When you are running a small startup, having enough funds to keep your business running is one of the most important things to you as a business owner. Therefore, it’s important that you have sufficient knowledge about the different sources of business loans within your reach.
Although it’s difficult to qualify for a loan, banks are one of the most popular sources of funds for most small businesses. However, this doesn't mean that you can’t get a traditional loan to facilitate your business expansion plans. In fact, you only need to prove that your business has a great revenue generating potential and the lenders will be lining up to offer some funds.
Small business loans
In the past, securing a small business loan was quite hard considering most banks were yet to recover from the aftermath of the recession. However, things are better now with the government having commissioned funding programs to offer financial help to small startups.
The Small Business Administration (SBA) is mandated to fund small businesses in almost any industry. The loans are offered through several banks that work in collaboration with the SBA. You can get more information from your bank and try to see whether they have attractive financing options. Alternatively, you can check out the SBA website to see if your business meets the qualification criteria.
The main perks of a traditional small business loan are lower interests available and you won’t be asked to give up some equity in your business. In addition, the only concern the bank has is how the money will be paid back. Besides, this program was initiated to encourage banks and other lenders to lend to small startups but the SBA covers a huge part of possible losses in the event where a borrower has defaulted.
However, the SBA loans are meant to be used for business expenses like real estate, equipment, inventory, and working capital.
Covenants that come with bank loans
Before you settle for any funding from traditional sources for your business, it's important that you fully understand the terms and different rates as well as the associated collateral. Basically, a covenant is a clause in the lending contract that may limit borrowers from using the funds for a certain cause. In addition, they can require your adherence to a specified business performance. The specific number of requirements is determined from the risk that a borrower carries. Normally, the risk is indicated by credit scores, loan payment history, and business acumen and finances.
Covenants are important to the lenders because they are assured of payment irrespective of what has happened to your business. As such, you should endeavor to understand the covenants that come with loans so that you can avoid violations that can lead to severe consequences.
To illustrate, some loans may come with a covenant that restricts you from using the funds towards certain expenses, this means you can’t touch the money even when you are facing an emergency. Similarly, you may be required to stay away from additional loans when the contract with the bank is active. If you do any of the above, the bank interprets this as a breach of contract.
When you violate the covenant, most banks can pull your credit line, call back the note or demand payment of the entire amount within a month. On the extreme, they can seize your personal assets or even come after your business.
Getting a traditional business loan
Most traditional lenders tend to rely on your business’s credit score when making a lending decision as well as determine the loan terms. Besides having a great credit score, it is important to establish good relations with a justrightloans.com lender early enough and improve the odds of getting your loan approved as well as advice on how you can improve your chances. When you are in good terms with a lender, they are likely to give you the funds when the need arises.
You can apply for a business line of credit where the bank offers you a pre-approved loan that you can draw anytime the need arises. Unlike a term loan, you only use what is necessary at the time, which means you’ll only pay interest on the amount spent. Normally, the bank allocates you an amount with regard to the receivables of the business but you may also use some personal assets as the security.
The challenges of traditional business loans
As time goes, bank loans are still out of reach from a large percentage of small businesses. In fact, less than half of all applicants seeking small business loans were granted one in 2016. This continues despite the increased optimism in the small business community.
Most startups have great plans for expansion but they have little access to funds from traditional banks. As such, most small business owners tend to heavily rely on personal finances to further their business ambitions.
Where there isn’t much being done to make the situation better, the banks are not the only ones carrying the blame. The truth is that most small businesses are not adequately prepared to receive the funds and the business credit score is wanting. Nevertheless, some banks have improved their lending to small businesses since the Small Business Jobs Act was enforced.
Although the banks are still cautious when dealing with small businesses it’s due to the losses suffered in the previous recession. Since this trepidation doesn’t account for the cautious approach, business owners can get funded if they improved their credit scores and observe due diligence in the application process.
If your small business has created a good track record and the credit scores are impressive, it’s not hard to get some funds from the traditional lenders. The good thing about getting a loan from the banks is that you get a lower interest rate. In addition, you can enjoy higher security as well as assistance provided by the government through the banks.
On the other side, it can be quite difficult to access the loans if you have just started the business and you don’t have good credit scores or the necessary assets to act as security. In this case, getting an online loan from non-conventional lenders can be a good idea.