What is a Small Business Loan?

Small business loans (not to be confused with SBA loans) are generally one of the lowest costing options for small business owners in need of financial assistance. They are usually provided by a bank, and offer flexible repayment options along with fair interest rates. However, it can be very difficult to qualify for a small business loan, and potential lenders will require a lot of assurance in your ability to run a successful business.

Conventional small business loans usually lend a minimum of $250,000, have interest rates between 5-10%, are repayable between 1 to 20 years, and feature a 2 to 4 month turnaround time.

The downside to business loans is their eligibility criteria. You will need excellent business credit and personal credit in order to qualify, as you will be deemed too risky otherwise. Poor credit is often the sole reason for a denial of a small business loan. Small business loan lenders will also require you to have a sound tax history, and you must be able to demonstrate that your personal and business taxes are filed promptly and properly.

Those applying for a small business loan are also required to put some of their own money into the business too. This is known as an “owner’s equity injection”. Injecting some of your personal equity into your business shows the lender that you are confident in your business, and also reduces the amount of monthly payments that your business to required to make. Around 20% of an owner’s equity injection is usually required. The more of your own money that you contribute, the more likely you are to approved for a small business loan. Ultimately, no type of small business loan will provide you with 100% of the finances, as it is simply too risky of an investment for the lender.

You should also do your research before applying for a small business loan. Look into the statistics about your business model and other similar businesses. How much money are you realistically likely to make? Will you be able to cover all your expenses and loan repayments while still turning a profit? This is important, because you need to ensure that your business will be able to afford its loan repayments without becoming crippled and eventually failing or defaulting.

Though it may seem like common sense, lenders will also look favorably upon those who have proven and successful business or entrepreneurial experience. Small business owners with a proven track record of making sensible and profitable business decisions are a smaller risk than those who are new to their chosen industry. Very few lenders will back someone who has a great business model but little business experience.