What You Need To Know About The Best Business Loans
Part of the reason why small startup businesses fail is due to poor or lack of financing.
As a business grows, so does its needs.
Any growing business at some point will need extra money to cover up unavoidable expenses that the current budget can’t handle.
A small business loan comes in handy during such times to give your business the boost it requires to get through the rough patches and propel it to greater success.
It is, therefore, necessary that before you apply for a small business loan, you should have all the information regarding the best loan products in the market, how to qualify, what you need the money for, what to look for in lenders and how to apply.
Why are business loans important?
Different businesses need funding for various reasons.
Some of the most common reasons why small business owners require loans are:
- To purchase new equipment or inventory that would help them serve their customers better.
- To expand into new markets.
- To take advantage of a new business opportunity.
- To help with the daily expenses.
- Start a new line of business.
- And to help boost their working capital.
All these business needs require different loan products, and it’s prudent to know why you need funding before applying for any.
How does a business loan work?
Getting a loan as a small business may be a daunting task as compared to established businesses. It is, however, not impossible.
Many lenders especially the traditional banks are risk averse and will want to know why you need funding. They also require that a business fulfills certain requirements before their loan application is approved.
Borrowers with good credit scores stand better chances of getting affordable loans with better repayment terms. A good credit score is an indication that you are a responsible borrower and your delinquency rate is low.
They will, therefore, perform credit checks, ask for your personal and business details to verify if you are creditworthy. If your application is approved, you will discuss your interest rates and all the associated borrowing costs, monthly payments and the repayment terms before the loan is closed.
Make sure you understand every detail before signing the loan agreement form because once you agree by appending your signature, you’ll have to abide by the terms until your loan is fully repaid. Failure to do so may attract penalty and legal proceedings.
Factors to consider when searching for the best business loans
Before applying for any small business loan, it’s important to keep in mind the following factors:
- Why do you need the money?
The lending market is awash with different loan products. Each loan type performs a different function. In case you need extra money to finance expansion, a term loan would be ideal. Invoice financing comes in handy when you have overdue invoices but still need cash to stay afloat, a business line of credit can help to boost your working capital and inventory financing works best when you want to add more stock to your business. It is, therefore, important to know why you need funding so that you don’t end up with too much or very little money than you required.
- How much can you comfortably afford?
Before applying for a loan, you should be in a position to repay it. Perform a business analysis and ascertain your current financial position. What positive impact is the loan going to have on your business? How much are you able to set aside for the monthly repayments? Are you able to pay back the loan without affecting your bottom line? Normally, your debt service coverage ratio should tell you and your lender if you have enough cash at hand to service a loan. Check your monthly income versus the monthly repayments. The amount you pay back should be equivalent to the amount you plow back to your business. Settle for an affordable loan that even after repayments, you will still have enough money to run your business.
These are some of the most common requirements among lenders:
- A good credit score
You can never underestimate the role of good credit when looking for a business loan. A good credit rating of above 620 shows your potential lender that you can be entrusted with credit and pay back in time.
With a good score, you are eligible for affordable loans with a longer term. Borrowers with minimum credit scores can only borrow up to a certain amount and their terms are usually not as attractive as those for borrowers with good credit ratings. Before applying for your loan, it’s crucial that you check your credit reports. You can contact the credit bureaus, and let them make amendments if the reports don’t reflect the true picture of your credit. You have to produce proof that what’s in the report does not reflect your actual scores. If, on the other hand, the credit report is right, you can work on improving your scores by paying your bills on time to improve your creditworthiness.
- How long has your business been operational?
Your years in business play a crucial role when you are searching for best business loans. Lenders tend to shy away from startups and business that are less than a year old. Depending on different factors, most startups don’t achieve their full potential. They usually fail after their first five years of inception. No lender would want to lend out money they are not sure will be paid back. They are usually skeptical that startups with no proven cash inflow, no established clientele, and real assets can pay back their loans without defaulting. A business that has been in operation for over two years, on the other hand, gets funding easily because they are more stable and are less likely to fail.
- What is your annual revenue?
Lenders would want to know if your business is profitable.
The annual revenue could be broken down further into what you make daily or on a monthly basis.
This will help them determine how much you are eligible for and a comfortable monthly repayment for you.
Lenders prefer business that’s profitable and has a stable cash flow.
What to look for in a lender
Since there are many lenders in the market, it’s possible to get confused and end up with an expensive loan.
When looking for best business loans, it’s important to factor in the cost of credit, the ease of getting it, the amount and how flexible the terms are.
Below are some ways you can use to vet lenders:
- Reputation – check on their reviews and see what past clients are saying about them. If they have positive reviews, then it means they may be a good fit for your business.
- Quick turnaround time – normally loans are meant to help in emergencies. The application process and approval time should be as short as possible.
- Clear requirements – the lending requirements should be easy to understand.
- Competitive rates and APR –your potential lender should offer affordable interest rates so that you don’t end up with an expensive loan.
- Have an online presence – the lender should have a website with contact details and directions to their physical offices across the state. This will help build trust.
- Flexible terms –get a potential lender who can bend the rules to accommodate you. Check out on prepayment and late payment penalties, other loan charges, and the repayments terms. Go for terms that can accommodate your current financial position.
Since you now know why you need funding, how much you can afford, what lenders are looking for and how to vet lenders, it’s now time to apply for that business loan.
You have to ensure you have the right documentation.
Well, lenders are different and some may not require lots of verification to approve your loan request, but some of the common documents you need to attach with your application are:
- Your current bank statements
Lenders will ask for bank statements to see your cash inflows. Depending on the lender, you may need to produce bank statements for the last two years or just for three months.
- Your debt repayment schedule
If you have a running debt, your potential lender may ask for the repayment schedule to check on how you have been repaying the loan. They’ll access how consistent you’ve been and if your current financial position can allow for a new loan.
- Your personal tax returns
This document will help your potential lender verify your income details. It’s crucial that you keep them up to date before applying for a loan.
- Business tax returns
It helps to verify the annual revenue of your business. Make sure that it’s filed and shows your business revenue for the last two years.
- The balance sheet
It’s a document that shows the current financial position of your business. Most lenders will require this document because it shows the financial health of a company.
- The income statement
It’s a document that clearly shows the income and expenditure of a business within a given trading period. The lender will use this document to ascertain if your business is viable and worth funding. Make sure it’s updated when applying for a loan.
Comparing different loan offers
The idea is to end up with the most affordable loan as possible. Do your research and compare different lenders. Instead of concentrating on interest rates only, ask your lender about the loan’s APR.
While interest rate is the cost of borrowing, APR is the interest rates plus other charges. If the APR is high, no matter how attractive the interest rate is, the loan will still be expensive.
You may be lured by low interest rates only to end up paying double digits APR that may end up affecting your cash inflow.
Some of the associated borrowing costs to look out for are:
- Late payment fees – some lenders will charge you for paying your loan late. To avoid incurring this cost, make sure you keep your repayment dates.
- Pre-payment penalty – if you choose to clear your loan ahead of the scheduled time make sure your lender does not charge prepayment fees otherwise you may incur more cost. Some lenders do this to recoup the interest on the loan.
- Application fee – lenders charge an application fee to recoup the cost they incurred in doing credit checks and processing your loan. Some lenders charge it upfront or deduct it from your loan.
- Origination fee – this is the cost of underwriting your loan. Usually, it’s a percentage of the principal
- Check processing fee – if you choose to receive your loan through a check system, some lenders will deduct an amount used to process the check.
- Guarantee fee – since SBA doesn’t give out small business loans, they instead guarantee individuals to government lending institutions for funding. If you choose SBA loans, you may be forced to pay guarantee fees upfront.
Some of the best business loans for a small business owner
If you need small business financing for your venture, below are some options worth pursuing:
- Short-term loans
Short-term loans are ideal for short-term needs because their approval process is pretty fast. You don’t have to worry about bad credit, they have a fixed payment structure, don’t need for a lot of paperwork and they can be used for a wide range of purposes. These loans are, however, expensive than your usual term loans, and business with no stable cash flows may find it difficult keeping up with the fixed weekly repayments. Short term loan lenders in most cases prefer businesses with a stable cash inflow. A good annual revenue, good credit, and a proven business history. These loans are usually applied online and you can receive funding within the same business day.
- Merchant cash advance
If most of your business revenue comes through credit card sales, a merchant cash advance is an ideal financing tool for your business venture. The financing company lends you money in exchange for a percentage of your credit sales plus some interest. You don’t need any security to get a merchant cash advance and can still qualify even with bad credit. The approval process is quite fast and it supports various business purposes. The only downside is that the interest rates are a bit higher and the daily deductions cut into your cash inflows. Merchant cash advance lenders support small businesses that have no proven transaction history, have no real assets to use as collateral, mostly make their revenue through credit sales and have a not so good credit. You can easily apply for a merchant cash advance online and get is as fast as possible.
- Personal loans
If you have a good credit score with limited business history, a personal loan from your bank can help support your new business venture. These loans come with affordable interest rates, flexible monthly repayments and are ideal for businesses with no transaction history. They are, however, limited to certain amounts and any negative reports affect your personal credit history and not the businesses. Depending on the lender, getting approved may take a long time or even a day. Most traditional banks will perform credit checks and verify a lot of documents before approving your request. Online lenders, on the other hand, have an easy approval process and you may get funding on the same day of application.
- Invoice financing
If you have outstanding accounts receivables, then this mode of financing may be ideal for your business. Normally, the financing company lends you money against your unpaid invoices. The invoices act as collateral and allow you to inject more working capital into your business without having to depend on your creditors. This mode of funding is ideal for businesses that mostly deal with credit sales. Lenders are more interested in your account receivables. Other aspects of your business like transaction history or revenue are not as important as the quality of your invoices and if they make any financial sense to warrant their financing.
- Invoice factoring
If you need quick cash and don’t want more debt, you can sell your account receivables at a discount to a factoring company.
Unlike invoice financing, you actually sell your invoices and not just use them as collateral to receive funding. Once you sell them, you get the money and concentrate on running your business. You, therefore, give the financing company the power to get payment from your creditors on your behalf. This mode of funding is ideal for a business that requires quick cash but can’t get financing from traditional banks.
Now that you have all the details, it’s now time to contact us and let us connect you with reputable lenders who will finance your business venture as fast as you want. Fill out our loan application forms and let us make your funding needs a reality.