How a Small Business Loan Works (and How to Apply)

Small businesses are the heart of any community. In fact, these types of businesses make up almost half of the United State’s private workforce and have accounted for two out of every three new jobs for nearly three decades. People start these businesses for a myriad of reasons, whether marketing a new product, becoming their own boss, or helping to solve a common problem with a unique solution. However, getting started can be a huge hurdle to overcome.

No matter what type or size, starting a business is expensive. Research shows that the average start-up costs for a small business can be anywhere from $30,000 to $40,000. This is often related to furnishing your store space, buying the technology you need to run your business, or covering any staffing responsibilities. For many, access to this type of capital from your personal savings account or from investors isn’t possible. That’s where a small business loan can come in handy.

In this blog post, we’ll walk you through how a small business loan works, what you can do to increase your chances of loan approval, and how to get started with First Seacoast Bank.

What Types of Small Business Loans Are Available?

There are a few types of small business loans available for you to choose from, but here are some of the most common ones you might come across in your research.

SBA Loan

These types of loans are a win-win for both business owners and lenders. Because they’re backed by the Small Business Administration (SBA), the risk on these types of loans is lower, which means the lender may be more willing to increase the amount. SBA loans also have competitive interest rates and can have extended repayment terms (up to 25 years).

Small Business Line of Credit

Similar to a credit card, this option allows you to borrow up to a certain limit and only pay interest on the amount of money you borrow. This means you can draw from the fund and repay your balance as often as you’d like as long as you don’t exceed your credit limit.

Equipment Financing

Equipment financing helps cover some or all of the costs for items you need for your business, whether that be electronics or large manufacturing machinery. These can vary depending on the cost of the needed equipment. They may require a down payment of about 15% and have terms ranging from three to 10 years.

How to Apply for a Small Business Loan

Two of the key factors lenders look at when reviewing loan applications are your business plan and your personal credit history. This will help them see exactly what you plan on using the money for and what risk they might be taking on if they choose to lend you money.

When creating your business plan, there are some important details you need to include, such as a business description, product or service descriptions, market analysis, management team information, sales and marketing strategy and implementation, and your financial plan and projections. This not only fleshes out the purpose of your business, but helps to show how you expect to make it profitable.

Additionally, be sure to familiarize yourself with any loan requirements in addition to these, like other financial or legal documents. In most cases, these include a driver’s license, a voided business check, bank statements, profit and loss statements, and business and personal tax returns. However, the loan officer you’re working with will be able to advise you on what’s needed for your specific application.

Some lenders may require you to provide collateral for your loan. This could be an asset like real estate, equipment, or other items related to your business that the lender has the right to seize and sell if your business struggles and/or you fail to make your payments. The size or value of this collateral can vary depending on your loan. For example, an SBA-backed loan requires collateral and a personal guarantee from each owner equal to at least 20% of the business.

Unsecured business loans are also available and don’t require any collateral, but these can come with less favorable terms.

Having a Community Banking Partner You Trust

When starting your small business, you want a lending partner you can trust and who wants to see your business grow. At First Seacoast Bank, our flexible banking solutions are designed to fit your needs. Our team of lending professionals is available to walk you through the entire process and answer any questions you may have. When you’re ready to apply, they’re here to help. Contact them today to get started.