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3 Small Business Loans You Can Get & How to Pick One

Christine DiGangi

No matter what kind of business you're trying to start or grow, you need money to make it happen. Unfortunately, trying to get it can be overwhelming.

"The variety of loans [is] practically not countable," said Linda Rusche, director of the Small Business Administration's office of credit risk management. That's not too surprising, considering there were 27.9 million small businesses, as of the 2010 census, with a wide range of needs and loans to serve them.

With so many small business loans to choose from, where should you start? You can break down the process into three stages: deciding what you need, learning where to find it and shopping around for the final product. Once you complete the first part and take stock of your needs, the second step will likely be less intimidating.

Rusche said getting a small business loan usually starts with putting together a solid business plan explaining the management skills of the owner, a cash-flow projection for the next 12 to 24 months, a good description of what the business does, a list of potential loan collateral and, if the business exists, 2 to 3 years of financial statements or tax returns. Once you've gone through those details and know how much money you need (and for how long), there are three main sectors to search for financing.

Conventional Loans

When most people think of loans, they think of banks. Credit unions, commercial banks, investment banks — those are the traditional sources of small-business financing, and which you choose often depends on how much money you need to borrow.

Regardless of that number, you'll need to put down some of your own (or your business') money and be able to meet the lender's credit-underwriting requirements. If you're just starting out, this means putting your personal credit on the line. (You can view two of your personal credit scores for free each month on Credit.com.) As your business grows, you can establish your credit that way. (Like personal credit scoring, business-credit scoring is a big and complex industry.)

For some entrepreneurs, the financial and credit requirements for a conventional business loan can be difficult to meet. Business owners in that situation still have a few options.

SBA Loans

Borrowers who don't qualify for a conventional small business loan may be able to get a little help from the government by way of an SBA loan. Basically, a borrower who poses too much risk to a lender under conventional standards could still get financing if the SBA guarantees the loan — that is, it takes on some of the risk of the loan, so the lender won't be left holding the bag if the loan goes bad. The SBA also has a network of local small business development centers, where you can find help with business planning and loan research, Rusche said.

Alternative Loans

Of course, you can't forget the internet. There are many places you can get small-business financing that don't require you to work with a traditional financial institution or Uncle Sam. Because alternative lenders aren't regulated to the degree some traditional lenders are, the underwriting criteria may not be as strict. That's a risk, but it also expands business owners' financing opportunities.

Each of these financing arenas offers a variety of products: term loans and revolving credit, short- and long-term financing, start-up loans, micro-loans, equipment loans, real estate loans and so on. Take your time when comparing them.

"Shop for a loan like you would shop for anything else you would buy," Rusche advised. "You should contact many potential lenders, and ask each one the same set of questions about the loans that they make."

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