Which Loans Can Help You Expand Your Small Business?
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For a small business, the initial goal is not success, but survival. But once it becomes established, the owner faces the prospect of expansion.
Growth offers greater business reach that taps into more consumers. Relocation becomes a real possibility along with any tax incentives that state and local governments provide new job creators. A new headquarters may also move a business to a larger and more qualified workforce, another factor that can fuel future growth.
But expansion often requires additional cash outlays beyond startup costs that many business owners don’t readily have in reserve. Many owners shy away from equity funding from outside investors because they’d rather not relinquish control of the business. That leaves debt financing as capital source.
Loans for small businesses can come with many downsides: higher interest rates, a higher collateral requirement, and possibly a personal guarantee on the loan. The good news is that the marketplace has a host of options and careful preparation can help ensure approval of a new loan.
Getting Ready to Get Approved
Before filling out a loan application, gather documents to support your business expansion and loan request. Below is an exhaustive list of documents that your lender may request. Online lenders are less stringent and may ask for less, while traditional banks will want the entire suite. Also expect lenders to pull your personal credit score and your business credit score as part of the approval process.
Personal financial statement: This SBA form requires you to list your personal assets (cash, investments, real estate and cars) and liabilities (mortgages, other debts and unpaid taxes). Private lenders may ask for a similar statement. Profit and loss (P&L) statement: You must provide a current statement plus supplementary schedules for previous years. Financial projections: The SBA requires a detailed, one-year projection of income and finances along with how you expect to achieve the forecast. Other lenders may require two to three years of projections.
Business certificate/license: You will need your original business license or certificate of doing business. For a corporation, your corporate seal stamp is required.
Business plan: Provide background on the business along with a market analysis and plan for the loan funds. Ownership and affiliations: Provide a list of names and addresses of subsidiaries and affiliates. That includes any entities you hold a stake in or are affiliated with by stock ownership, franchise or proposed merger.
Loan application history: Provide records of any past loans you may have applied for.
Income tax returns: Provide signed personal and business federal income tax returns for the last three years.
Resumes: Provide resumes for each business owner or principal.
Business lease: Include a copy of your business lease or letter from your landlord, detailing terms of your proposed lease.
Choose the Best Loan for You and Your Business
With the rise of the internet and online financial banking, options for small business loans have only grown. But there are trade-offs. An easier approval typically means higher interest rates to compensate for the added risk, while lower rates mean a lengthier process.
The Small Business Administration (SBA)—which guarantees a percentage of the loan amount to banks rather funding directly—is particularly helpful for expansion loan options. The SBA will guarantee up to 85 percent of loans for as much as $150,000 and up to 75 percent of loans over $150,000. A small SBA loan of $25,000 or less can get an 8% interest rate with a payment term of fewer than seven years. The rate on a loan over $50,000 can drop to as low as 6.5% with the same payment terms. Some banks may offer private loans, but their requirements are even stricter than those of the SBA.
Online lenders offer loans with higher rates. But the online lenders often have a faster approval process than banks originating SBA loans. In some cases, funding can occur in one week compared to several weeks or even months with the more onerous SBA approach. But be aware of repayment terms. Many online lenders will require repayment in full within anywhere from one to three years.
Another borrowing source on the rise is peer-to-peer lending, or marketplace lending, for businesses. In this scenario, ordinary investors can participate in a growing economy by funding, in part, business expansion loans. With this option, the business owner will need a strong credit score. APRs range from 7 to 40 percent with approvals as high as $1 million. Whichever option you choose to be sure you're comfortable with the terms, including collateral and the amount of your personal guarantee. Many terms are negotiable and lenders expect some back and forth, so don’t be timid to work towards the best deal. It’s your business on the line.
Whichever option you choose to be sure you're comfortable with the terms, including collateral and the amount of your personal guarantee. Many terms are negotiable and lenders expect some back and forth, so don’t be timid to work towards the best deal. It’s your business on the line.
The article Which Loans Can Help You Expand Your Small Business? originally appeared on ValuePenguin