In this article, weâll cover:
- The size range of small business loans
- The maximum size of an SBA loan
- How long it takes to secure a small business loan
- The benefits of business lending
Business loans are a great way to get a startup off the ground or to fund growth in an existing company. But how much money is actually available to you? The amount of small business financing you receive may determine whether or not your ideas are feasible, so itâs important to know how much you can expect to qualify for. Weâll take a high-level look in this article so that you have a good understanding of the basics, but of course, you can always contact a lender like Biz2Credit directly to explore your options and get professional, personalized advice.
A Wide Range of Possibilities
Small business loans can range from $2,000 on the low end, to $6 million on the high end. Thatâs a wide range, so what makes the difference? When you submit your loan application, the lender evaluates it based on the merits of your business and the intended use for the money. Some loan types are quite specific or may be capped at a certain amount, so you should do your research ahead of time and only apply for the loans that apply to your situation.
To get started, think through what it will take to accomplish your goal. For example, do you need $100,000 to purchase key pieces of equipment? Or do you need just $25,000 to establish a small emergency fund in case of unexpected expenses? You donât need to nail down your ideal loan amount to the dollar, but you should have a range in mind that will meet your needs. Then, with that range determined, you can start looking for a financial institution that will be able to serve you.
What Are the Maximum Loan Amounts?
If you are taking out a small business loan through the federal governmentâs Small Business Administration (SBA) program, the size of your loan will be limited by the caps of that program.
As a starting point, $5 million is the standard limit for 7(a) loans (this is the most common type of SBA loan, and is flexible enough for most borrowers). Of course, while the 7(a) loans have a limit of $5 million, that doesnât mean you will qualify for that full amount. Most SBA loans are issued for far less than $5 million. As of 2017, the average SBA loan amount was $107,000.
Businesses that need to obtain funding quickly may look to the SBA Express program for help. This is one of the fastest loan options, with a response available in just a couple of days. For this program, however, the borrowing ceiling comes down to $500,000, so it is not a viable option for businesses that need to take out larger loans. Speaking of small loans, the SBA also has a microloan option for businesses that are looking to borrow less than $50,000.
What Are the Qualifications for Getting an SBA Loan?
The goal of the Small Business Administration lending program is to make it easier for small businesses to access capital. They do this by guaranteeing a large portion of every SBA loan so that lenders are willing to accept what might otherwise be a more risky opportunity. As a result, SBA loans have a lower interest rate than traditional loans, but they do require a more rigorous application processâthere are qualifications that must be met before a loan can be issued. The specific qualifications will vary from lender to lender, but factors that impact your qualification include:
- You will need to be running a for-profit business that is operating in an industry that is approved by the SBA (this includes most mainstream industries)
- The business must be operating within the United States
- A solid personal and business credit score is needed to gain approval
- In most cases, the business needs to have been operating for a couple of years and have annual revenue to report before lenders will offer an SBA loan
- It might be necessary to present some form of collateral, such as real estate, in case you arenât able to make the loan payments
To be clear, the Small Business Administration doesnât give out any loansâyou still work with a bank or online lender like Biz2Credit to actually take out the loan. But the SBA backs the loan so that if you are a newer business or donât have much capital to put up, you can still access affordable funding.
Of course, you donât have to take out an SBA loan for your business. You can also work with banks, credit unions, and online lenders to see what loan options they have available. As with personal loans, youâll always want to carefully check the repayment terms offered by business lenders to make sure there are no prepayment penalties or anything else that will give you trouble down the road.
What is the Average Time for a Business Loan?
Getting a loan for the right amount is obviously important, but itâs just as important to get a loan at the right time. If you have an opportunity that is only going to be available for a limited time, like purchasing a competitorâs business or buying some real estate, getting a lump sum of cash into your bank quickly is absolutely vital.
We mentioned above that going through the SBA Express program can provide you with a response to your loan request within a couple of days if you meet the eligibility requirements. However, this is not the norm. Typically, SBA loans take significantly longer than traditional loans, and this is one of the downsides of pursuing that type of loan. Even with banks and credit unions, getting a decision on a loan may take weeks or even one to three months, so if youâre in a hurry, online lenders are really your best bet.
Given that reality, itâs important to plan ahead and get started with your loan application process as soon as possible. Once you know there is a project or purchase on the horizon that may require funding, get started with the application process so you can increase your odds of having the money arrive before your deadline.
You may also consider opening up a business line of credit if you know you might need quick access to funding soon. A business line of credit isnât technically a loan, itâs more similar to a credit card in that you qualify for access to a certain amount of funding, but only repay (and pay interest on) the amount that you draw. So letâs imagine that you saw some potential opportunities down the line, but didnât have enough clarity that you knew you needed a loan yet. You could take out a line of credit for, say $25,000, and if you needed to, you could withdraw up to that amount at any time. If ultimately you didnât need the cash, you would still have access to that line of credit, but wouldnât owe any payments since you hadnât used it.
Are business lines of credit a silver bullet? No. They are limited in size and have variable interest, so if rates go up, so will your payments.
What Are the Benefits of a Business Loan?
You may be reading this and wondering if itâs a smart idea to take out a loan at all. After all, getting in debt shouldnât be taken lightlyâyou want to make sure that any financing you use makes sense. That is, will you see a positive ROI on your loan after you include all of the costs?
The reality is that most businesses can benefit from the right kind of financing. So letâs look at some of the advantages you can incur:
Create Solid Credit
If youâre a small business, you may not have much credit established. So when an opportunity for growth comes and you need a large loan, you may be out of luck. Taking out modest term loans â and making your monthly payments on time, every time â is an excellent way to prove the creditworthiness of your business ahead of time, while financing early growth. This could come in handy in the future if you need larger loans to take on big capital projects, as your credit report will play an important role in that process. By paying off small loans on time, you can start building a good credit history for your company. Even if you already have a good personal credit score, creating the same thing for your new business is important for future growth.
Stock Up for the Busy Season
Running out of inventory is always a looming threat for small businesses. If you have a busy season in your industry, and that season is approaching, using a loan is a smart way to fill up your inventory before the customers start streaming in. Without the loan, you might go into the season light on stock because of lackluster cash flow. That would mean leaving money on the table, so itâs better to borrow ahead of time and put yourself in a good position to maximize sales.
Afford Important Talent
Many small business owners start out doing all of the work on their own. Thatâs a strategy that can only take you so far, however, as there is a hard cap on the hours you have available in the day. Also, you only have so many skills, so tapping into talent outside of yourself is a great growth strategy.
That talent is not free, however. Using a small business loan to acquire the talent needed â perhaps on a contract basis – to accomplish specific objectives can be another way to boost the bottom line. If you can secure a loan with a modest interest rate, this approach could make getting good talent a more viable option. Using a business loan calculator will help you find the true cost of what you plan to borrow, and you can weigh that against the value that higher-priced employees can bring to your company.
Instant Backup Plan
For many small businesses, there isnât much left over at the end of the month after paying everyone and all the expenses. Thatâs okay as long as you are making ends meet, but it doesnât leave you with any margin for error. Owners in this situation may opt to borrow a modest amount from a lender to have an emergency fund in place. This way, youâll have something saved up that you can use when an unexpected expense pops up, while you keep reinvesting profits into growth.
A common use for loan funds is to buy equipment that is needed to serve your customers. This type of loan might be taken out right at the start of your business, or you might look for equipment financing once you have your footing and need bigger machines in order to ramp up production. If you can borrow the total amount needed to buy the equipment upfront, you can avoid waiting two years or more to make that purchase and expand.
Get the Money You Need Right Away
Whether you are after a loan to acquire a business like Scotch Hills Pharmacy was, or you have a business that you want to expand, Biz2Credit is a great place to start. Youâll find helpful staff who work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing can help you.