Every entrepreneur has the same question: Where do I get funding for my business? While some entrepreneurs may get tempted to approach many sources, a better option is to have one primary funding source to avoid complications like double-servicing and a lack of communication. While there are many financing options, banks are often the best for small business loans.
Banks have a history of providing small business loans, understand the general lending process, and know how to service small businesses. Bank loans also have a relatively quick turnaround.
No matter which financial avenue you decide to pursue your business’ financing needs, it’s important to remember that getting approved for a loan or line of credit will not guarantee the loan will fund. The following nine factors should be considered before approaching a lender for a business loan.
Consider the Terms of Your Loan
The loan terms will determine how much money you can borrow, how long it takes to pay back, and what interest rate you’ll be charged on balance.
When considering terms, ensure that the length of payments works with your budget and cash flow projections. Also, be aware that some lenders may offer flexible repayment schedules or low introductory rates that increase over time as an incentive for taking out their loans.
However, these options aren’t always beneficial. Ensure they’re right for your situation before choosing them over traditional fixed or variable rates that remain constant throughout the term of the loan agreement.
Review Your Credit Report and Score
Your credit report and score are two of the most important factors lenders will consider when making a loan decision. Your credit report is a history of your financial activity, including late payments, bankruptcies, and any other information that would negatively affect your ability to repay a loan. Your credit score is a numerical representation of your creditworthiness, with higher scores representing a lower risk to lenders.
If you don’t know your credit score, check it free through any major credit reporting agency. You should also review your credit report to ensure no errors could hurt your chances of getting approved for a loan.
Know How Much You Need to Borrow
One common mistake small business owners make is requesting more money than they need from lenders. This can hurt your chances of getting approved for a loan, increase the cost of borrowing and put your business in a difficult financial position if you cannot repay the balance.
When calculating how much you need to borrow, including the costs of any equipment or inventory you need to purchase and any renovations or repairs needed. You should also have a buffer of working capital to cover unexpected costs or slow periods.
Once you know how much money you need to borrow, shop around for the best loan options before approaching a lender. This will help you understand what terms and rates you can expect and give you leverage when negotiating with lenders.
Understand the Application Process
The application process for a small business loan will vary depending on the type of lender you’re working with. However, some common elements are typically included in most applications, such as personal financial statements, business tax returns, a list of collateral and a detailed business plan.
Some lenders may also require that you have a minimum amount of time in business or that your business meets certain revenue requirements. Be prepared to provide this information when applying for a loan, so the process goes as smoothly as possible.
You can save time by completing the application process online, but ensure you’re working with a reputable lender before submitting any personal or financial information.
Do Your Research and Shop Around for Lenders
There are different types of lenders you can work with when seeking a small business loan. Each has its strengths and weaknesses, so it’s important to research and find the one that best suits your needs.
Some common types of lenders include banks, credit unions, online lenders and peer-to-peer lenders. You can also get financing through the Small Business Administration or a business credit card.
Be sure to compare multiple lenders before choosing one, and don’t be afraid to negotiate for better terms. Remember that the goal is to get the best loan possible for your business, so don’t rush into a decision to get it over with.
Take the time to research and shop around for lenders, so you can get the best loan possible for your business.
Be Aware of Any Fees You Will Have To Pay
When taking out a loan, it’s important to be aware of any fees you’ll be required to pay. These can include origination fees, prepayment penalties and late payment fees.
The lender charges origination fees for processing your loan, typically a percentage of the total loan amount. Prepayment penalties are assessed if you pay off your loan early, while late payment fees are charged if you miss a scheduled loan payment.
These fees can add up, so factor them into your overall costs when taking out a loan. You can negotiate with lenders to waive these fees, but it’s not always possible.
Be aware of any fees you must pay when taking out a loan. So you can budget accordingly and avoid any unpleasant surprises down the road.
Keep Track of Your Repayments
Once approved for a loan, it’s important to stay on top of your repayments. Ensure you know when your payments are due and how much you need to pay each month.
It can be helpful to set up automatic payments so you don’t have to worry about forgetting to make a payment. You can also set up reminders in your calendar or use a budgeting app to help you stay on track.
If you’re struggling to make your loan payments, reach out to your lender as soon as possible. They may work with you to modify your loan terms or provide other assistance.
Keep track of your loan repayments to stay on top of your finances and avoid any missed payments.
The Bottom Line
Taking out a small business loan can be a helpful way to get the financing you need to grow your business. However, it’s important to research and understand the process before applying.
Be sure to shop around for lenders, compare terms and rates, and be aware of any fees you’ll have to pay. You should also make a budget and track your loan repayments to ensure you can afford the payments.
If you take the time to research and understand the process, you can get the right loan for your business and avoid any stressful surprises down the road.