Small businesses are without doubt essential to the U.S. economy. These businesses make up almost half of the country’s economic activity. They are responsible for the creation of two-thirds of new jobs and for driving innovation.
In turn, business loans are essential for the growth of small businesses. Statistics from the Small Business Association (SBA) show that lenders provided over $644 billion in small business loans in 2019 alone.
Businesses borrow money to invest, refinance, expand, replace capital assets, pay down debt, and cover operating costs. If businesses don’t have access to loans, they will end up cash-starved and eventually fail. Statistics show that running out of funds is the second major reason why businesses fail.
That’s probably why 43 percent of small businesses applied for a loan in 2019. However, not every business that applied for a loan was able to get it. In some cases, even when the loan is approved, the business only gets a fraction of what is applied for.
If you understand the process of getting a business loan, you stand a better chance of getting approval for the full amount you requested for. One way to better understand the process is to hire an experienced business firm that can walk you through each step, such as Generations Law Group.
What Type of Business Loan Should I Pick?
There are plenty of options for small business owners looking for a loan to choose from, including:
- Invoice or accounts receivable financing
- SBA-backed loans
- Alternative lender loans
- Equipment loans
- Bank loans
- Merchant cash advances
- Business lines of credit
- Business credit cards
The best way to determine the most appropriate loan for your business is to consider your needs. A good example is when you are starting a new business, personal loans and credit cards are more likely to be approved because lenders are usually not keen to offer business loans to startups since they have yet to establish a record of success.
While an already established business that needs flexible funding for its daily expenses stands a good chance of benefiting from a business line of credit, if you are expanding an already established business or adding a new branch, traditional loans, and government-backed SBA loans might be your best options.
An equipment loan is your best bet for business owners looking to buy equipment, machinery, or software.
Once you can identify your business capital need, it will become easier to pick the best lending options available. Our business attorneys at Generations Law Group have decades of experience helping Idaho business owners through these very questions, and we’re happy to work with you, too.
What Will Be My Loan Amount?
Different lenders offer different loan amounts.
The average amount for a business loan is approximately $600,000 to $700,000. The best way of handling this is to look at your average loan amount by lender type; this way, you will be able to narrow down your available options for funding.
ValuePenguin breaks it down into loan size and lender type:
- Small national or regional banks: $146,000
- Large national bank: $593,000
- Alternative lenders: Between $50,000 and $80,000 (but as low as $5,000 and up to $200,000)
The SBA has the full data for small business loan size; the data shows that if a lender has an asset of up to $50 billion or more, it should be able to provide most small business loans, holding more than 76 percent of them.
These lenders in question are large commercial banks such as Wells Fargo, JP Morgan, and Citibank.
Finder.com’s analysis of Federal Reserve data states that small and regional banks tend to be a better option for businesses with lower capital needs.
Bigger banks loan an average of about $600,000, while smaller banks can boast of $146,000. If SBA backs a business loan, then there is a big chance it is for smaller amounts; it doesn’t matter whether it is from a big bank, small bank, or regional bank. It is important to note that business loans are dominated by big and small banks.
What Are the Factors that Idaho Lenders Consider?
To determine whether a business deserves a loan or not, you’ll have to consider the risks that it presents to the lender. If there is a medium or high credit risk, the borrower is more likely to default on the loan or line of credit than pick a borrower with low credit risk.
So, you need to consider these factors to determine your creditworthiness:
- Outstanding loans and debts
- Credit score and report (both your credit score and your business credit score)
- Business assets; in particular, current assets such as cash and accounts receivable
- Company investors
- How long you have been in business
- The value of the collateral you can provide
- Financial statements and accounting records, including: the business’s balance sheet; cash flow statements; income and loss statements; debt-to-equity ratio; and receivable; earnings taxes, accounts payable, depreciation, before interest, and amortization; and future financial projections
A good understanding of your credit risk can go a long way to influence your decision on the type of loan you are applying for.
The Federal Reserve report states that in 2020, just 37 percent of loan applicants received all of the money that they applied for; this figure comprises mainly of people with low credit risk.
Statistics also show that the approval rate for loans, merchant cash advances, and lines of credit have reduced drastically since the beginning of the Covid-19 pandemic. People have turned to small banks and financial companies compared to bigger banks and online lenders.
How Do I Prepare My Loan Application?
If you are about to apply for a loan, be prepared for many documentation processes. However, different lenders have different requirements, so be sure of their requirements before applying for a certain loan.
Here are the minimum requirements for an application:
- Business plan
- Financial statements for the past two to five years
- Business name and federal tax ID number
- Bank statements
- Tax returns for the past two to five years
- Leases and business licenses
- Business credit report
- Insurance policy documentation
- Tax returns of the business
- Amount of loan requested
- Amount of loan requested
Why Should I Contact Generations Law Group?
Most lenders prefer financial statements that are audited and reviewed by a certified public accountant. So, it would benefit your business to work in partnership with an Idaho business attorney who can help you identify an appropriate loan for your business, collect the proper documentation, advise on laws and regulations, review loan documents, and more.
Generations Law Group can help you navigate the lending process. Contact us to schedule a meeting with one of our Idaho business attorneys.