Before worrying about funds, make sure that you have thoroughly prepared yourself for what’s to come. Ask yourself the following questions:
- Is there an opportunity in the market to turn your idea into a successful product or service?
- Where are you planning to start your business?
- Are there any potential customers in that location?
- If so, what are the types of businesses that are already operating there?
- What are your competitor’s strengths and weaknesses?
Conducting thorough market research, as part of your business plan, allows you to gain a better understanding of your market and/or target audience. Knowing how to leverage the information you acquired allows you to stay ahead of the competition and keeps your business flexible enough to adapt to changing situations. Your business plan will also serve as an important document whenever you decide to apply for small business funding.
What is small business funding?
Small business funding is used as a general term to refer to the financing options business owners can avail of to start a new business. It can also describe funds used to purchase or take over an existing business and/or to finance a new business opportunity. Small business funding usually comes in the form of SBA loans, traditional bank loans, personal loans, and credit cards.
How to get funding for a small business?
When looking for funding options for your small business, it’s important to prepare all the documents you need to support your loan application. While the requirements for business loans depend on the type of loan you’re applying for, there are certain standard documents that lenders will ask business owners to submit. When you apply for funding for small business, make sure to prepare the following documents:
- Personal and business credit scores - In terms of loan eligibility, two of the biggest factors that lenders consider are your personal and your business’ credit scores. These scores represent your overall creditworthiness and show how you manage your personal and your business’ finances. Having a great credit score reassures lenders that you are trustworthy and that you will be able to pay back your loan.
- Personal and business income tax returns - Your personal and business income tax returns almost carry the same weight as your personal and business credit scores. Lenders use your tax returns to verify your income and gauge the loan amount that you will be able to pay. It also allows lenders to assess your ability to repay the loan.
- Business financial statements - In addition to credit scores and tax returns, your lender may also ask you to submit various financial statements. Expect that major financial documents such as your balance sheet, income statement, and your cash flow will be studied by your loan provider to give them a better understanding of your business’ overall financial health and stability.
- List of collateral or assets - While it’s a fact that loan requirements vary based on the type of loan you’re applying for, putting up collateral can boost your chances of receiving financing even if your financial standing falls below the standard requirements. Collateral can be defined as property or assets that you pledge to surrender to your lender in the event that you become unable to repay your loan. However, keep in mind that offering collateral does not guarantee the approval of your loan.
- Business plan - One of the most common requirements when applying for a small business loan fund is a business plan. A business plan should be able to convey your plans for growth as well as integrate the strategies you have in place in order to achieve those goals. Having a business plan also gives your lender an idea about the right loan product to offer based on your goals and financial projections. A well-developed business plan proves to your lender that they are making a good decision in investing in your business.
- Time in business - How long have you been in business? How has your business grown over the years? Most lenders prefer to work with businesses that have been operational for at least two years. Note that lenders, understandably, want to protect their investment whenever they grant a loan and if you’ve only been operational for a couple of months, lending to you may be considered risky.
By no means is this a comprehensive list of documents that will help you get funding for your business. As mentioned above, lenders have different requirements based on the type of loan that you are applying for. It’s important to study each option that’s available to you and only apply for loans that have rates and terms that you can handle.
How does small business funding work?
As mentioned above, small business funding options usually involve some sort of loan that business owners apply for to start a new business or take over an existing one. Loans are often offered by banks, credit unions, and online lenders. Typically, the way small business funding works is that a loan is offered as a lump sum that business owners pay back with interest over a certain period.
What are my options for small business funding?
The first step in finding the right small business funding solution is understanding the financing options available to you. Ultimately, you should shop around and find the right funding solution for your business. Remember, there is no one-size-fits-all approach when it comes to finding the best loan as it will always depend on your business’ current financial situation and how much funding your business requires. If you’re unsure about where to start, there are third-party services out there that partners with various financial institutions to give you the best loans with the best rates. One popular service that comes to mind is PrimeRates.
PrimeRates enables borrowers to shop and compare loan rates using a quick and easy pre-qualification process that would have no impact on your credit score. Here’s how it works:
- Pre-qualify in less than two minutes - no credit score impact
- After getting pre-qualified, borrowers can choose between offers that have the best payment terms
- Select the loan offer that makes the most financial sense and finalize it with your chosen lender
- Your lender may require you to submit documents such as an ID, income, and other relevant financial documents to help support your loan application
- Once approved, all you have to do is wait for your funds!
PrimeRates is revolutionizing lending for borrowers and lenders by integrating lead sourcing at the underwriting lenders. What this means is that borrowers can shop for personalized offers that have a higher likelihood of approval - making the loan application process easier and simpler.
Now that you have a service that gives you an overview of the different funding options that you can qualify for, let’s now take a look at your small business funding options.
- Term loans - Traditional term loans are often offered by financial institutions such as the Small Business Administration (SBA), banks, credit unions, as well as online lenders. This type of loan can be used to purchase equipment, fund expansion projects, or even acquire a new business. Term loans usually have fixed-rate options that allow borrowers to easily predict their monthly costs. However, there are also some term loans that have variable interest rates.
- Short-term loans - Generally, short-term loans are much easier to obtain because of lower credit requirements. The downside is that payment terms are usually shorter and include a higher interest rate. Short term loans can be a great option for business owners looking for small business funding with bad credit.
- Business lines of credit - A business line of credit can be compared to credit cards in the sense that a revolving line of credit is available for businesses to access as needed. The great thing about lines of credit is that you only need to pay the interest for the amount you take out and not the whole available amount.
- SBA loans - The SBA is a government organization that provides businesses with low-cost loan options with competitive rates. As an example, the SBA offers a loan called the SBA 7(a) loan. This type of SBA loan provides financial assistance to small businesses that can be used for any business purpose. The standard SBA 7(a) loan is perfect for building purchases, restocking inventory, buying equipment, and as a seasonal line of credit.
- Business credit cards - Like lines of credit, business credit cards enable small businesses to access a revolving line of credit with a set limit. The biggest difference between business credit cards and business lines of credit is that credit cards are almost always unsecured. This means that no collateral is required when applying for a business credit card.
While it seems overwhelming, equipping yourself with enough knowledge about the different kinds of financing options available to you is important to determine which loan product is perfect for your business’ needs. Be sure to shop around and compare the different small business funding options before settling on a loan. Look for a lender that looks for the requirements that you have and offers loan terms that you can comfortably work with.
Can you get small business funding with bad credit?
Yes! However, expect terms that have higher interest rates and a shorter payment period. To improve your chances of getting small business funding, your lender may ask you to offer collateral. Lenders often ask for collateral in the event that a borrower becomes unable to pay back a loan. Another thing that you can do to bolster your chances of getting approved for a business loan is to find a cosigner. A cosigner is a person that guarantees to take over the loan payments if a borrower defaults on the loan.
Key Takeaway
Again, the type of small business funding that’s best for your business depends on a variety of factors. Unfortunately, there is no single best financing option for small businesses. It all boils down to the factors that are specific to your business and your financial needs. At the end of the day, you, as the business owner, will be the best person to gauge the type of loan that would best apply to your current situation.