One of the most frustrating things in life for a novice entrepreneur is transitioning from having a dream to securing the funding to make that dream a reality. Many first ventures are small outfits, but if they are successful, they can become the rock upon which entire empires are built. Below are some of the options for taking those first steps and securing funding for your small business.
Banks are the most common lenders for all types of businesses and they can be surprisingly flexible about who they lend to. All banks will offer you the ability to check your credit score and will be able to assist you in bringing it up if necessary, although they may charge for this service. Fortunately, you can run a credit check yourself and there are now a variety of options for people who wish to do so.
The types of loans offered by banks fall into two categories; small business administration loans (SBA) and conventional bank loans (CBL). SBAs are loaned according to government guidelines and are guaranteed by the government meaning that if you are ultimately unable to pay the loan off, the government will pay 70-90% on your behalf (this will still have an impact on your credit rating and ability to secure loans in the future though).
SBAs are less stringent in their requirements and are offered to those who would otherwise have been denied a loan, for those who have an excellent financial history they still offer terms more favorable to the borrower, again because of the government guarantee.
CBLs, on the other hand, tend to carry lower interest rates and the approval process is much quicker as your bank doesn’t have to go through a federal agency like they would with an SBA loan. The catch is that the requirements are much stricter than an SBA and that the bank will want to be repaid sooner.
There are now more options than ever when it comes to securing a loan for your business and banks no longer have the near monopoly on the market they once did. In fact, you can now obtain a loan online if your credit score is high enough.
Alternative lenders are not subjected to the same regulations, federal or otherwise, as a bank is and can be much more flexible with regards to how much time you have to pay the loan back as well as interest rates on the loan. Be aware, though, that this extra flexibility won’t necessarily work in your favor, and as with a bank, the offer you receive will depend largely on your credit and FICO score.
Types of Loans
A loan from a bank will almost certainly be either an SBA or a CBL. With alternative lenders, there are different types. Working capital loans are aimed at businesses which are already operational and require a quick cash injection. Equipment loans are small loans designed to help businesses purchase any equipment that they need.
When approaching any lender, bank or otherwise, be sure to enquire as to what the types of loan they can offer you and ask them to talk you through the pros and cons. Lenders will be happy to do this as it is in their interests for you to choose the right kind of loan and be able to repay it.
As long as you are committed to your business and don’t rush into things, you should find securing a loan relatively painless. Remember to look around for the best offer you can but be realistic about what you can expect. Knowing your credit score will help a great deal with this if you need to do some work to improve your score, ask your bank how to best go about it.
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What have you done to obtain finances for your small business?