Small Business Loans And Qualification Criteria

Types Of Small Business Loans And Qualification Criteria

As small business owners don’t get public funding like their larger counterparts, it is important for the owners to understand what loan options are available for them to develop their business. In the United States, the typical small business loans can be divided into three major categories. These include business loans from small business administration, cash flow loans, bank loans and alternate loans from a variety of other institutions.

qualifying for a business loan

Small Business Administration Loans

Perhaps, the easiest method for businesses to get loans is to get help from SBA. In the United States, SBA runs a dedicated chapter in nearly every U.S. State. In fact, SBA is developed exclusively to deal with financing and development problems of small businesses. As such, the U.S. government does not finance the SBA. Instead, SBA gets its funding from local banks, financial institutions and various micro-lending institutions. The main advantages of approaching SBA for loans is the variety of loans that the organization can offer to loan seekers. However, such variety can also be overwhelming as each loan has particular guidelines and parameters on how to repay such loans.

The variety of loans available at SBA are due to the arrangement between SBA, lending institutions and the government. Despite the fact that the government does not play a major role in financing, it guarantees lending institutions anywhere from 75 percent to 90 percent of the loans that are given to borrowers. Such favorable terms for lenders also automatically translates into variety and flexible terms for borrowers. For borrowers the downside of taking loans from SBA includes extra paperwork, additional fees and longer times for approval. According to experts, SBA loans make sense because SBA can offer loans terms, which are declined by the bank. Hence, small business owners with tight cash-flow streams and bad credit are also able to take advantage of SBA loans.


Traditional Bank Loans

Another important resource for small business owners is conventional bank lending. Unlike the SBA, loans offered by the bank does not require heaps of paperwork. Most banks have clear criteria and easy-to-understand guidelines for borrowers. Hence, most small business owners can get a fair idea of their chances of getting loans after their first meeting with the bank loan officer.

The main advantage of traditional bank loans is the lower interest compared to SBA loans. In addition, the loan is delivered quickly relative to SBA timelines. On the flip side, there are certain drawbacks of taking loans from the banks. These include less time for the payback, which also includes balloon payments. Therefore, it can be summarized that conventional bank loans are slightly difficult to get but it comes with low interest and fast approvals. It is also notable that different surveys have revealed that major banks only approve just a little more than 20 percent of the loan applications they get. Still, the approval rate at smaller banks is much higher, which is typically 50 percent.

traditional bank loan

Alternative Lending Institutions

For those business owners, who are not contend with the two major borrowing facilities described above, getting a loan from alternate lending institutions may be a good idea. Actually, alternative lending institutions are very attractive for borrowers with no credit history or those who have bad credits. Sometimes, alternate lenders are also extremely useful for lenders with excellent credits because most of these institutions have online applications that promise a decision within hours. If lending terms are suitable, most borrowers get funds delivered to their accounts in less than a week.

Alternative lending options can be divided into two types, which includes direct lending institutions and lending marketplaces. Examples of direct lending alternate institutions include Foundation and Kabbage. Similarly, Biz Fi and Biz2Credit are examples of lending marketplaces. Overall, the advantage of using alternate institutions is the instant approval without restrictions on how the loan is used. On the other side, potential drawback for selecting alternate lending institution is the higher rate of interest.

In summarizing benefits and drawbacks of all three major options for small business owners, it can be suggested that startups and businesses with weak credit should approach either SBA or alternate institutions for their loan needs. On the other hand, established businesses should start by seeking loans from conventional banks. If large banks decline the application, the borrower should contact small local banks, who are known to approve more than half the number of potential applicants with a fair business history.