Understanding Small Business Loans

For many small businesses, the ability to spend large amounts of capital for upgrades or replacing equipment might be limited. Therefore, a business owner might look for capital at other sources, such credit cards or a small business loan. Throughout this article, we will explore a small business loan and some key facts that you need to know.

What Types of Small Business Loans Are Available?

There are a variety of loans options available. They include 7(a) loans, real estate and equipment loans, disaster recovery and even exporting. The Small Business Administration (SBA) works with third party lenders to allow small businesses to access capital for a variety of reasons through financial assistance programs. These programs include debt financing, surety bonds and equity financing.

The SBA does not make the loans directly, but they set the guidelines for the loans and guarantees that these loans will be repaid. This lowers the risk for the lenders themselves, but gives businesses access to necessary capital. However, if you have access to other funding options with reasonable terms, then you might not qualify.

The loan guaranty and its requirements can change as the Government alters its fiscal policy or priorities, based on the current economic realities. So what was policy a few years ago, may not be policy today. Therefore, you need to work with your third party lender to determine if you qualify and at what terms.

Guaranteed Loan Programs – What You Need to Apply

If you have decided to go the route of a small business loan for a capital investment or to finance debt, then you will need certain information to qualify. Before you find a lender, it is important to understand the key factors that a lender will be looking for when reviewing your application. The first is the amount of equity that you have already invested in your business. Basically, when combined with the borrowed funds, they want to be sure that the business can operate in a sound financial way.

Collateral is additional form of security that your lender may require as part of the approval of your business loan. Essentially, the collateral serves as a secondary source of loan repayment if your business is unable to do so.

Working Capital and Resource Management

How are your business earnings? The reality is the loan is being made based on your cash profits, not those that are just on paper. If your business cannot demonstrate the ability to meet its financial obligations, then the lender will not be inclined to give your business the additional funding. Working capital is key to this process. Essentially, this is the difference between current assets and current liabilities. Your current assets are your most liquid assets that the business could tap to repay its obligations.

Working capital essentially could be considered a rainy day fund of sorts. If your business is not making any cash due to a temporary downturn in sales, the working capital could be used to meet obligations until the business has an uptick in sales. The working capital can also be used as a smoothing effect over the course of the year, because most business will have slow parts of the year, yet they must meet certain monthly obligations.

This leads directly into resource management. How you handle your day to day business affairs can also factor into whether or not you will receive a small business loan. This includes looking at how you pay your debts, collect on debts owed to you, deliver services and products to customers, as well as manage your inventory. The reality is that if you are always late in many of these areas, or delinquent on some of your bills consistently, then the lender might see you as a potentially higher lending risk.

How To Help Your Business

If you have determined that a small business loan is your best option, then it is important to make sure that you are paying the obligations of your business on time. Manage your cash efficiently and effectively. Be sure that you are meeting your deadlines timely and delivering when you say. Define what are assets of the business and make sure that you have them all listed with your information. They may be able to serve as your collateral if necessary.

For many small businesses, growth requires an influx of capital that may not be readily available. Others may choose to incur the debt to avoid liquidating assets and other capital currently held by the business. However, it is important to make sure that your choices are based on the sound financials and that your business can actually make the payments without compromising it financially.