Shopping Around for Small Business Loan Options
Shopping around for a business loan can mean the difference between paying a higher rate of interest versus a lower rate of interest. There are many other benefits to shopping around for a business loan.
It's important to do your due diligence and plan accordingly. Read on to learn how to shop around for a business loan.
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Gather Business Credit Documents
It's important to have your business credit in order. Establishing business credit takes time, energy, and quite a lot of effort before you can even think about applying for a business loan. Once you have established your business credit and are ready to apply for a business loan, you’ll need your credit documents to know where you stand with lenders.
Here are some things you should do:
- Pull a copy of your business credit profiles. There are several business credit reporting agencies. The most important and most visible are Dun & Bradstreet, Experian Business, and Equifax Small Business. Make sure to pull at least these three credit bureau profiles.
- Review your business credit profiles to learn your credit scores. One of the first things most lending companies look at is your business credit score. Depending on how much business credit you have established and how well you have managed that business credit will largely determine your credit score. Make sure you are creditworthy enough to apply for a business loan. The more excellent your business credit score, the more likely you are to get approved for a business loan.
- Fix your business credit if necessary. If you don't already have business credit established, then you may want to think about improving your business credit. There are strategies you can follow to build business credit.
- Ask professionals for help. As a small business owner, your attention may be taken in many directions. It's important to reach out to experts in matters regarding business credit. An expert will help you assess your business credit to determine how much loan you may qualify for and afford.
Gather Business Financials
Once you've established your business credit score, it’s time to move on and gather your company's financials. These are documents like your balance sheet and income statement, cash flow statement, bank statements, tax returns, and so forth.
When applying for a business loan, it's important to have this information handy as business loan lenders use it to determine how risky it would be to lend money to your organization.
Here are some things to keep in mind:
- Financials tell lenders how healthy your business is. A business with a steady track record of growth stands a far more likely chance of qualifying for a business loan than a company whose financials are in the toilet. The better your financials, the better your chances of getting a loan for your business.
- Ensure projections are aligned with your business plan. When you formed your business, you should have written a formal business plan. In this plan, you should include financial projections and sales forecasts. Look at your current financials and compare them with the projections you forecasted in your business plan and evaluate how well they match up. Ideally, your projections should match the reality of your current company financials. If they do, this tells lenders that you are a pragmatic business owner, capable of managing a business.
- Fix misaligned projection on your business plan. If your financials exceed the projections in your business plan, this tells lenders you are a bit on the conservative side when it comes to projecting sales. If your projections are far above your business plan projections, it will likely hurt your chances of qualifying for a business loan. This is because lenders want to see business growth, not stagnation and decline. If this is the case, go back and change the numbers on your business plan to reflect the actual sales you’ve made since drafting your business plan.
Learn Your Lending Options
Traditionally, most small businesses that needed to raise capital applied for traditional business loans. Nowadays, this is not so much the case given that there are many alternative options when applying for a business loan.
It's important to research your lending options so you can find the best loan for your business.
Here are some things to know:
- Traditional lenders, like banks, are stricter on their business loan requirements. It’s more difficult for most small businesses to get a traditional business loan through a bank than it is through an alternative lending source. Most small businesses will be disqualified from a traditional loan if they have no established business credit, poor financials, and a lackluster credit score.
- Alternative lenders come in all shapes and sizes. There are many different types of alternative business loan lenders. Before applying for a business loan, shop around to learn more about these alternative lenders.
- Alternative lenders have fewer restrictions than traditional lenders. In some cases, alternative lenders may rely on your credit score or even how well your business is doing. Merchant credit accounts lenders will gladly charge you more interest and take a daily percentage of your credit card sales as repayment for the loan they extend to your business.
- Know the difference between non-predatory and predatory loan practices. Predatory business lenders charge ridiculous interest rates and have hidden fees, which can destroy a business and, at best, stunt its growth. Stay away from predatory lenders.
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Create a Lender List to Know Your Lending Options
It's important to create a list of potential lenders. This is important to do because you'll need to research each lender to ensure you're qualified to apply for a loan with them. It is also important to make sure that they qualify for your business.
Creating a lender list is easy:
- List only qualified lenders. Once you've gotten a peek at your business credit scores, have a better understanding of your company financials, and have a pretty good idea of which loans you qualify for and which ones you do not, it’s time to start creating a list of potential lenders that are in alignment with your business goals.
- Qualify lenders based on business needs. You know why you need a business loan. Now it's important to look at some factors that may disqualify a lender from your list. Some of these factors may include how quickly the loan gets approved. For instance, traditional lenders might take you three months to get approved for a business loan. Alternative lenders may give you a loan within 24 hours. If your business needs an injection of cash flow today, then you might want to stick with an alternative lender who has a proven track record of dispersing funds in a timelier manner if you don't need a loan immediately. You may find more favorable rates and terms with a more traditional lender, like a bank.
- Understand lenders have limits on how much they’ll lend. Lenders will only loan out so much money. If your business needs a lot of money, find a lender who specializes in lending out larger sums.
- Make sure you're qualified. Depending on your company’s financials, your business credit score, how long you've been in business, and how many assets your business has and what they’re worth, generally decides whether or not you qualify for a loan. More traditional lenders, like banks, have very stricter requirements. You'll need a perfect credit score to qualify for some loan types. Some lenders won’t even look at your credit score as lending criteria.
- Consider alternatives. If you don't meet the strict requirements some lenders require, you may want to consider alternative lending options. Business credit cards and Factoring your accounts receivables can be some good options to look into. They will help your business build credit. They will also help your business qualify for better interest rates and terms in the future.
- Decide which lenders fit your circumstances. Now that you know which lenders qualify for your business and which lenders you qualify to do business with, it's time to create a list of vendors that fit your circumstances. As you decide which lenders best fit your business, you'll need to do some online research and determine which lending partners make the most sense. For most small businesses and startups, a Small Business Administration (SBA) 7(a) loan is most common. For larger businesses that are more well-established, who have impeccable business credit, a business term loan through a traditional lending house may be the best option. Decide which loans you qualify for and compile a list of only those lenders.
Apply to Companies That Offer the Most Favorable Terms and Rates
Interest rates, annual percentage rate (APR), and fees matter when applying for a business loan. It's important to calculate the interest and terms with each lender so you can pick the lender that will offer you the best deal.
Here are some things to keep in mind when picking the most favorable terms and rates:
- Don't pick a lender based on emotion. Every business has different customer service standards. Don't fall prey to picking a lender just because they have better customer service standards than a lender who may offer you better terms and interest rates. At the end of the day, it's the interest rates and terms that will haunt you, not the customer service.
- Know the difference between APR and interest rates. Interest rate is just that — it's a rate (percentage) of interest charged on a loan. APR, on the other hand, includes all origination fees and other fees along with the interest rate. If you select a loan based on interest rate alone, you may be paying far more for that loan than had you selected another with a higher interest rate but a much lower APR. Make sure and read the fine print. Know the entire cost of the loan before applying.
- Every lender has a track record and a history. Find out what the history is and what their lending practices are. You can do this by checking with the Better Business Bureau as well as doing online research into the company. If possible, ask the lender if you can talk to some of their previous and current clients. Find out what they’re not telling you.
Submit Your Business Loan Application
After you have gone through all the steps of gathering your business docs, gathering your business financials, discovering your lending options, building a lender list, and finding out who the best lender is to apply to, it's time to submit your application.
This is the final step and the most important step because if you don't submit an application, you are guaranteed not to get the loan.
Here are some things to keep in mind when submitting your application.
- Traditional lenders usually require an in-person visit. Some organizations, like banks, usually want to meet with a business owner to finalize the application process. If it's a bank, you will probably have to go in person in professional business attire and talk to the bank. When going in person, make sure you have all the required paperwork and documentation needed to apply for the loan. Be organized. You don't want to waste this person's time or yours. Give the impression that you know how to manage things nicely. First impressions are important.
- Alternative lenders and online lenders may require you to fax in or email your application. Some online lenders may have an online application process in which you'll upload your business documents and other required information. Once this is accomplished, someone with the lending agency will go through your paperwork and an underwriter will have the final say in whether or not you are approved.
- Some lenders may prefer to do business through multiple mediums. A factoring company may wish to talk on the phone as well as through email. Some will overnight an application to be filled out and sent back in.
- Don't forget anything. When finalizing your business loan application, submit everything all at once, and keep a copy of all your documentation in case you have to resort to it later.