Small Business Loan Basics
When it comes to borrowing money for your business, there’s one key rule to follow: borrow enough money to reach your business goals, but not so much that you can’t feasibly pay it back. When estimating borrowing costs, it’s important to be as accurate and detailed as possible to identify your ideal borrowing amount. Fortunately for small business owners, there are a wide variety of loans and types of lenders to choose from when starting or expanding your business.
Government: The U.S. Small Business Administration (SBA) offers loans on federal, state and local levels and includes low-interest loans, venture capital and grants. These programs tend to be very supportive of the growth of small business, especially at the state and local level.
Banks & Credit Unions: Banks and credit unions can be a great resource for small business loans, especially for short-term, lines of credit and single-purpose lending options.
Friends & Family: For smaller ventures that don’t require a large amount of money up front, friends and family may be a good place to start.
A promissory note is a written agreement that simply states your repayment amount plus the terms of any accrued interest that was agreed upon. This is an important, legally binding step and a precaution that should be taken with every lender — even friends and family.
Interest rates play a big role in lending, and when it comes to borrowing for a small business there are certain parameters you must stay within. There are caps on interest rates to protect you that must be abided by, and these can differ by state and type of lender. This goes for having too low of an interest rate. If borrowing from a private investor, it’s important the interest rate isn’t too low, otherwise the loan repayments may be treated as dividend payments to the shareholder.
Cosigners & Guarantors
Some lenders require a cosigner or guarantor in order to get your loan. This action protects both the lender and you. If you’re unable to make a payment, the cosigner or guarantor will be obligated to pay. Who your cosigner is can depend on a number of factors, including what type of business you operate, your assets and whether or not you’re married.