Looking to expand your side gig or start a new business? Here’s what you need to know about small business loans.
- Where can I get a small business loan?
Typically, small business loans come from the government (through a lender approved by the U.S. Small Business Administration, www.sba.gov), a traditional bank or credit union, or a private investor. Some nonprofits and community organizations offer microloans to local entrepreneurs.
- What should I look for in a small business loan lender?
Your lender will depend on the type of business. Are you going to open an online store where you are the only employee, or a brick-and-mortar store with many employees? Each lender has different criteria. Before you look for a lender, you need to clearly define and communicate your ideas in a business plan.
- How much can I get in a small business loan?
According to the SBA, small business loans can range anywhere from $5,000 to $5 million, with the average amount around $135,000. How you use the money depends on your projected costs and needs as outlined in your business plan.
- How do I qualify for a small business loan?
In order to apply for a small business loan, you will need to prepare a batch of documents:
If you have a clean public record and a strong credit score you will find it easier to get a loan — however don’t let past mistakes stop you from pursuing your dream. It doesn’t hurt to have previous business or management experience, but strong ideas, good planning and passion can help you overcome deficiencies in your experience. Depending on the loan, you might need to provide some form of collateral.
- A business plan, which explains your products or services and your plans to grow your business.
- Your resume, and the resumes of any key business partners, showing what qualifies you to run the business.
- Financial statements, which show your current cash flow as well as your projections for future profits.
- What should I consider before taking out a small business loan?
As with any loan or line of credit, make sure that you have a realistic repayment plan. Borrowing money for any purpose carries risk. Some business loan lenders or investors might ask for additional terms such as profit sharing. Consider carefully the true cost of your loan, including how much interest you will pay, penalties for late or missing payments, and control of future business decisions.
- Visit the U.S. Small Business Administration website, www.sba.gov. The Starting & Managing section (www.sba.gov/starting-managing-business) offers a wide range of resources for how to write a business plan, how to register your business, filing taxes and hiring employees.
- Get a mentor. The SCORE Association (www.score.org) offers guidance through in-person and online mentoring for new entrepreneurs.
- Research loan sources including the federal government (the SBA Loan Program), your bank or credit union, and sources within your local community.
- Before agreeing to any loan, run scenarios through a loan repayment calculator.
- Consider other funding sources such as loans from family or friends and crowdfunding. Watch the Introduction to Crowdfunding for Entrepreneurs video in the SBA Learning Center.
[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]