Anyone who has dabbled into entrepreneurship knows that starting a business (or expanding one) can be expensive. From the day you conceptualize your idea for your business until the time you begin growing your business, you need access to a consistent flow of working capital to help you carry out your plans. Fortunately, a small business loan can help you address the financial needs you will encounter along the way.
According to a 2019 survey conducted by a group of Federal Reserve banks, 43% of small businesses need access to external funds. More than 56% applied for a loan to expand their business, and or take advantage of new opportunities, or acquire more assets. On the other hand, 44% needed funding in order to cover daily operating expenses.
Furthermore, studies show that small businesses mainly apply for loans from banks or large lending institutions. However, it’s no secret loan applications for larger banks that can be complicated. Because of this, entrepreneurs turn to online lending institutions to access small business loans.
Finding the best loan for your business takes time, so we’ve narrowed down some tips to help you simplify the process.
1. Figure Out Why You Need A Loan
First thing’s first: you need to know exactly why you need a loan. Will it help grow your business? How will you use the money?
Your answer to these questions can help determine the type of loan suitable for your company. For instance, if you need to set aside cash for emergency purposes, you can apply for a business line of credit. If you want to buy commercial buildings, you can try to apply for SBA 504/CDC loans.
Other uses for small business loans such as paying for marketing strategies, purchasing inventory, and funding daily operating expenses can fall under multiple loan categories. But by following the first step, you can easily narrow your options and choose the perfect one for you.
2. Calculate How Much Money You Need
It’s important to remember that there’s a borrowing limit and that each small business loan varies. For instance, you can borrow as little as $500 or as much as $25 million. For this reason, you need to have a specific number in mind.
Many entrepreneurs falsely think that the higher the loan amount, the better it is. But obviously, you’ll need to pay back whatever you borrow. The larger the sum, the bigger the loan payments, which can put a large dent in your cash flow in the long term.
Additionally, the majority of lending companies factor in the interest and other fees as a percentage of your loan. This means that a larger loan comes with higher fees. This is the reason why you need to carefully calculate how much you need so you won’t end up paying extra.
On the other hand, you don’t want to get a loan that’s too small because you wouldn’t want to come up short on cash in the middle of an expansion.
Requesting the wrong amount is the most common mistake entrepreneurs make when trying to secure a loan. Best to ask for assistance from a reputable financial advisor who can help you find the perfect balance.
3. Check Your Credit Rating
Now that you have an idea of the type and amount of loan you desire, your next step is to get real with your credit rating.
By knowing your credit score, you’ll have a clearer picture of the type of loan you can actually qualify for. Even if you’ve deduced that your business needs a $700,000 business term loan, it doesn’t necessarily mean you’ll get one.
You can be sure that all lenders will check your creditworthiness before approving you for a loan. They may ask you certain questions, such as:
- What’s the current state of your business and personal credit?
- How much is your annual revenue?
- Have you declared bankruptcy before?
- How long has your business been operating?
If your credit score doesn’t make the cut, there are certain ways to improve it. Make sure to pay your bills and suppliers on time, check your credit report for errors and then rectify them immediately, and decrease credit card spending.
4. Know Your Options
The next step is to look for financial institutions and evaluate their loan offers. For example, if you want to apply for inventory financing, you can compare different lenders who offer this type of loan.
As you compare loans and lenders, pay attention to the minimum and maximum loan amounts, interest rates, terms, APRs, and fees.
One size does not fit all when it comes to small business loans. At the end of the day, you need to decide what’s best for your company. Do you need low monthly payments? Long-term loans? Or a high loan amount?
Apply for a Small Business Loan Today!
Opting to apply for a small business loan is a big decision for business owners. Make sure you’re making the right one by consulting a trusted financial advisor.