Loans for small businesses can play an instrumental role in helping your start or maintain your company. While it’s true that it is somewhat more challenging to secure a loan these days due to lending standards being tightened, you can make the process of acquiring a loan easier by having a firm understanding of what the loan process entails. That’s why our loan experts at Seek Capital put together this handy guide. In just a few easy steps, you will have a better idea of what goes into getting a loan and how you need to approach securing a small business loan.
Potential lenders are always going to want to know why you require funding for your small business. The answers that business owners give are generally one of the following:
Knowing exactly why you need outside financing will make it easier for lenders to determine the type of loan you will receive. If you are just starting out and need capital to establish your business, it is very unlikely that you will get a loan from a bank or lender. They need to know that your company is making money so that they can be assured that they will get paid back in a reasonable period of time. Since you’ve yet to open your doors, the chances of you getting a loan are pretty slim. But that’s not to say that you don’t have any options if a lender denies your request. On the contrary, there are plenty of resources available to you that you may not have tried or even thought of yet. You can always attempt to secure a personal loan and use it to finance your small business. If you are successful in going this route, you will want to be sure that you can make your repayments if things don’t work out as anticipated with your business. You will need to have some ideas to fall back on so that you can come up with the agreed repayments. If your business is successful, you might want to consider paying off your loan early, as long as there are no penalties for doing so. At this point, you may have enough time under your belt to get a business loan for other reasons. If a personal loan doesn’t pan out, you may want to look into crowdfunding your small business. This has proven to be a viable resource for many now-successful business owners. Depending on the crowdfunding platform you choose, you may not have to provide rewards to your backers, making it much easier to focus on growing your business . Credit cards or borrowing money from family may also be an option for you if you can’t secure financing any other way. Just keep in the mind the interest rates that come with most credit cards, and consider the stress your loan could cause on friends and family if you borrow from them.
As you search for lenders, you are going to come across three main types that specialize in small business loans:
When you choose to do business with one of these three lenders, you will have access to lines of credit, terms loans, and accounts receivable financing. Your options are going to be pretty limited if you don’t have collateral or sufficient time in operation. That’s why you may be better off sticking with an online lender, especially if you have yet to go into business. Online lenders are easier to establish a line of credit without the need for collateral or a set amount of time in business. Many business owners will turn to online lenders because the approval process isn’t as strict. What’s more, online lenders can typically get you financing in a hurry. Some will have your money to you in as little as 12 hours. It’s important to keep in mind that you’re likely going to be trading low APRs for higher approval rates. So don’t be surprised if you have to repay at a higher rate. If, however, you do have collateral and have been in operation for some time, you should certainly check with a bank first. You can usually borrow a much higher amount when you go through a bank; just keep in mind that it may take some time before you receive your loan. Not only can you get term loans through banks, but you can also get commercial mortgages to buy or refinance properties. While it’s true that securing a loan through a bank is tougher, approval means you are likely to have low-interest rates. If you are having trouble securing a loan due to the size of your business, a microlender may be your best bet. Designed for smaller businesses, microlenders will usually give you a short-term loan equaling less than $50K. Your APR is likely to be higher than a traditional bank loan, however. And unlike online lenders, you’re probably going to need to provide detailed information about your small business before securing funding. As such, you should expect the application process to take some time. The good news is that you won’t need collateral and your personal credit history won’t disqualify you from getting a loan. These two factors can be problematic for many people, making microlenders a viable option. The amount that you can borrow is significantly less compared to your other options, but at least you will have something to work with until you can improve your credit score or establish collateral.
There are four specific questions involved in helping you determine whether you can qualify for a small business loan. When you can answer these questions, you will have an easier time determining where you stand in securing a loan. What is your credit score? TransUnion, Equifax, and Experian can provide you with a free credit report. It is strongly advised that you take advantage of these resources so you know what kind of credit you have. Once you know your credit score, it will be easier to approach potential lenders. If your credit score is at least 680, you have a much better chance of getting a small business loan through a bank. If you discover that your score is less than that, you will want to think about going through a microlender or online lender. Have you been in business for at least 2 years? If you’re going through an online lender or bank, you’re going to have to have been in business for at least 2 years. Otherwise, you will need to speak with a trusted microlender to try to secure the funding you need for your small business. How much money do you make? Depending on the online lender you choose, you may be required to make anywhere between $50,000 and $250,000 a year. As such, you need to calculate your annual income before approaching lenders. Having this data handy will make your application process go much smoother. Can you afford to make the required repayments? This is a tough one for many people. Not enough data is taken into account to ensure that repayments can be sufficiently made on time. This can get you in trouble quickly. You need to be sure to calculate all of your monthly responsibilities before agreeing to a small business loan. And if something unforeseen occurs in your business and you can’t make the agreed repayments, you need to have a backup plan in place to ensure that your payments are made on-time.
Once you know what type of loan you need and all of the necessary data compiled, it’s time to apply for your small business loan . Be sure to take the time to compare all of your available options; don’t immediately jump on the first offer that you get. Compare APRs and read the agreement carefully before proceeding. This will ensure that there are no surprises over the course of your financial arrangement with your chosen lender. In the end, diligent research will pay off.
As a business owner, it’s important to put together a detailed outline of your plans for your business. This will give potential investors the information they need to help them determine whether to loan you money. If you are having trouble securing a small business loan, be sure to read our guide on getting small business loans . We have a wealth of helpful resources on our website, so feel free to explore it for more help on leading a successful business. Not to mention, you can get your business the funding it needs right here from Seek Capital. Sources https://www.nerdwallet.com/article/small-business/top-nonprofit-microfinance-organizations-that-lend-in-us https://www.consumer.gov/articles/1009-your-credit-history https://www.experian.com/