The Ultimate Guide to Getting a Small Business Loan
Looking for a small business loan? Check out this guide to how to find a loan, and other small business funding options!
The Ultimate Guide to Getting a Small Business Loan
Are you a business owner looking to fund your business with $25,000-$500,000 in community capital?
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What is a Small Business Loan?
There will come many times when you as a small business owner need some capital, or funding, to help you reach the next step. Sometimes, businesses are able to rely purely on their own savings and revenue to fund these steps, other times, they look for other ways of raising money, such as looking for investors, but one of the common routes that entrepreneurs take is seeking out a small business loan.
A small business loan is, well, a form of debt. An entity such as a bank extends a lump sum of capital at once, which you pay back over a certain period of time, paying interest.
Small businesses use loans for all sorts of things: startup capital, funds to renovate a location or open a second one, money to open a new business revenue stream (like a food truck to go with your already-existing restaurant), capital to expand your distribution network, and so on.
How Much Can I Get from a Small Business Loan?
The amount of money you can raise from a small business loan depends on the type of loan you take out. Here are some of the options of loans you can look out for:
Microloans
Microloans are offered by several different entities, including the SBA, online lenders, and crowdfunding portals. Typically valued at $50,000 or less, microloans have low interest rates, making them excellent for small businesses that are starting up or businesses in economically disadvantaged areas.
There are also crowdfunding platforms that offer zero-interest microloans, such as Kiva, which helps entrepreneurs raise loans from $1,000 to $10,000.
Small Business Administration (SBA) Loans
If you’re lending through the Small Business Administration (SBA), you can borrow anywhere from $250,000 all the way up to $5.5 million dollars. The SBA isn’t a lender, exactly, but a federal department that connects small businesses with lenders and other resources. So, this would be great if you’re looking for a massive expansion project, such as building a new location or something along those lines.
Crowdfunded Small Business Loans
Crowdfunded small business loans can also vary, depending on your project needs and your ability to raise the money. Honeycomb Credit offers crowdfunded small business loans from $15,000 to $500,000+, making it accessible to a wide range of businesses for a variety of different scales of growth projects.
What Small Business Funding Options (Besides Loans) Are Out There?
If you’re looking for small business financing, there are other options besides loans that you can take advantage of. Some small business owners prefer not to take out loans because they aren’t in a good position to take on debt. Here are some other options available as alternatives to taking out a small business loan:
Small Business Grants
In certain circumstances, there may be grants available to help your small business grow, or even just stay afloat. Grants are a great way to get capital for your business in a way that doesn’t require you to take on debt.
One of the biggest grant programs of recent memory was the Restaurant Revitalization Fund, a series of grants from the government to help restaurants who were hit hard by the coronavirus pandemic.
Some community organizations offer grants to small businesses in their communities, often in small amounts. For example, there is The Awesome Foundation, which allows chapters to select small businesses, individuals, and nonprofits for grants of $1,000 for projects that contribute to the “awesomeness” of their communities.
The federal, state, and local governments might also have grants available for small businesses. For federal grants, Grants.gov is a great resource. You can check with your local governments and small business development centers for other grant opportunities.
If you are a woman-owned, minority-owned, or veteran-owned business, there are also many different grant opportunities you can find, usually through a Minority Business Development Agency or some similar association.
Crowdfunding
Yes, we already brought up crowdfunding, but there are many different kinds of crowdfunding, not all of which end up in a small business loan. Many small businesses choose to crowdfund their start-up and growth as a means of raising capital and also bringing in the community.
This often takes the form of gift or reward crowdfunding. Imagine you run a Kickstarter campaign for your business, and you offer perks with different tiers of donations - a customer contributes $100, they get a t-shirt. This is an example of reward crowdfunding - just one of the different types of crowdfunding tools out there.
There is a downside to this kind of crowdfunding, however. Many times, small businesses who crowdfund through a gift or reward platform don’t reach their full potential, or even their minimum crowdfunding goal. The industry average is a 22% success rate, compared with Honeycomb Credit’s 83% success rate.
Investors
Another way that small businesses often find capital is through investors. These investors might be family and friends, industry partners, or angel investors who see something in your business.
There are different types of investors: some want to invest in your small business as a loan, others want equity. Equity investing means that your investors will want to take a percentage of your profits, and might even act as an owner and want to make management decisions.
Taking on investors comes with a whole host of factors to consider. How much of your profits are you willing to share? Are you comfortable with bringing in another person to your management team? Do you feel okay about possibly being in debt to someone you have a personal relationship with?
If you do choose to find investors for your business, there are some best practices you should take. Make sure you write up the terms of the agreement clearly, have a clear business plan that details your financial goals, and have an idea of the success metrics for your business.
Rolling Pepperoni in Pittsburgh raised $46,750 to finance their bakery's buildout!
Why Should I Get a Small Business Loan?
Often, some small business owners balk at the idea of going into debt to take out a loan. They’d prefer to use their own savings as much as they can instead of taking out money from a bank or other lender.
However, there are several benefits to taking out a small business loan that you can’t get from bootstrapping. The first is, it’s a great way of getting the influx of capital you need for your business’s growth project while keeping your cash flow steady. You might not have a spare half a million floating around to invest in a new location for your business, or whatever your project might be. A loan is where you can get that!
Another benefit to small business loans is that they allow you to build relationships in your communities. If you work with a bank, that relationship is primarily between you and the bank, but it’s still a good thing because having a good existing relationship with your bank will pave the way for more loans along the way if you need them.
If you choose to crowdfund a small business loan, those relationships you’re building are instead with your customers in your community! Crowdfunded loans with Honeycomb have been shown to strengthen relationships with customers by turning them into brand advocates for your business. This relationship is just one of the many benefits of crowdfunding small business loans that go beyond raising money.
What Kinds of Small Business Loans Are Out There?
There are several different places you can turn to to find a small business loan. One of the most traditional sources of these loans are banks. Many different kinds of banks offer small business loans, from large corporate banks to smaller community banks.
Another common route that entrepreneurs take when seeking out a loan is going through the Small Business Administration (SBA). They have several different types of loans of differing amounts and terms, and are essentially a conduit to make the process of finding a loan a bit easier for you.
However, SBA Loans (and traditional financing like through a bank) aren’t always reliable for small businesses. Fewer and fewer small business loans are being granted to small businesses, with approval rates plummeting from traditional financial institutions.
Luckily, there are alternative lending choices you can take instead of SBA loans, as well as ways to supplement SBA loans if you want to use a variety of lending sources.
What Types of Small Business Loans Do I Need to Be Wary of?
If you Google “small business loan,” the first thing you’ll see is about a jillion ads offering you a quick and easy small business loan with pre-approval in minutes and next-day cash in hand. These online loans are something you need to be very careful about pursuing.
Often, online loans are what’s also known as Merchant Cash Advances, or MCAs, and these Merchant Cash Advances can get to be very expensive - they can have APRs of 94% or greater! If you’re looking at a Merchant Cash Advance, you need to read the fine print, because they often get you with astronomical and variable interest rates, revenue sharing, prepayment penalties, and more.
Common Merchant Cash Advances lenders include Square Capital, OnDeck, Kabbage (now defunct), and PayPal Working Capital. While they are useful for some small businesses who need perhaps small amounts of cash lended to them quickly (and which they can pay off quickly if possible), they typically should be avoided for large projects, lest you get trapped in high-interest debt.
Keyla and Tim of Casa Brasil crowdfunded a loan of over $90,000 to get a liquor license for their restaurant!
How Do I Get a Small Business Loan?
Whether or not you choose to get a small business loan through a bank, through crowdfunding, or with another kind of lender, there are some similar steps you’re going to take to go through the process.
1. Decide what kind of small business loan you want to pursue
The first step in getting a small business loan is deciding on what kind of loan you want to pursue. Do you want a traditional bank loan? A microloan? Do you want to crowdfund?
Knowing this will help you gather the information you need and modify your plans accordingly to the needs of each lender.
Also, you don’t have to stick with just one kind of loan or funding source! Many small businesses crowdfund a portion of their capital needs as well as take out an SBA loan, especially if they’re looking to boost their business’s marketing or strengthen their relationships with customers.
2. Have a plan for what you want to do with the small business loan
Often, lenders want to see a business plan so they can get a better idea of who you are, what you have to offer, and the landscape of the industry you’re trying to grow your business in.
If you’re looking for a small business loan, you want to be as specific as you can about how much you need and what the funds are going to be used for, so having a plan written up with these specifications will go a long way in getting funding.
3. Get the documents you need in order
While the forms you’ll need to fill out might vary depending on the lender you’re using, they’re going to overlap with the basics. You’ll often need the following:
Borrower Information
Personal background and financial information
Business financial statements
Profit and Loss statements
Balance sheets
Income Statement
Business license
Your (and your partners’) resumes
Previous loan information
Income Tax forms
Business lease
4. Apply for your small business loan
The next step is to apply! You can do this at the location of the lender you’re going through, if applicable, or through an online portal if they have one. In other cases, such as with Honeycomb, you’ll work closely with a team of operations experts to make sure your loan application is processed properly.
It also can make a difference when you decide to apply for a small business loan. We’ve found that one of the best times to apply for a small business loan is after you’ve filed your taxes for your business.
5. If approved, receive money and begin growing your business!
If your loan application is approved, you’ll receive the principal amount in your business’s bank account to do with what you’ve planned! After a certain period of time (for Honeycomb it’s 45 days), you will then start to pay back your loan in incremental amounts, depending on the terms of the loan.
What Special Loans Might I be Qualified For?
If you work in a certain industry or are a member of a specific demographic, there might be special kinds of small business loans that you’re eligible for!
Industry-Specific Loans
Industries like restaurants often have their own set of small business loans that they can utilize. On top of the usual channels like banks and SBAs, there are also equipment financing and restaurant lines of credit, as well as restaurant-specific crowdfunded loans like the Honeycomb Comeback Loan.
Loans for Black-Owned Businesses
Black-owned businesses and other minority owned businesses often have the short end of the stick when it comes to funding their small businesses. We’ve seen this especially in 2020, as PPP relief funding disproportionately was not allotted to minority businesses.
Black-owned businesses are often denied small business loans, and don’t have the resources that other small businesses do. Thankfully, there are options of loans specifically for Black-owned small businesses, as well as other opportunities that can be taken advantage of. Such as the Minority-Owned Business certification program through the US Chamber of Commerce.
24 percent of Honeycomb Credit campaigns are minority-owned businesses, and many of which have direct connections to uplifting their communities. Take Guidance Whiskey, for example, who raised $120,000 to grow their whiskey business. Guidance Whiskey not only sells high-quality whiskey, but they act as a support and mentor for other Black distillers hoping to break into the spirits industry.
Loans for Veteran-Owned businesses
On top of their usual loan offerings, the SBA has several options for veteran-owned small businesses in business resources. They also have loans such as the Military Reservist Loan program, which offers loans to cover operating costs if you have an essential employee called away to service.
Honeycomb has also been proud to serve many veteran-owned businesses in crowdfunding small business loans, such as Scoot! Cold Brew and Lucky Sign Distillers, who raised over $121,000 to fund a production and retail location for their distillery.
Loans for LGBTQ+-Owned businesses
There are several great ways for LGBTQ+-owned businesses to be invested in, as well as lending opportunities.
LGBTQ+-owned small businesses can get access to loans through the usual channels like banks or the SBA, but they can also seek out specific loans from their area through their local LGBTQ chamber of commerce (if applicable), and join the National Gay and Lesbian Chamber of Commerce for access to national funding opportunities.
Loans for Women-Owned Businesses
There are also tons of resources for finding funding as a women-owned business, as well as options for advice and counseling through the SBA and Women’s Business Centers.
As with any of these affinity groups, women-owned businesses have also seen a lot of success raising small business loans on Honeycomb. In 2020, 50% of our crowdfunding campaigns were run by women-owned businesses. Compare this to the 2.2% of venture capital funding that goes toward women!
Norraset raised over $33,000 for his restaurant's rebranding, bringing Laotian food to Pittsburgh!
What Challenges Might I Have While Applying for Small Business Loans?
Sometimes, small businesses run into problems accessing and getting approved for loans, especially from traditional financial institutions such as banks or small business associations. Often, entrepreneurs find themselves asking, “Why can’t I get a small business loan?”
These obstacles to getting small business loans often impact start-up small businesses, those in “riskier” industries like food & beverage, and businesses looking for quick access to financing.
Can I Crowdfund a Small Business Loan?
You absolutely can crowdfund a small business loan! You might be more familiar with crowdfunding in a gift or rewards sense: you know, you give $100 to a business, and they give you a t-shirt in thanks. This is what crowdfunders like Kickstarter or IndieGoGo do.
This leads to many misconceptions about crowdfunding, especially crowdfunding small business loans. Some people see it as “digital panhandling,” or think they don’t have the time or resources to crowdfund. However, if you’re crowdfunding a small business loan, you’re not just asking for money, you’re entering a partnership with your customer-lenders who are extending you a loan.
In fact, there are many benefits to crowdfunding a small business loan, known as debt crowdfunding, over rewards crowdfunding.
For one, you are able to take out a loan and pay interest to your community, not a big bank. This allows you to strengthen your relationships with your customers. Debt crowdfunding can also give your business some needed marketing buzz, and get you some press mentions as well.
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