Are you wondering where to find a small business loan or how to qualify for a small business loan? Looking for banks that give small business loans or small business loans for women? Read on to find answers to these questions.

Why would I need a small business loan?
You may need a business loans to grow and expand your business. You can use a business loan for things such as startup expenses, working capital, financing ongoing operations, investments in equipments, renovation of facilities or for build up in inventory. Many businesses opt for a business loan even if their operations are generating enough cash flow to fund expansion. They save the cash flow from operations for unexpected expenditure.

You have to go through elaborate application process to get approved for a business loan. Your lenders would want to make sure you are committed to your business and have the ability to pay back the loan principal with interest. Lenders also run a credit check before approving your business loan. Every time you submit an application, it gets noted on your credit report. So it is important to do it right the first time and also apply to multiple financial institutions to improve your chances of getting a loan.

What are my chances of obtaining a loan for my startup business?
It is tough but not impossible to get a business loan if you are a startup. You must prove to your banker that your business idea is viable and can make enough money to pay back the loan and the interest. You may also be expected to make a personal financial commitment to the business. The business loan is likely to cover only a percentage of your total requirement. Before you call your bank or walk in there to ask for a business loan, do thorough research and build an in-depth analysis of your target market. Make worst case and best case expense and income projections. You will greatly improve your chances of approval if you back up your enthusiasm with strong business analysis and knowledge about the industry.

A good way to demonstrate business acumen is to showcase any past successes in running a business. If you see any gaps in your experience or knowledge, cover them by hiring a management team that has the relevant experience to complement your skills.

What are the different types of business loans available?
Following are some of the most common types of business loans

• Lines of credit are a general business loan where you have access to a fixed amount of money.  You are not given a check by the bank. Instead you withdraw the money in increments as you need it. To repay the line of credit, you make monthly payment based on the principal amount. There is generally no collateral needed for a line of credit but some banks may ask for collateral if the line of credit is too large or your business is not credit worthy. You can also obtain a line of credit against your accounts receivables or purchase orders. This is called factoring. You get a loan for 80% of the value of you A/Rs and rest once the customer pays. There is usually a 3%-5% fee. Lines of credit are generally more expensive than other forms of business loans.

• Business cash advance is also called merchant cash advance. If you accept credit cards from your customers and have at least a three year history of sales, you may qualify for a credit card advance loan. A bank will lend you money against your expected future income. As you must have guessed, credit card advance is not a cash advance on your business credit card although you can always get that too.

• Term loans are the most common general purpose loans and are usually for very large amounts. Term loans can be used for many different purposes. Most common use of a term loan is for buying equipment for expansion, working capital, refinancing of previous loans, and acquisitions. Term loans are repaid monthly. Length of the loan is determined by the expected lifespan of the collateral. Such loans are also called business loans. Short term loans are typically setup for repayment within a year. You make one payment at the end of the term and payoff the principal as well as the interest.

• Equipment Leasing is usually the easiest to obtain and generally the cheapest. The bank will use the equipment as the collateral. Payment term is less than the useful life of the equipment and you make a fixed monthly payment. Equipment Leasing is less risky for you. In case of default, you will only loose the equipment that is collateral for the loan and there is no lien against rest of your business. If you have paid off equipment but need cash for expansion, you can go in for an equipment sale-lease back loan. The bank buys your equipment from you and leases it back to you for a fixed monthly payment.

• SBA Business Loan: In the US, small businesses can obtain SBA loans from banks. These loans are guaranteed by the SBA. To qualify for such a loan you will have to apply to your local SBA office.

• Secured Working Capital Loans: Business owner can pledge company or personal assets to obtain a secured working capital loan.

• Unsecured Working Capital Loans: Business owner does not need to pledge any assets. Loan is based on credit worthiness of the applicant.

• Franchise startup loans are available to franchisees of nationally recognized franchises.

How can I improve my chances of obtaining a small business loan?

Following are some of the important areas a lender would look into before approving the loan for your business. These are all hard data point used by the lender to make a decision

• Credit. For established businesses, the lender will focus on the company's credit history and outstanding loan accounts. If your business is less than three years old, lender will also evaluate your personal credit.

• Cash flow. You will have to present audited cash flow statements from the past three years and future projections for about two to three years. Most lenders will require cash flow to expected debt ratio of at least 1.25. Ratio will be higher if you are weak on other criteria used to approve a loan.

• Proven profitability. The lender will feel more confident about making a loan to you if you are running a profitable business with proven business model.

• Collateral. Lenders will want you to pledge collateral for the loan. It can be real estate, equipment, or other property. You can even pledge personal property to obtain a business loan. Some lenders will consider loaning you money against current and future contracts. You should be careful about what you pledge and not over extend yourself. Lenders will seize the collateral if you default on the loan and are unable to renegotiate the terms.

• Capital and equity. This is the total value of your cash on hand, equipment, facilities, land, buildings etc. Lenders would want you to maintain a debt to equity ratio of no more than three or four. Remember that higher your debt to equity ratio, greater will be your cost of capital.

• Management. A great business idea without good people behind it cannot be successful. You management team’s skill set and experience in your industry and your company will affect your chances of obtaining a loan.

There is more you can do to improve your chances of obtaining a business loan.

1. Prepare well for the meeting with the commercial lender.
2. Work hard on your business plan. Your lender must feel confident about the viability of your business and your ability to execute.
3. Ask for the right loan amount. If you ask for more than you need, you will raise your costs. If you get a loan less than what you need for growth, you may not be able to achieve you goals and may have difficulty repaying.
4. It is important to find the right lender. If you are pitching your plan to a bank that only extends lines of credit, there is very slim chance they will make a loan to buy out a competitor.
5. Call your current bank first. You already have a relationship with them and there is a good chance they will make another loan to you. If your bank denies you the loan, look for loan brokers that charge a small fee for obtaining a loan for you.
6. Some lenders will not lend to undesirable businesses like alcohol, tobacco, gambling etc. If you company falls under undesirable or high risk industry, you will need to work hard to find the right lender.
7. Check your lender’s references, preferably businesses similar to your size and from your industry.

How much does is cost to get a commercial loan?
Interest rates and fees are dependent on your creditworthiness and the commercial lender. Get some competing offers for business loans. One way to compare the loans is to compare the monthly payments over similar loan term. If you have difficulty comparing small business loans get help from your CPA. Some commercial lenders will charge prepayment penalty. If you anticipate prepayment make sure the contract allows it without a penalty.