Small Business Funding FAQ
We take an in-depth look at some of the most frequently asked questions about small business loans.
Our main FAQ page focuses on questions a user might have while using our site. This is where you'll find more general information about small business funding. We should point out that we are not a loan provider. While this information is general, we do not mean to imply that we offer small business loans. If you are looking for a business loan, we will try our best to connect you with a loan provider. That said, let's dive into some of your biggest questions.
How Do I Get Small Business Funding?
The answer to this question depends on what kind of loan you want. We recommend researching different types of small business loans. If you're having trouble deciding on a loan type, consider going with one that offers low interest. However, it is crucial to know that this sometimes means taking on more risk. Secured loans sometimes have lower interest, but if you cannot pay back the loan, then you might have to give up whatever collateral you secured the loan with. In extreme cases, that could mean that you lose your business.
There are multiple ways to earn money to fund your small business. A few options include:
- Crowdfunding - Numerous crowdfunding websites have helped entrepreneurs and inventors support and build their startups. Kickstarter, Indiegogo, and Fundly have gained popularity over the last few years, to name a few. Each crowdfunding site has a unique platform through which business owners can choose how they want to fund their business. For example, Indiegogo allows owners to keep all the money they raise, despite not meeting their goal.
- Friends and family loans - Close relatives and friends can also lend a helping hand and invest in your business. However, it is best to sit down and discuss the benefits and potential disadvantages of this option, as money can affect relationships with those closest to you.
- Banks - Locally owned banks are a helpful resource for businesses as they are often interested in building the local economy. Even if you do not qualify for a loan, speaking with someone at a bank can help you understand how to become eligible for a loan in the future.
- Online lenders - Online lenders provide fast funding for those who are in immediate need of a loan and cannot attain one with a traditional bank. They are most beneficial for owners dealing with poor credit. One factor to consider when taking out this loan is the interest rate lenders charge.
- Credit unions - Credit unions offer loans approved by the SBA (Small Business Administration). However, you will most likely have to be an active member of a credit union in order to qualify for a loan.
What Does it Take to Get a Small Business Loan?
Business owners have many options when it comes to acquiring a loan. Below is a list of a few requirements you will find when applying for a business loan:
- Credit score - Lenders will examine your personal credit score to see if you can take on a loan. If you are already in business, you may need to submit a credit report for your company as well.
- Potential collateral - If you choose to apply for a secured business loan, you may need to use an asset to back your loan against default. Assets include equipment, inventory, or real estate.
- Annual revenue - Lenders often require that businesses bring in an annual revenue greater than $50,000.
- Net operating income - In order to make sure you can make your payments on time, you need to show a salary that is at least 1.25 times greater than your expenses.
How Will My Rates Be Determined?
Before you're approved for a loan, your provider will check to make sure you meet some basic qualifications. Lenders will be sure to check if you're a U.S. citizen, at least 18 years old, and have a real address. From there, they will likely ask for more information about you and your business. Some of this information may be used to determine the rates you will pay for your loan.
Here's a list of what a lender may look at to calculate the rates you'll pay on your loan.
- The type of loan you need
- Your credit rating
- Your business credit rating
- How long your business has been around
- How successful your business is, or how much of a risk it will be to lend to you
- Whether you're securing the loan or not
- The state and federal regulations
This list is not all-inclusive, and your loan provider may use other factors to calculate your interest rate and fees.
What if I Have Bad Business Credit?
If you have poor credit, you will likely end up paying more in interest and fees. You'll also probably have fewer loan options to choose from; however, it doesn't mean you have no options.
If you think your business credit will affect your chances of attaining a loan, see if you qualify for SBA loans geared toward struggling businesses. This type of loan may require you to take classes. The loans generally take longer to apply for than other types of loans. If you need money sooner rather than later, this type of loan isn't always a viable option. But if you have the time and think you can qualify, this is the route you should take.
What if My Business is Less than Three Months Old?
A lot of loan providers will ask for your financial history from the last three months. This can be a point of conflict if you are trying to fund a startup, as small business loans are meant for businesses that have already established themselves. A startup brings its unique risks that are better addressed by a different financial product. You can find more information on startup loans.
What is a Small Business Grant?
A small business grant is different from a loan in that you don't have to pay the money back. This type of funding is very competitive and somewhat dangerous. When applying for small business grants, there are a few things you should be aware of:
- You may have to match the grant with your own money, meaning that you may have to take out a loan to qualify for the grant.
- There are scammers out there that pose as grant providers and try to steal your financial information
- Many grants come with strings attached.
While this type of funding seems ideal at surface level, it gets a lot more complicated when you learn about the application process and logistics of the grant. If you do decide to apply, we recommend going with a provider you can trust, like a government organization. Then, make sure you don't agree to anything that may hurt your company down the road.
Do You Offer a Small Business Loan Calculator?
No, but we do recommend that you use one. A loan calculator can help you get an idea of how much you'll need to pay each month. To get the most out of one of these apps, you will need to have an idea of how much interest you'll be paying and how long your loan term is. Then punch those numbers into the calculator and use the information to plan out your loan.
We'll be posting more articles in the future with general information about small business funding. At Lendza, we want you to be as informed as possible before you take out a loan.
