How to Apply For Small Business Loans
Every business needs funding to operate. For many businesses, that begins with an influx of cash. But there comes a point in most businesses’ lifespan when cash flow becomes less certain—or when growth requires additional capital.
Enter the business loan, one of the most effective ways to fund your business. This article will cover everything you need to know to get one, including:
- SBA loans: What they are and how they work
- Traditional loans: What to look for in a non-SBA loan
- How a line of credit can support your business
SBA Loans: What You Need to Know
For many small- to medium-sized businesses (SMBs), the first and best loan option available are the ones guaranteed by the Small Business Association (SBA). But, how do small business loans work when they’re through the SBA?
The SBA does not directly lend money to small businesses; instead, it works with both lenders and businesses to help pair you with the perfect lender and loan.
These SBA loans can be big or small, ranging from $500 to $5.5 million dollars. According to Capital Alliance: “Banks tend to prefer signing off on loans that last anywhere from three to 10 years. The average loan size hovers near $500,000, but banks are occasionally willing to lend as little as $50,000 to small businesses.” And they can cover nearly anything, from working capital to fixed assets. Some use cases include:
- Seasonal financing and refinancing of debts
- Business equipment, furniture, and remodeling
- Export loans, revolving credit, and operational expenses
To qualify for these loans, businesses must meet certain criteria. For example, they generally need to be for-profit businesses and meet given size thresholds, depending on funds required.
However, these requirements are typically much more relaxed than those of traditional lenders.
Because SBA backing protects lenders, they can offer loans to businesses at better rates than they might receive from traditional bank loans. In addition to competitive rates and unique benefits, like little to no collateral requirements, these loans can also come with education materials and resources to help you manage the funds.
SBA Lender Match: How to Apply for Small Business Loans
The SBA also offers a simplified platform that helps you find the right lender for you.
Namely, the system is called Lender Match. And it begins with the business owner answering a few simple questions about your business and its needs, as well as filling out the Lender Match form, which the SBA reports can take as little as 5 minutes. The next step is to simply wait.
According to the SBA, you should be paired with multiple prospective lenders in as little as 2 days. From that point, you can begin negotiating and comparing loans terms and preparing to officially apply for your loan. In the meanwhile, you should prepare to present:
- A business plan, especially for startup funds
- Knowledge of your industry and position within it
- A breakdown of how much capital you need, and why
- A credit score or history (business and personal)
- A projection of your company’s financial future
- One or more assets to put up as collateral
These are general areas that many lenders may ask about, regardless of what kind of small business loan you request. If you are after a particular standardized loan, such as the COVID-19 temporary loan program(i.e. Paycheck Protection Program), there is a more regulated set of materials that lenders may request from you
The time it takes to actually receive the funds can be lengthy—especially for highly regulated loans, like SBA-backed ones. This is one main reason many businesses choose other, potentially faster options.
Traditional Loans: What You Need to Know
While SBA loans often offer great and safe funding, with competitive rates, they are certainly not the only option available to businesses. Especially if you have excellent financial standing and credit, your business may qualify for an even better, non-SBA backed loan.
These come from traditional or conventional sources, including but not limited to:
- National banks, like Bank of America, Chase Bank, etc.
- Local banks in your immediate area.
- Lending companies, like Rocket, Fundera, etc.
Given the wide variety of lenders, the process for applying will vary widely, as well. There is no uniform application process, like with the SBA’s Lender Match program.
Since these loans aren’t regulated in the same way SBA loans are, their terms are set by the lender. Thus, there is greater potential for variance between lenders, so you might find unique conditions that aren’t available to you in any comparable SBA-backed loans. By the same token, since there is less protection for the lender, the rates may not be as preferable to you as they would be from an SBA-backed lender. Because of this, ideally, you should shop around for multiple loans and then later decide which offers the best rates and terms.
Pros and Cons of Traditional Business Loan
One of the main reasons a small business owner might seek options beyond SBA loans is the need for expediency. Even though the initial pairing is fast, the various layers of protection and regulation can slow down the underwriting process.
In comparison, a small business loan from a traditional, non-SBA source can often be approved much faster. Other benefits on these loans include:
- Fewer restrictions on the lender, which can translate into greater flexibility in crafting unique conditions that best suit your particular business needs and means.
- Fewer restrictions on the borrower with respect to how the funds are used, what options are open for repayment and refinancing, etc.
Common drawbacks include:
- Significant requirements for credit and business standing and collateral can prevent many businesses from getting non-SBA loans approved.
- An absence of oversight can lead to a greater possibility for lenders to offer poor or even predatory loan conditions.
If neither SBA nor non-SBA loans offer your business a clear-cut, perfect solution, another great option to pursue as a small business owner is a line of credit.
Lines of Credit: Different Means, Same End
If your highest priority is securing funds immediately, your best bet might actually not be a loan. Instead, you should consider opening up a line of credit, like a business line of credit or charge card, to pay for various expenses.
A revolving line of credit can offer greater flexibility, as they can be much easier to qualify for than actual loans. However, the amount of credit you are approved for may be less than a loan. In addition, you may face higher APR or interest rates than you would with a business loan.
With traditional credit, you can stretch expenses out over multiple months, paying interest on any balance you carry over from one pay period to the next. But in the case of a charge card, where no balance can be carried month to month, the line of credit can function like a de facto loan with no interest at all—you just need to be able to pay it back in time.
In addition, top-tier corporate cards offer bonus features, like savings opportunities with cash back incentives and integrated expense management and vendor management platforms built-in.
That’s how Ramp works for small businesses.
Use Ramp to Power Your Small Business
When it comes to securing a loan for your business, you have two main options: SBA loans or conventional loans. While SBA loans can be easier to qualify for and offer greater protection, conventional loans provide you funds quicker.
Consider Ramp to be the third, more effective option. Our smart corporate card empowers your business to save money (not spend), with unlimited flat cash back and automatic cost-saving opportunities, like duplicated subscriptions and SaaS creep.
On top of that, we also enable unparalleled monitoring and control over spending with our expense management platform and vendor management platform.
Your best bet for a business loan might not be a loan, at all.