If you are trying to find the best loan options for amounts up to $50,000 for your small business, we suggest taking the following steps before you apply.
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Small Business Loan Application Preparation
Before applying for a small business loan of any size, it’s helpful to do a quick financial assessment. The first thing we recommend is to identify your business plan and working capital needs. This preparation will prove useful in the loan application process, help you understand eligibility requirements, and understand your loan options.
This will include looking at your annual revenue for the past three years, projecting income for the year ahead, and then calculating your cash flow and anticipated cash flow. Once you get a sense of what your current situation is and make an estimate of how you will grow in a year from now, you can assess your business needs with more clarity.
Depending on the type of loan you choose, lenders will want to see your ability to repay the loan. There are many loan programs and financing options available to small business owners and depending on your business needs, you want to find the right fit. Keep in mind that getting the working capital you need may mean that you get small business financing from multiple loan programs.
After looking at your cash flow, annual revenue, projected revenue for the year ahead you should be able to answer the question, “do I need a $50,000 business loan?”, and “will I be able to make the monthly payments to repay the loan?” If the answer is “yes”, then you should start to assess eligibility requirements.
A few things that mostly all lenders will want from you as part of your business loan application.
- you need to have a business bank account, typically a business checking account.
- you will need to provide several years of bank statements,
- tax returns for the company
Credit Score and Credit History
For many loan programs, lenders will rely upon the business owner’s credit score and credit history. If you are a business owner with bad credit or no credit history, it will be more difficult to qualify for a loan and you will likely be paying a higher interest rate on borrowed funds. Conversely, if you have good credit, you can expect more loan options and lower interest rates.
However, borrowers with bad credit are not automatically disqualified from getting business financing. There are many reasons (some understandable and forgivable) for having a low credit score. Generally speaking, those borrowers with less than good credit will still find financing, especially with online lenders.
We strongly advise getting a copy of your credit report and reviewing it carefully before applying for a loan. In particular, look at the part of your credit report that shows any “derogatory” information. These will include, late payments, inquiries, write-offs or any other negative information. If you feel that the information is incorrect, inaccurate or outdated, you should dispute the claim. Some credit experts suggest disputing all negative information on your credit report.
You have a legal right to dispute anything on your credit report free of charge and without any penalty or recourse. The companies that reported the negative information must respond to your dispute within thirty days and prove it is valid or it automatically is removed from your report.
Startup Companies and Business Loans
It is worth noting that startup companies face a more difficult time getting financing overall. That is simply because lenders don’t have a history of business activity to judge whether you have a viable business. Think about it; you are looking for a loan amount of $50,000 and you only have an idea and a business plan, you are asking a lender to take a very big risk. A new business may need to look at alternative lenders.
That does not mean you cannot get a loan as a startup, it means you have fewer loan options and will likely need to give a personal guarantee to repay the loan in the event the business fails.
Top Sources and Loan Types for a $50,000 Business Loan
A term loan is one of the most popular types of loans and the most common for a business loan up to $50,000. It usually involves the borrower receiving a lump sum amount, repayment terms for a fixed amount of time (3 years, five years, etc.), with fixed or variable interest rates and a fixed monthly payment. This loan type is most common with traditional banks and credit unions.
Business Line of Credit (BOL)
A business line of credit is different from a term loan mainly because a BOL is “ready cash”. That means the borrower takes the money when needed and not as a lump sum. A business line of credit is a valuable tool for businesses because it can be used on a revolving basis when needed, and when you don’t need the cash, you only pay the interest rate on the actual amount drawn.
Banks and credit unions will be the most likely small business lenders for this type of financing when you maintain a business checking account. A BOL is highly suited for business loan amounts of $50,000.
Business Credit Cards
A business credit card is another option for business financing. However, most business credit cards charge a high annual percentage rate and will often look at a business owner’s personal credit score. With good credit, a small business owner could use a business credit card as a means to $50,000 in business financing.
One added benefit to using a business credit card is those card providers may allow you to accumulate cash-back or earn rewards for every dollar spent using the card.
Small Business Administration (SBA Loans)
The U.S. Small Business Administration does not lend directly to businesses. Instead, an SBA loan is made by an online lender or traditional lender, such as a bank and the SBA guarantees payment to the lender if the borrower defaults.
An SBA loan is generally associated with loan amounts of several hundred thousand dollars and is an ideal source for a $50,000 business loan. SBA loans are very desirable because they will have lower interest rates and very favorable repayment terms.
One of the most popular loan types from the SBA is SBA 7(a) loans. Additionally, many SBA loan programs can be used to refinance existing loans.
If you are seeking a $50,000 business loan to acquire equipment for your business, you may want to consider equipment financing. With an equipment financing plan, a finance company or equipment manufacturer will provide the financing for you. This type of financing has some advantages over borrowing cash to purchase your equipment.
With Equipment financing, it’s common to use the equipment being financed as collateral. And while you may be required to make a down payment, it’s common to finance up to 100% of the equipment cost. Equipment financing will usually carry a lower interest rate because it’s not an unsecured business loan…it’s secured by the equipment.
Merchant Cash Advance
A merchant cash advance should be used very sparingly and generally as a last resort. Merchant Cash advances are typically short-term loans or financing based on your company’s credit card transactions. Depending on your volume of monthly credit card sales, you can qualify for $50,000 in business financing quickly. But be cautious, merchant cash advances can be among the most expensive business financing options.