The landscape of small business financing has drastically changed over the last three years. Coming out of the recession, we’ve seen the fast rise of “alternative lenders” as traditional banks struggled to understand the typical SMB risk factors in the wake of the housing market crisis. This shift has changed the way many small businesses approach and assess financing options today.
As one of the 28 million small businesses currently active in the US, you have an abundance of funding solutions available to choose from! The trick is to understand why you should consider a small business loan, how you can get a small business loan, what some of the trends are in loans, and where you see your business in the future.
To help you with this, Kabbage, a fast and simple platform for small business loans, and Priori Legal are taking the mystery out of the process with a broad overview on everything you need to know about small business loans.
Types of Loans Available Today
Small business loans are a lot like small business in that they come in many different shapes and sizes. One can almost always find a funding solution that fits their specific business needs.
However, not all alternative financing options are created equal and understanding what options are out there is essential to making the best call. Here are the 3 most common loan-types available, today:
- The Small Business Administration: The SBA offers several types of loans, including the SBA 7(a) Program, MicroLoan, and 504 loans. All three types of loans are backed by the government but issued through a traditional bank.
- Traditional Loan: Sometimes called a term loan, a traditional loan is typically used for purchasing long-term assets. However, keep in mind that you will have monthly payments and interest to pay off the loan.
- Alternative Loan: Without the restrictions of a traditional loan, alternative loans offer access to funds easily and faster than any other loan. And some alternative loans can be accessed online and the same day.
What Determines The Approval of a Loan Application?
Getting a small business loan is not as simple as saying you would like one. No lender will just give you a loan without knowing what they think they’ll get back in return.
The amount of your approved loan depends on a number of factors, such as your credit score, the age of your business, and your monthly revenue/cash flow.
Below are some of the criteria typically used determine if an applicant is a good candidate for an SBA loan, specifically:
- Size of the Business: The SBA loans have “small” in the name for a reason. They help funnel loans to SMALL businesses like you! So that means in order to receive an SBA loan, you must meet the size guidelines for your specific industry, which typically is fewer than 500 employees.
- Prior Failed Attempts to Obtain Financing: In order to receive an SBA loan, you need proof of failed attempts at obtaining a loan from traditional sources such as banks. If you could have received a loan from other places, you probably wouldn’t request help from the SBA.
- Lender Restrictions: In addition to checking off the first two points, you must meet additional qualifications for the lenders who will be processing your loan through the SBA. Be sure to do some research about which type of loan you’ll need and what additional requirements you may run into.
Application Requirements
Now that you’ve gone through the checklist, you can move onto filling out the application for a loan through the SBA. The application process takes time and research on your part so that you can find the best lender based on your financial background.
No matter what loan option you decide to apply for, here are a few things you need to make sure to include in your loan application:
- Credit Report: Your credit score is one of the most important factors in determining if you can and will receive a loan. Generally, you’ll need a relatively high score to get approved, meaning you’ll need to be in the 700+ club.
- Financial History Report: Compile a complete financial history report to supplement your credit report. In case your credit score is somewhat below par, you can paint a better picture to lenders about your stable or slightly unstable financial history. Make sure to include current profit and loss statements in addition to a recent balance sheet.
- Business Plan: Also at top priority is a business plan. Creating a complete business plan shows lenders that you are organized and fills in any gaps your financial history may not cover. Basically, the business plan shows lenders what your business is, what you need the loan for, how you plan to use the loan to increase your bottom line, and how you plan to pay back what you owe. So be sure to include any financial projections and cash flow projections.
What Trends Will Shape The Future of SMB Loans?
Advancements in small business lending have impacted the upward turn in offering small businesses loans. So what trends will make the biggest impact going forward?
Here are just a few of the trends we think will help to define small business loans as they progress to the next phase of their evolution.
- Lending has gone mobile:With so many people connected to the web when they’re on the go, some providers decided to go digital. Many alternative lenders offer apps for your smartphone that allow you to access your funds wherever you are. For instance, Kabbage’s mobile app allows you to receive a small business loan wherever you are in as little as seven minutes. So whether you need another loan or one to begin with, technology has made it easier than ever to get access to working capital.
- Middle market SBA loans:If you’re a small business owner on the brink of being categorized as a medium sized business, there’s good news for you. Back in 2010, the SBA increased its 7(a) loan program to $5 million. With the increase in funds, medium sized businesses that need larger sources of funds than small businesses can grow and thrive. Before the increase, medium sized or middle market businesses did not benefit from any loan program on the market.
- Traditional lenders working with small businesses: In just the past few years, traditional lenders such as banks are starting to work with small businesses more and more. In fact, traditional lenders have turned to alternative lenders to help finance more small businesses.
- Non-bank alternative lenders: While banks are in the process of making a bigger push to reach out to small businesses, not all banks, credit unions, and other traditional lenders welcome small businesses with open arms. So many alternative lenders are stepping up to the plate and keeping up with financial demands of businesses out there. Alternative lenders usually offer low interest rates, which is very appealing to small business owners.
- Traditional lenders are changing their views: With so many small businesses in the U.S., traditional lenders are starting to realize how important small businesses are to local economies and the nation overall. So traditional lenders are starting to commit more funds to smaller businesses. As an example, Wells Fargo has promised that in four years (by the end of 2018), it will lend $100 billion to small businesses. As more traditional lenders follow suit, small businesses will have more financial options than ever before.
Although getting a loan will always be somewhat arduous, requirements are now in place to make getting them easier and interest rates lower than ever before. So while many large banks decrease their credit standards, and the overall small business lending rate is rising to close to 20 percent last month – the time to apply for a small business loan has never been better!
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