most important step when using a small business loan is making sure it’s paid off on schedule, and you should make sure you’ve gotten the maximum ROI in how you’ve spent the funds from it. But you also need to have a plan for exiting and paying it off in the event you’re unable to make your business succeed. If you feel you need to make smaller monthly payments to save money, you might want to look at refinancing the loan if possible.

Basically, you can get a business loan that matches your business size and specific operations even just by getting online and filling out an application form. Just make sure you understand all small print items and get to know all the fine points of qualifying.

4: Other things to consider

The monthly income of the self-employed varies greatly. For credit institutions, this is a factor of uncertainty when determining the creditworthiness for granting their small business loan. They therefore usually make a deeper insight into the applicant’s income a prerequisite for a loan. The banks also want to see in order to be able to verify the correctness of the information on the income. Sometimes a look at the order books is required.

As a rule, banks want to see the sales of the past months for the self-employed. The development of income is also important: are they increasing gradually or are they constantly at a good level? Then the chances of getting a loan are better than if the income gradually decreases. Anyone who has been self-employed for a long time can, in the longer term, usually prove steady income better than someone who has just dared to take the step into self-employment.

Equity as a credit requirement

Who already has a larger amount of equity will be able to take out a loan more easily. A certain amount of saved sum is particularly important for loans for very large sums. For example, some banks require not only proven creditworthiness but also equity capital of 20 percent of the purchase price. In the case of consumer loans for smaller sums, equity is usually not required.

Collateral for the small business loan

If a small business loan is to be taken out for a larger sum, the income alone is often no longer enough for the banks as security. The bank will then ask for further evidence to show that the installments can be paid in the future. These options, among others, are conceivable as security:

Life insurance

For some mortgage lending, credit institutions make life insurance a prerequisite. It provides security because it bears the remaining debt should the borrower die before the end of the term.

Disability insurance

This insurance also serves as security for the bank. If the borrower becomes unable to work, the policy takes effect and thus also secures the loan.

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