Small business loans

Small business loans: Types, benefits, approval rates & how to apply

Struggling to secure funding for your small business? It can get tough, but small business loans can help! They help manage cash flow, cover unexpected expenses, and grow your business. So, here’s everything you need to know about small business loans to help you make informed decisions and feel more confident and in control of your financial future.

What are small business loans?

Small business loans help small business owners get the money they need to fund various business activities. Whether you’re starting a new venture, expanding your current operations, buying equipment, or simply covering daily expenses, these loans provide the necessary funds. The main goal is to give small businesses the financial support they need to succeed and grow.

How do small business loans work?

Small business loans typically come in two main types: lump-sum loans and lines of credit.

Lump-sum loans

These loans provide a fixed amount of money all at once. You repay this amount over a set period through regular monthly payments that include both the principal and interest. Lump-sum loans can be short-term (usually repaid within a year) or long-term (with repayment periods extending several years). 

Lines of credit

A line of credit is more flexible and works similarly to a credit card. The lender approves a maximum credit limit that you can draw from as needed. You only pay interest on the amount you borrow, and once you repay it, you can borrow again. 

Types of small business loans

Understanding these various types of small business loans can help European business owners make informed decisions about the best financing options for their needs.

Bank term loans

Bank term loans are a popular choice for small businesses needing a substantial amount of money upfront. Term loans provide a lump sum of money that businesses repay over a fixed period, typically ranging from one to ten years.

The repayment is done through regular installments, which include both the principal and interest. These loans are ideal for significant investments, such as purchasing equipment or real estate.

Short-term vs long-term loans

Short-term loans

These loans are generally repaid within a year or less. They are often used for immediate financial needs, such as bridging gaps in cash flow or covering unexpected expenses. Because they have shorter repayment periods, they may have higher interest rates.

Long-term loans

These loans have repayment terms extending beyond a year, sometimes up to ten years or more. They are suitable for long-term investments like business expansion, purchasing high-value equipment, or large capital expenditures. 

Secured vs unsecured loans

Secured loans

These loans require collateral, which is a valuable asset that you pledge to the lender to secure the loan. If the loan is not repaid, the lender can seize the collateral. Common types of collateral include real estate, equipment, or inventory. Secured loans typically offer lower interest rates because they pose less risk to the lender.

Unsecured loans

These loans do not require collateral, making them riskier for lenders. As a result, they often come with higher interest rates and stricter qualification requirements. Unsecured loans are suitable for businesses that may not have significant assets to pledge as collateral.

SBA guaranteed loans

In the United States, the Small Business Administration (SBA) guarantees loans to reduce lenders’ risks. Europe has similar programs funded by the European Union (EU) and individual countries to support small and medium-sized enterprises (SMEs).

European funding programs for small businesses

EU-funded SME loans

The European Investment Fund (EIF) and European Investment Bank (EIB) provide funding and guarantees to support small businesses. Programs like the COSME Loan Guarantee Facility (LGF) under the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) program help SMEs access financing by reducing the risk for lenders.

National programs

Many European countries have their own government-backed loan programs. For instance, the UK offers the British Business Bank’s Enterprise Finance Guarantee (EFG), and Germany has the KfW Bankengruppe that supports SMEs with various financing options.

Online loans

Online lenders have become a popular option for small businesses due to their speed and convenience. They often offer faster approval times compared to traditional banks, sometimes within 24 hours.

Moreover, the application process is usually straightforward and can be completed entirely online, making it accessible for busy business owners. Online loans can vary significantly in terms of repayment periods, loan amounts, and interest rates. Some lenders offer short-term loans, while others provide longer-term financing options.

Due to the increased risk and convenience, online loans may have higher interest rates compared to traditional bank loans.

Lines of credit

A line of credit is a flexible loan that provides access to a set amount of funds that businesses can draw from as needed. Lines of credit are perfect for managing cash flow, covering short-term expenses, or handling unexpected costs. They offer flexibility that fixed-term loans do not.

Businesses are approved for a maximum credit limit and can borrow up to that amount. They only pay interest on the funds they use. Once the borrowed amount is repaid, it becomes available to borrow again.

How to get a small business loan

Applying for a small business loan involves several key steps:

Step 1: Determine your needs

Clearly defining how much funding you need and what you will use it for is a crucial step. This helps you choose the right type of loan and keeps you focused on your financial goals.

Step 2: Check your credit scores

Both your personal and business credit scores will be assessed by lenders. Ensure your credit reports are accurate, and work on improving your scores if necessary.

Step 3: Research lenders

Look into various lenders, including banks, credit unions, online lenders, and government-backed loan programs, to find the best fit for your business needs.

Step 4: Gather documentation

Collect all required documents, such as financial statements, tax returns, business plans, and legal documents.

Step 5: Submit your application

Complete the loan application with the chosen lender, providing all necessary information and documentation.

Documentation requirements for getting a small business loan

Make sure you have the following documents before applying for a small business loan:

• Business and personal tax returns
• Financial statements (balance sheets, income statements)
• Business plan outlining your business model and financial projections
• Legal documents such as business licenses and articles of incorporation
• Bank statements and details of any existing debts

Key factors affecting your chances of getting a small business loan

Several key factors play a role in whether or not you’ll get approved for a small business loan:

Credit score

In order to get a business laon, your personal and business credit scores are crucial. Lenders look at these scores to determine your creditworthiness. A higher credit score means you’re seen as a lower risk, which can lead to better loan terms and easier approval.

Business income

Lenders want to see that your business makes enough money to repay the loan. Consistent and sufficient cash flow is essential. They’ll look at your business’s financial health to make sure you can meet the repayment requirements.

Collateral

Some loans require you to put up collateral, which is an asset that the lender can take if you don’t repay the loan. Common forms of collateral include real estate, equipment, or inventory. Providing collateral reduces the lender’s risk and can increase your chances of getting approved.

Tips for improving loan approval chances

Improve credit scores

Pay off debts and ensure timely payments to boost your credit scores.

Strengthen your business plan

A detailed and realistic business plan can make a strong case to lenders.

Prepare thorough documentation

Organize and present all required documents clearly and accurately.

Build relationships with lenders

Establishing a rapport with potential lenders can improve your chances of approval.

Pros and cons of different loan types

Choosing the right type of small business loan depends on various factors, like interest rates, repayment terms, and eligibility criteria.

Bank loans

Pros

Bank loans offer lower interest rates and longer repayment terms. Established banks can provide stability and trust.

Cons

Require strong credit scores and substantial documentation. The approval process can be lengthy and rigid.

Government-backed loans

Pros

They have lower interest rates and favorable terms. Programs like the EU-funded SME loans reduce lender risk, making it easier to qualify.

Cons

The application process for government funding and loans is usually complex and time-consuming. Specific eligibility criteria must be met.

Online loans

Pros

Quick application and approval processes, often within 24 hours. Easier qualification criteria compared to traditional banks.

Cons

Higher interest rates due to increased risk for lenders. Shorter repayment terms and higher fees may apply.

Alternatives to small business loans 

Small businesses have several alternative financing options aside from traditional loans and lines of credit:

Business credit cards

These provide a revolving line of credit with additional perks, such as earning rewards or cashback.

Invoice factoring

This means selling outstanding invoices to a factoring company at a discount in exchange for immediate cash.

Merchant cash advances

In this type of funding, small businesses receive a lump sum upfront in exchange for a percentage of future sales, typically repaid through daily or weekly deductions.

Equipment loans

These loans are specifically for purchasing business equipment, with the equipment itself serving as collateral.

Crowdfunding

Platforms like Kickstarter and Indiegogo allow businesses to raise funds from a large number of people, often in exchange for early access to products or equity in the company.

Conclusion

Understanding small business loans is key to getting the right funding for your needs. Check your credit scores, ensure your business income is stable, and gather all necessary documents. Choosing the right loan type, whether it’s from a bank, an online lender, or a government-backed program, will help your business grow and succeed. Make sure to pick the loan that best fits your business goals and financial situation.

FAQs

What is the best loan option for a small business?

It depends on your business needs. Bank loans are great for lower interest rates, SBA loans offer good terms for qualifying businesses, and online loans provide fast access to funds.

What is the easiest SBA loan to get?

The SBA Express loan is the easiest to get due to its simpler application process and faster approval times, although it has a lower maximum loan amount.

What is the most common type of small business loan?

Term loans are the most common type of small business loan, offering a lump sum of money repaid over a fixed period with regular installments.

What is a CC loan?

A CC (Cash Credit) loan is a short-term loan used by businesses to finance their working capital needs. It allows businesses to withdraw funds up to a certain limit based on their inventory and receivables.

How do I get an investor for my business?

To get an investor, create a solid business plan, network with potential investors, pitch your business idea clearly, and show how it can generate returns. Platforms like AngelList and networking events can help you connect with investors.