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Growing Business

Small Business Loan

Posted by Paul Daniels on Wednesday, August 3, 2022

Applying for a small business loan for the first time can be overwhelming. We’ve put together this guide to help you navigate the process with confidence.

Woman on Tablet Searching How to Get a Small Business Loan,

What You Need To Know About Small Business Loans

As a business owner, you’re always thinking about what’s next for your small business. Whether it’s hiring more team members, increasing product offerings or acquiring another company, there are several financing options available — including a small business loan.

Navigating the process and lending options can be intimidating if you don’t know where to start. We’ve put together this guide to help answer your questions about how small business loans can help you achieve your dreams of small business success.

Is a Small Business Loan Right for My Business?

Before diving into the details of the types of loans available and what you need to qualify, it’s important to think about what your current business goals and needs are and whether a small business loan can help. To help you determine if a loan is the right financial solution, here are a few ways a loan can support your business:

1. Business Expansion

If your business is turning a profit and the future looks positive, you may want to expand. A loan can help you achieve your goal of opening a new retail location, renting more office space, hiring more employees or adding new equipment to expand your product offerings.

2. Build a Strong Credit History

Your credit history helps tell the story of how you’ve managed your debt in the past. And many companies will look at credit history in order to predict future financial behavior. Taking out small, short-term loans that you can pay off easily can help you improve your credit. The better your business payment history, the more likely your business is to be approved for a larger loan in the future.

3. Increase Working Capital

A working capital loan might be the right fit if you want to start or expand a business. If you’re a startup, you can get financing that will help you through the early stages of your business; the loan can be used to cover costs related to inventory, staff and rent. Contractors and farmers who have seasonal businesses can benefit from a working capital loan because their income fluctuates throughout the year. This type of loan can act as a bridge if there are periods when you aren’t bringing in enough revenue to pay your expenses.

What Types of Loans Are Available?

If you've determined that a small business loan is the best option, the next step is to learn about all the different types available. There are several short-term and long-term loans, including:

1. Equipment Loan

An equipment loan can help you buy or lease equipment, from heavy construction equipment to office equipment. Buying or leasing equipment can be a large investment, so before applying for a loan, it’s important to look at your current budget and let it serve as a financial road map to help guide your purchase decision. Most equipment loans have lending terms between six months and seven years.

2. Real Estate Construction Loan

A real estate loan can help you acquire or develop residential properties, construction lines of credit or purchase income-producing properties, including office buildings, industrial buildings, self-storage and more.

3. Working Capital Loan

A working capital loan is money borrowed from your bank or lender to keep cash flowing in your startup or expanding business. A working capital loan matures in one year and has monthly interest payments. There are two ways to obtain a working capital loan: from the assets you already have with accounts receivable or by applying for a loan. A commercial lender like Northwest Bank can work with you to apply.

4. SBA Loan

The U.S. Small Business Administration (SBA) provides resources — including loans — to business owners to help them grow and succeed. The most common SBA loan program is SBA 7(a). This type of loan can be used to set up a new business but can also support  an acquisition or expansion of an established business. There are many benefits of an SBA loan, and the specific terms can be negotiated between you and an SBA-approved lender like Northwest Bank.

Another common SBA program is a 504 loan, which is geared toward small businesses looking to finance commercial real estate or large equipment to use in their operations. Additionally, a 504 loan can be used to finance land acquisition, construction or improvements to an existing building.

The SBA can offer loans with longer repayment terms and higher borrowing limits. For example, you can get up to 25 years for repayment on  a real estate loan and up to 10 years on an equipment loan through the SBA.

How Do I Qualify for a Small Business Loan?

Initiating a small business loan transaction depends on the type of loan and the lender you choose. When applying for small business financing, a lender will determine your creditworthiness by looking at the following:

1. Five C’s of Credit

Before applying for financing, make sure you meet the criteria of the Five C’s of Credit:  Character, capacity, capital, collateral and conditions.

  • Character: A lender will want to know a little bit about you and what kind of person you are.
  • Capacity: They will look at cash flow and your ability to pay off the debt. In addition, they will look at not only  your business’s cash flow but also your personal finances.
  • Capital: The more cash you can inject into your business, the more likely it is that you will be able to pay back the debt.
  • Collateral: This could be real estate, equipment or inventory, or accounts receivables. If your business is unable to pay its debts, the collateral is sold to pay off the remaining loan balances.
  • Conditions: A lender is going to be interested in what is going on in your industry and whether any of these conditions could create a challenge for your business.

2. Personal Credit Score

Your personal credit score matters and can impact your financing options. A good credit score typically ranges from 650 to 799 and an excellent score is from 790 to 850. You are more likely to get approved for a business loan, as well as have better financing terms and lower interest rates, if your credit score falls within these ranges.

3. Supporting Business and Financial Documents

Before applying for a small business loan, a lender will want to see:

  • Business plan with projections
  • Annual revenue (or monthly sales)
  • Bank statements
  • Past three years of tax returns
  • Legal documents
  • Available collateral

When you share this information, a lender can better understand your business’s assets and guide the conversation when discussing what type of loan is best for your business.

How do I apply for a small business loan?

The first step is finding a lender. This could be  an approved SBA loan provider, online loan provider, credit union or community bank like Northwest Bank. A commercial banker is a great person to talk to and bounce ideas off regarding your business finances. They can walk you through loan options and provide sound advice on what loan will benefit your business.

While there are a variety of funding options available, don’t get overwhelmed. Make sure you refer back to this guide to understand your loan options and how to apply. Each type of small business loan can help your company reach its goals and make way for profitable growth.

Reach out to one of our Northwest Bank Commercial Bankers today to start the loan process.

The Author

Paul Daniels

Paul Daniels

Business Banking Manager, VP

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