Small businesses face the hurdle of getting capital from the bank and other lenders as well. This is because new firms are not able to provide a guarantee as to how well they will do in the market. If the owner of the business firm has a good property that is worth double the cost of the loan amount, then the loan is granted quite easily. But this might not be the case with everyone. That’s where loans become a big part of a small business foundation. These form the initial capital for starting a new business.

Small businesses need to be prepared with all the relevant paperwork to make the application process for bank loans easy and efficient. However, startup firms usually tend to get disqualified from loan applications because of the uncertainty associated with their future growth. For this purpose, here is an insight to provide you a basic understanding in this regard.

Different categories of small business loans

First of all, you must be aware of the different types of small business loans. Then, choose the loan scheme which suits you best and might be easy for you to repay. Here are the options:

Small business line of credit

Under the line of credit loan type, your lender will provide you with a cap on the amount that you can withdraw. There will also be guidelines for withdrawing money whenever you need it. It is a great option for small business firms which often have unexpected expenses. It is one of the best financing options.

Working capital loans

A working capital loan is used to meet the daily costs of the firm, as it helps in financing their day to day expenses, including everyday costs and unexpected expenses. It helps in the capital expenditures and expansion of the firm.

Equipment loans

These are great for new start-up firms. Under this scheme, firms can take equipment loans through which the firm will only have to pay around 20% of the total amount of the equipment as down payment. The rest can be paid as EMI or monthly installments at low or 0% interest rates.

Small business term loans

Term loans are loans for meeting the daily requirements and capital requirements at a particular rate of interest. These can be repaid within six months to three years. These loans also have a stake in the fixed assets and properties of the firm, in case the firm fails to repay the loan amount.

Accounts receivable financing

This kind of line of credit option is great when your bill receivable amount is similar to the finance amount. The bank receives the money from the debtors in exchange for providing finance to the firm.

Small Business Administration (SBA) loans

These are small business loans available at low-interest rates and are backed by the SBA of USA. Loan amounts can range from $5000 to $30 million. These are the most popular type of loans in the country as the repayment terms, and interest rates are great.

Before opting for a loan, you need to ponder through the following points-

Choose the type of loan that is perfect for your firm. Start-ups usually do not get loans easily. Sometimes, you will have to consider alternate sources of financing such as your friends and family or business credit cards. If you apply for loans once your start-up is up and running, there is a higher chance that your loan application will be approved.

Determine whether you qualify for a loan: The financier from whom you get a loan verifies and checks all your documents. They will also check whether you have been granted a loan before from any other institution. The following points are considered.

The age of your business and the credit score

Whether you make enough money or not, whether the cash flow generated is suitable for making the payments, you must seek answers to these questions.

Gather the right documents for a loan. Different financiers ask for different documents, but some of the most common documents required are:

• Business and personal tax returns
• Personal bank statements and current bank statements
• Final accounts of the firm
• Legal documents, license, and deeds

Select the best type of lender for your business. Consider the rate of interest and loan repayment terms, among other things while deciding which lender to select.

Apart from these, there are some of the points most start-ups or small businesses should keep in mind while applying for loans. You need to create a good business credit score for qualifying for small business loans of any kind. Occasionally, fixed and tangible assets are kept as a mortgage, which acts as collateral security in exchange for financial help from the bank. So, study the scenario carefully and make an informed decision equipped with all the relevant information.