Applying for a small business loan refers to the process by which a business owner requests funding from a lending institution. The process is usually not very easy and many documents are required for a lender to consider loan requests.
The most common documents a lender will require of small business loan applicants are the loan application, personal and business tax returns, a personal financial statement from each owner of the business, certified financial statements of the business, documentation of the business’s structure, a list of all outstanding debts, and a business plan. A business plan usually includes expected revenue and how the loaned money will be spent.
Depending on the lending agency, applicants may be required to also submit a proposal on how they will repay the money, including payment amounts and the length of the loan repayment term. Other times the lender will already have a set plan regarding loan terms.
Lenders also consider the available capital and collateral of a business when an owner applies for a small business loan. Lenders want to know how much the owner has invested in the business and what collateral can be used to secure the loan in case it is not repaid.
The interest rates and payment plans differ according to which lender is chosen for a small business loan. Having good credit and a healthy financial history can help a business owner secure the best terms for a small business loan.
Applying for a small business government loan usually means to go through the United States Small Business Administration (SBA) to obtain funds for a business. The most basic type of loan offered by the SBA is a 7(a) loan, which is provided by lenders such as banks. These lenders structure their loans according to the SBA’s requirements and receive a guaranty for a portion of the loan. These loans are available only by guaranty, and both the lenders and the SBA share the risk of loans not being repaid. 7(a) loans come directly from the lenders; therefore, they are technically not government loans.
To apply for a small business government loan, business must meet all of the following eligibility requirements:
* Be a for-profit business
* Meet size requirements for the business’s industry
* Lack internal sources for financing
* Demonstrate ability to repay loan
Certain types of 7(a) and special purpose loans may call for additional eligibility requirements. Other important factors considered when applying for a small business government loan include effective management, character, owner’s equity, and collateral. An individual may also be asked to provide a “Statement of Personal History” to analyze the abilities of the individual.
Other variables that a business owner should be aware of when applying for a 7(a) loan are the maximum loan amounts, interest rates, fees, guaranty percentage, maturity terms, and prepayment penalties.