If you are thinking of starting or expanding an existing business you own it’s important to understand how small business loans work. Choosing the right loan option and lender can make the difference between a frustrating experience and one of ease.
Before you start looking into loans there are a few questions you need to stop and ask yourself. This will give you and potential lenders a guide to who you are and what you goals are. These questions include:
- What Is The Exact Amount Of Money You Need To Borrow?
- By What Date Do You Need The Funds?
- What Are Your Specific Plans For The Money?
- What Is The Estimated Amount Of Time It Will Take You To Pay Back The Loan?
- What Is The Financial Shape of You And Your Business?
- What Collateral Are You Willing To Put Up For The Loan (Personal and Business Assets)?
Now that you have a clear idea of what you need it’s time to discuss how you’re going to get that necessary funding for your business. This all starts with understanding what potential lenders are looking for in a viable investment.
What Do Lenders Look For?
Each financial institution will have various requirements for lending, however, there are three main factors that will influence your ability to get a business loan.
Credit Score – This shows your ability to repay debt. If you have a low credit score due to financial mishaps or just no credit history, it can make getting a loan difficult. Those with a low score will typically pay more on average interest than those who have a high credit score. Some lending institutions may require a minimum score before they consider any other factors on the application.
Business Age – If you are starting a new business you’re going to have a harder time getting a loan than a business that has been around for 50 years. Having a profitable business year after year proves to potential lenders that you are financially responsible and they will have a greater chance of getting a return on the money they lend to you.
Business Revenue – One very important factor for any lender is to see the monthly income of a business. This will reveal to them if the business is capable of paying their monthly loan requirement.
Some other common factors that lenders take into account on a business loan application are accounts receivable credit scores to ensure the income flows into the business, your history paying your accounts payable on time, and any previous bankruptcies of the business owner(s).
Many lending institutions will take the personal financial history of the business owner into account as well. This includes looking at your history of repaying debt, including personal loans and title loans.
What Type Of Loan Should I Apply For?
There are typically two types of loans a business can apply for. These include conventional bank loans and small business administration loans (SBAs).
Conventional bank loans are where you go to your local bank and apply for a business loan. You will typically need to have a profitable business and a good amount of collateral to get approved for this type of loan. These loans do tend to come with low-interest rates, get approved a lot faster, and typically have a shorter repayment term than SBAs.
SBAs are business loans that are provided through approved lending institutions and are partially backed by the government. This means that if the debtor defaults on the loan the bank will get a portion of their investment back from the government. Typically those who couldn’t get approved at a traditional bank due to their credit risk can get approved through an SBA. This type of loan takes longer to process than conventional loans.
Once you understand these basic concepts about small business loans you can prepare to start contacting your local financial institution.