For many small businesses, financing via a loan is the primary method used for starting or growing a new company. Like many other loan applications, this is a process that has a few essential steps to it, knowing these will help you navigate it properly.
At Michigan Certified Development Corporation, we’re here to assist our clients in numerous related areas, such as getting an SBA loan for their business. We’ll help you through every step of this process — plus with knowing what these benchmarks are ahead of time so you know what to expect. This two-part blog series will go over all of the important steps in the process of obtaining a small business loan.
Determining Loan Type Needed
First and foremost, you need to determine precisely which form of loan you need to fund your business. Generally speaking, there are three options available:
- SBA loans:
- 7(a) loan: These function like traditional term loans. SBA 7(a) loans are made through commercial banks and credit unions and the U.S. Small Business Administration guarantees a portion of the loan, which makes it easier for lenders to approve applications from small businesses. These loans can reach up to $5 million and provide flexible uses such as startup expenses, working capital, fixed assets like real estate and equipment. Many 7(a) loans carry a variable or floating interest rate but some institutions do offer fixed rates.
- 504 loans are also obtained in conjunction with a financial institution but must go through a Certified Development Corporation or CDC. 504 loans are specifically for fixed asset purchases such as business real estate or equipment purchases, construction or expansion. An advantage of 504 loans is the interest rate is fixed for the life of the loan providing long-term cost certainty for your business.
- Startup financing: Usually offered in the form of business credit cards and personal loans, startup financing is a popular way of getting the cash needed for starting a new business. However, these loans don’t have very long repayment periods and come with high interest rates that oftentimes outpace other types of loans.
- Business revolving lines of credit: Lastly, for an established business, a business line of credit is a revolving loan that provides businesses with funds as needed. These loans are considered “revolving” in that once you borrower and pay back a portion, you can re-borrower that amount at a future date, with some restrictions. Interest rates for revolving business lines are lower than other types startup loans.
Ensure You Qualify
Once you know which type of loan you’ll be applying for, it’s important to ensure that you qualify. Lenders will want to see a few key things from your business before approving you for a loan, and these include:
- A good credit score for the company and its principals
- A detailed business plan with realistic financial projections
- Collateral or assets to use as security for the loan
- Sufficient cash flow to cover monthly payments
Determine What You Can Afford
You also need to take a careful look at your company’s financials to determine precisely how much you can afford to borrow. This number should be based on how much money your business can realistically bring in each month, and it’s important to remember that you’ll need to pay back not only the principal of the loan but also the interest.
Part two of our series will go over the further steps to follow in this process. For more on this, or to learn about any of our small business loan services, speak to the pros at Michigan Certified Development Corporation today.