Before getting a business loan, and some key points to remember while doing so.
1. Should I apply for a loan?
Before deciding to apply for a loan, it is important to determine if getting a loan is even the right option to facilitate your business needs. Ideally, making a decision on borrowing funds largely depends on your cash flow, and your confidence in your business’s ability to pay them off. If your future seems secure, and your company seems to be in a good spot and is expected to be in the future, applying for a loan may not be a bad idea. However, if your business is facing certain losses, or certain challenges in cash flow or inventory, it may be wise to hold off on borrowing funds for now. Applying for a loan can either bloom your business, or be its downfall, so make sure to consult with your financial advisor before deciding to apply for one. Having a long-term vision for your business is paramount in deciding. This can mean thinking about how monthly payments will affect your business, or how beneficial borrowing funds will really be for your business. The purpose of borrowing funds should be to take you closer to your business goals, not merely to take on debt or tackle very temporary issues.
If you require immediate funds simply to improve your cashflow, you could consider invoice factoring rather than applying for a loan. Invoice factoring is a type of transaction which allows a business to sell, or factor, its receivable assets to a third-party in order to meet their immediate financial needs. Unlike applying for a loan which takes more time to be approved, invoice factoring allows you to convert your receivable assets into immediate operating cash. You can read more about invoice factoring here.
2. What do I need the loan for?
Before applying for a loan, identify why you need it, or for what exact purpose you need the loan for in the first place. This will not only help you have a clear idea of where the acquired funds will go and what the amount is invested on, but will also help determine what kind of business loan to apply for. Asking yourself how this loan will help you and your business is an important step in ensuring the loan you take is truly fruitful, and does not get used for unplanned or unnecessary expenses.
3. How much money do I need?
Both small business owners and fresh entrepreneurs often make the mistake of overestimating or underestimating the amount of money they require for their business. Either way, this can prove to be problematic. Underestimating can lead to you not having enough to work with or make any significant improvements to your business, overestimating can lead to lenders questioning your assumptions of your business’s potential and credibility. It’s important therefore to have a well strategized business model in place and calculate a budget before deciding on an amount to request for.
4. How long will it take for me to pay the loan off?
Having an idea of how long it would take you to repay the loan is pertinent to figure out if getting a loan is the right way to finance your business needs. Additionally, this will also help determine which type of loan to apply for. While the additional borrowed funds will help business initially, having to pay an amount every month for a prolonged period of time may prove to be burdening and may lead your business to incur unnecessary losses overall rather than profits.
5. Where do I go to borrow?
It is important to know which lender you want to borrow from. Different lenders have different policies and requirements for their loan programs. You should do some research on the lenders available to you and their terms in order to find the loan best suited for your business needs. Finding the right lender could be the big step in deciding whether your business thrives, or sinks.
Applying for a loan involves approaching an SBA lender, a bank, or an alternative third-party lender. Each has their advantages and drawbacks.
The Small Business Administration, or SBA, is a US government agency which provides support to entrepreneurs and small businesses. The SBA offers many different loan programs each with their terms and parameters to cater to a wide range of business types. This means you have a much better chance of applying for a loan much more fitted for you and your business’s specific needs. Some SBA loans also do not require collateral. While the SBA does not directly lend money to small businesses, it sets guidelines for its partners to abide by when providing loans to these small business. Having the authority of the SBA reduces the risk for partners by providing guarantee that the loans will be repaid. This acts as an incentive for lenders to be more comfortable in lending to small business that otherwise would struggle to avail loans elsewhere. The disadvantage of applying for a loan from an SBA lender is that they often have much more stringent requirements to qualify for a loan, and take much longer to be filed and approved (often 4-6 weeks).
Conventional bank loans are arguably the most popular, as they charge low interest rates and have relatively faster processing times. However, it is traditionally difficult to get approval for a conventional bank loan as the vast majority of applications or requests for funding are denied.
Alternative lenders are often alluring to small businesses as they do not require you to have ample experience in the business sphere, or require your business to have shown high revenue generating potential. As a result, approval requirements for alternative lenders are not as rigorous, and consequently, are very popular for budding entrepreneurs. The drawback is that alternative lenders tend to charge much higher rates of interest, or may require you to repay the loan in much shorter time.
Thus, it is important that you go through the options available to you and their stipulations before choosing the right source for your fund request.