Applying for a small business loan is a daunting prospect for most, if not all, business owners. After all, there is a one in five chance of their approval, but fearing the worst is not the way to avoid it. If you are looking to apply for a small business loan, then you need to equip yourself with the right information, to have the best chance of acquiring one. This means rigorous research on your lenders and their requirements and knowing your own business like the back of your hand.
Knowing how to choose a small business loan is one of the most useful pieces of information to have as a beginner entrepreneur. Here are the points to remember when applying for a small business loan:
Things to do:
- Know the Business Details: This not only includes the details of the loan you wish to apply for but also the details of your own business. For example:
- Know your business credit score (different from personal credit score) and check it against two to three different credit score calculators to be sure.
- Know your finances, especially expenses incurred and revenue generated in the past year of operations. It is important not to overestimate your revenue predictions, or underestimate the expenses since there are always unknown variables and unforeseen circumstances.
- Know your business plan going forward. The first and foremost concern of a lender is to be sure that they will receive the payback on time. You can convince them by providing a solid and reliable business plan that will ensure your business sustains and continues to churn a profit. A good business plan must include competitor analysis, market environment analysis, strength, and weaknesses of the business and financial projections for 3 to 5 years.
- Know the Lender: Different lenders have different loan terms and requirements. You need to know which lender suits your business needs, choose the best one. Here are some common lender options:
- Traditional bank loans are still a quite popular way to finance businesses. They offer short to medium term loans that range from 3 months to 5 years in duration.
- SBA loans are available in three main categories i.e. SBA 7(a) loan program, CDC/504 Loan program, and Microloan program. They are long-term, slower financing options.
- For faster financing options, businesses use alternative lenders that are accessible through online lending platforms like Orumfy. They have higher acceptance rates and more lenient requirements than traditional banks; however, they do charge higher interest rates.
- Know the Loan Details: There are many types of loans out there but only a few may meet your business needs. That’s why it is important to know which loan to apply for so that you stand a better chance of acquiring it. Here are some loan details you need to keep the focus on:
- The Annual Percentage Rate (APR) is the yearly interest cost of borrowing the funds. In simpler terms, the interest rates are usually lower for SBA loans since lenders that are backed by the government provide them.
- The repayment amounts determine how much you will pay back monthly/yearly. Too high and you may not be able to pay back, too low and you may take longer than needed to pay off the complete debt.
Things to Avoid:
- Do not put off down payment assistance, as they damage your credit score and hurt your chances of getting a small business loan.
- Do not choose faster financing loans if you do not have the reserve to pay higher APRs.
- Do not opt for loans that may cost you revenue down the line such as Merchant Cash Advance. This sort of loan uses a set percentage of your future credit and debit card sales as collateral for the loan so the higher the sales, the higher would be the percentage taken by the lender.
- Do not apply for too many loans, as this would damage your credit score. Every time you apply fully for a business loan, the lender does a hard credit pull and too many loan applications would dent your credit score substantially.