As the name indicates, small business loans are loans that are partially guaranteed by the government and are offered to start a business or expand a pre-running business. Such loans are offered by banks and also lenders who run their business just online. These loans can be the stepping stones of a venture one wants to start or expand as it provides the working capital. You can explore varied types of financial institutions for help with exploring such loans for purposes of expanding a business or starting up a new venture.

Benefits of a small business loans
These loans offer the applicant financial support through government approvals or even financial institutions. There are participating lenders in these programs and the applicant can apply for loan packages if he or she fulfills all the criteria. These loans are quite advantageous as the guarantee by the government reduces the risk to the lender. The various benefits of applying for a small business loan are mentioned below:

• The monthly interest rates are comparatively much lower than other commercial loans
• The duration of the loans given is of longer duration than the standard loans
• The rate of down payments are also reduced
• These loans are also completely amortized
• The prepayment penalties are low or even zero

With the sanction of this loan, the business owner can have the cash needed for his or her business.

Here’s how small business loans work
The criteria and guidelines for approval of such loans are set by the Small Business Administration (SBA). Banks and online lenders then partner up to provide these loans to the persons applying for them. The down payment for such loans is relatively lower than other types of loans. It is usually between 10% and 20%. With the targeted application to help a small business startup or add up capital to your existing business, a small business loan is extremely advantageous. This loan can also be taken for equipment purchasing.

Types of small business loans
There are many types of small business loans, and here are the most common ones applied for:

• Term loan
  In term loans, a certain quantity of loan is given to the party having certain tenure of repaying. Each payment consists of repaying the principal and interest amount.
• Equipment loan
  In this type of small business loan, the loan is applied for the purchase of equipment. Certain types of machinery can also be purchased through an equipment loan. It is very convenient for those who want to purchase the latest machinery that is there to be offered in the market.
• Invoice factoring
  This type of small business loan is for businesses that have difficulties with cash flows as invoices are not paid on regular timing.
• Business line of credit
  In this type of loan, a certain upper limit is set by the party providing the loan and interest is calculated to be paid on the amount that has been withdrawn and not on the total amount. This loan is normally taken for maximizing advertising budgets, buying machinery, expansion etc.
• Merchant cash advances
  In this type of loan, the lender provides the loan based on future projections of sales. A proper future projection report needs to be calculated and made into a statement and shown to the lender upon which the lender passes the loan.
• Franchise loan
  This type of loan is taken by paying up the franchise fees and other franchise-related costs.
• Healthcare professional loan
  This type of loan includes loans for various healthcare professionals like veterinarians, dentists, and general practitioners.
• Real estate loan
  Such loans are applied to purchase commercial properties like warehouses as well as retail units.

Documentation required for small business loans
Keep these documents ready when you need to fill an application:

• Duly filled application form
• Financial statement-personal
• Income Tax Returns – personal
• License of business
• Tax returns – business
• Rent/lease agreement (if applicable)
• Cash flow projection of the next year

Establishments that offer small business loans
Here are some providers that you can apply to for such a loan:

• Banks
  Banks offer such loans specifically to well-established businesses, whether small or large. If your loan application is backed by the Small Business Administration, the chances get enhanced for the loans to be sanctioned by bans. Alternatively, if you already have a business account with a bank, you can apply for a small business loan to it for better prospects of it being approved.
• Online lenders
  There are a number of online lenders through which this type of loan can be applied for. Similar to banks, they offer loans without the physical presence of an office. The application process is all online with first filling in the application form. An added advantage of taking up a loan from online lenders is that they have more flexibility than banks. These lenders also offer SBA-approved loan programs.
• Peer-to-peer online lenders
  Another alternative of online lenders is using peer-to-peer lending options for small business loans. Here, investors and business owners can interact and work together by giving and getting a loan, respectively. The rules are less strict as it is a P2P marketplace option.

Eligibility criteria
There is a whole list of criteria to be fulfilled to be able to be sanctioned a small business loan. The eligibility criteria of who all can apply for these loans are mentioned briefly below:

• Business plan
  The business plan submitted should be comprehensive and solid. This is the foundation of the loan application. It should be able to the prospects and potential of your business in the near future, say next five years. Ideally, the lenders ask for the revenue and balance sheet for the past two years.
• Cost estimate
  The business plan should be able to project your finances aptly. Hence cost estimation has to be done perfectly. Take the services of a professional if the need arises. The debt service coverage ratio should be at least 1.0 to be considered by lenders.
• Credit score
  The personal credit score of the person applying for the loan needs to be proper for the consideration of the loan application. Higher the personal score, the better would be the terms and conditions of the loan sanctioned. Additionally, if you will not be able to adhere to the repayment conditions then your personal credit rating would go down and it will be difficult to get further loans.

Ways to avail the best type of loan
There are certain factors on which the loan applicant can avail of the best type of loan. One should focus on the below-mentioned points to avail of the best type of loan from the lenders.

• Qualifications
  There can be different criteria for different leaders. So, it is advisable to enquire about it before putting in your loan application. It saves time too as some lenders only give loans to startups while some may give it to established businesses while some may give it to businesses that have operated for a certain number of years. In a crux look for these eligibility criteria while searching for lenders- a minimum number of years in the business, minimum credit score required, and the minimum revenue generation limit required.
• Type of loan
  Decide on the type of loan you are attempting to avail. Do your research well as one should select the type of small business loan that best suits the needs of the business. The necessities for an equipment loan would be different than those for a healthcare loan and there’s a limit to the amount approved. Also, there are the terms of the condition of loan repayment that the person taking the loan needs to look into in-depth. The duration of loan repayment needs to be worked on too as in whether one needs a short-term or a long term long. Costs that will be incurred include the down payment, factor rate, and the annual percentage rate. One needs to read into the details well and understand it deeply before coming to a conclusion. Then there are the fees to consider too. There can be a guarantee fee along with underwriting fees and service fees. Hence, these points need to be clear too. Read a lot of customer reviews of the shortlisted lenders too before coming to your decision. It will help.

Alternatives to a small business loans
Sometimes a loan can be rejected due to certain reasons by the lender. One must look for options to be able to process the amount required for the business. Below mentioned are a few ways to do so.

• Seek guidance
  One can seek guidance from an accomplished business mentor to guide you to concerned organizations or individuals who help up in such situations. Also, there is an option of freelance or volunteer business counselors who can guide you in the right direction.
• Personal loans
  If your credit score is good, you can apply for a personal loan and use the money for your business. But there will be a lower limit to the money you can get.
• Local investors
  You can look for local investors who can fund you for your necessity. The places to look for them are the SBA district branches, women’s business centers, etc.
• Business credit cards
  The next option that one can consider if one has been rejected with a small business loan is to apply for a business credit card. This is a good option under such circumstances though the interest rates need to be looked into. Most probably, the interest rates on a business credit card would be more than that of a small business loan but there is the advantage of having a continuous and rotational flow of credit. Additionally, these business credit cards give out reward points that can be accumulated and used later. Always be well aware of the terms and conditions of these cards before attaining on.

Small business grants
If a loan has been rejected, one can apply for a small business grant. Grants like the Small Business Technology Transfer are one such grant for businesses in technology. Femal entrepreneurs have the option to apply for grants available for businesses run by women.

Basic types of small business loans
With varied terms and conditions, there are basically three basic types of small business loans:

• SBA 7 (a) Loan
  This loan is the one most commonly taken and is given out for a period of 7 years. The application can be up to $5.5 million under this loan type.
• CDC/504 Loan
  These loans are meant specifically for machinery and real estate. Terms and conditions go up to 25 years for this type of loan.
• SBA Microloans
  The loan limit of this type of loan is $50,000 for a maximum period of 6 years. There is no down payment for this kind of loan.

Disadvantages of small business loans
Although very advantageous in nature, there are certain disadvantages to small business loans. At times the lender asks the business owner to give a lien as a security option. Hence, there is the risk of losing the security deposit if the repayments are not done timely. This impacts your credit score and liquidity and the business ultimately suffers. Your personal credit score reduces too. When applying for such loans, one needs to be aware that the sanction of this loan can take anything from 30 days to three months. This is another disadvantage of these loans.

Small businesses are now regaining strength after a long lull. These small business loans can effectively help the small business owners or those who desire to start up a small business.