Banks have been around forever, and they’re practically synonymous with business loans. But in recent years, business owners have turned to the new alternative loan market for faster financing, and higher approval rates. But while the idea of a business bank loan is enticing, there’s more involved than you might initially think. Before taking the dive into applying for a business loan from a bank, it’s best to understand what you’re up against, and the alternatives available.
Factors to Consider in Small Business Loan
1. Check your Credit Score
A good credit score can boost your chances of getting a quicker loan approval. Additionally, it also affects the cost of borrowing by providing a loan at a lower interest rate. Therefore, before applying for a business loan, you must have a clear understanding about your credit score. It is advisable that you regularly check your credit score to ensure that any mistakes / errors are rectified and a healthy credit score is maintained.
2. Determine Funding Requirement
Once you’ve decided that you do, in fact, need a loan, it’s important to be realistic about how much you need. Remember to include fees in the equation. You don’t want to go through this process multiple times, so make sure you’re asking for enough money to make accomplish your goal. At the same time, be cautious of taking out a larger loan than you need, as the interest will be costly and it doesn’t help your income-to-debt ratio.
Also, bear in mind that some lenders may be unable to provide the amount of funding you require, so do your homework first.
3. Expect to personally guarantee the Loan
Entrepreneurs don’t always have enough suitable assets in their businesses to guarantee a loan. So the lenders will require a personal guarantee from the business owner and any co-applicants or additional guarantors. This means you (and perhaps cooperating partners, friends, or family who secure the loan with you) will need to pledge personal assets as collateral in the event you are not able to repay the loan.
4. Look for alternatives to a Small Business Loan
These days, there are a variety of sources from which to seek funding. Traditional institutions, such as banks and credit unions, have long provided a needed influx of cash to the small business owner. Shady knee-capping agencies also have a long tradition, however. Today, there are merchant cash advance options, as well as companies that specialize in more flexible repayment options, so again, do your homework before jumping right in.
5. Show how you can pay it back
This is the most important thing lenders will want to know. As a new business owner, it can be difficult for you to prove your ability to repay or “service” the loan. Be sure to get your finances in order and provide thorough financial detail in your business plan. Don’t overstate your expectations, be realistic. If you’ve been in business for any length of time and can show that your profits exceed your expenses, have your proof on hand.
6. Understand the purpose of a Business Plan
There are many format variations of a business plan. What’s important is that you show that you understand your own operation and market, you can communicate the essentials of your business, and you have done enough research to provide realistic calculations to predict future financial results.
7. Read the Fine Print
Before signing any document you need to make sure you understand what you’re signing your way into. Not all loans are boilerplate; there are a variety of options out there, so look closely at the terms and conditions of the deal you need to be aware of the payment structure of the loan: Is there a balloon payment at a set date? Is the interest going to amount to more than the principal amount over the loan tenure? Are there origination fees or any early payment penalties? It’s best to look out for any such factors and thoroughly consider them before taking on any debt.