Finding the right loan for a business is a hurdle that every business owner has to face. Obtaining a business loan from most banks is not easy, due to their strict lending standards.
However, securing outside financing is necessary if you want to cover your daily expenses or grow a business.
Finding and applying for a small business loan can be a tedious process, so, you need to be well prepared to succeed. Here are some tips that will come in handy when looking for a small business loan:
Find out Why You Need the Money
You need to figure out why you need the loan before you approach any lender. Most lenders will ask why you need the loan and knowing where you’ll invest and allocate the money will also help you manage it once you get approved.
You most likely need a loan for one of the following reasons:
– To manage your daily expenses
– To have a safety cushion
– To start a business
– To grow your business
Once you know why you need the loan, you can prepare a good pitch when borrowing from potential investors.
Decide on the Right Loan
The reasons for applying will dictate the kind of small business loan you require. It is practically impossible to get a good loan in your first year of business. Lenders need borrowers with cash flow to make sure that repayments will be made: this disqualifies many startup businesses immediately.
In the meantime, you have to rely on credit cards, crowd funding or borrowing from family members to keep your business going. If you have a lot of student debt, you should consider joining a student loan consolidation and payment reduction program to lower it. Borrowing with poor credit only means higher rates for you.
If your business has more than a year of experience, your financing options are more versatile and include business lines of credit, SBA loans, and term loans.
Choose the Best Lender
You can acquire a small business loan from numerous sources, including online lenders and banks. Each of these lenders offer a myriad of loans such as accounts receivable financing and lines of credit. You need to approach loan shopping the same way to approach car shopping: do your research and choose the best lender for your needs.
Once you’ve chosen the best lender, you should compare two or three options based on APR and terms. Finally, you should choose the one with the lowest APR. Just make sure that you can make regular repayments. Small businesses have a harder time with loan approval due to low sale volumes as well as low cash reserves.
Although banks offer low APRs, they take longer to approve your loan, which is not going to work if you want to open your business quickly. If you opt for micro-lenders, you should be willing to accept short-term loans of less than 35,000 dollars. Moreover, these loans tend to have a higher APR than the bank loans.
Find Out If You Qualify
The main factor that will determine whether you qualify for a loan or not is your credit score.
To find out yours, you should ask for a free credit report from the three main credit bureaus: TransUnion, Equifax, and Experian. Banks, which are the source of the cheapest business loans, will require you to have a score of at least 680. If your credit score falls below the threshold, you should consider taking out a loan for people with bad credit.