Before committing to a lender, you should make sure to evaluate all the available options you have. Down below we list the places that you should look when trying to get a small business loan, note that not every loan may be the perfect choice for you, and like we always say, do not commit to a lender to early, browse all the options because you might be losing a great opportunity.
Traditional entities such as banks are still one of the best options for borrowing the largest amounts of money with a not so high-interest rate. Usually, they also offer longer repayment terms if needed.
One of the downsides of traditional banks loans is that these loans require a lot of collateral and can be hard to secure. Application and approval also can be intimidating, you will have to complete a giant amount of paperwork, put down up to 30% down, and possibly wait for months until to see any money, even if you did everything by the books.
The SBA or Small Business Administration is not a direct lender, but it provides government backing so businesses with lower credit score or that could mean a riskier investment can get financing through partner banks and credit unions, which are assured to receive a portion of their investment even if you default.
The SBA has more than one program, but the most common is its 7(a) Guaranty Loan Program. One of the SBA 7(a) loan strongest points it’s that its fees are lower and terms are usually longer than their non-SBA Loans counterpart, but what makes it so attractive are its flexible requirements. It is a possibility that you could encounter drawbacks such as lower caps and stricter requirements on the use of the loan.
Small business owners who are having a hard time getting a loan through traditional channels have a growing number of options online. In some cases, online lenders directly lend money themselves, while others use a P2P model (peer-to-peer) allowing individual investors to fund your request.
In both cases, the biggest advantage of going online for a loan is speed, most lenders are able to get you your money in a week or even less and usually, applications are much less time-consuming as well. Needless to say, that the biggest disadvantage that small business owners that acquire a loan from an online lender, is that the interest rate will be higher. Small businesses usually secure bank loans with single-digit APRs (Annual Percentage Rate). While that’s possible online, double digits are more the norm.
You will also have to personally guarantee the loan, meaning you will own assets and credit, not just those of your business. It could be at risk if you default your payment.
Many credit unions are issuing small business loans, and the pace they are approving their requests it’s twice the rate of big banks. Since credit unions are nonprofits with less overhead, the interest rates are lower and more competitive.
One of the requirements is to be a member, though they are often simple, such as living in a specific area. It is worth mentioning that although credit unions may be more flexible than traditional big banks, they primarily lend to established businesses.
Small business loans take a lot more work compared to a personal loan. You’ll need to be organized, know your needs, and be tenacious if you’re turned down. Here are some tips that will help you get the best small business financing:
Tell your lender exactly what you need, don’t be secretive. If you want a large amount of money from your lender, be clear and specify exactly how much you need and why you need it. Present your plan for the future and explain the lender how its funding fits into your plan.
Stay organized: you’ll need a wide range of documents, from tax returns to bank statements. Make clear what makes your business a better investment option than others. This is of great importance if you don’t feel like a strong candidate. Remember, for your business to sell, you have to sell your business first.
When trying to get a loan for a growing business, your credit score is as important (or sometimes more important) as it is when you’re applying for a personal loan. Your lender will perceive you as a greater risk if your credit score is low. Try to increase your personal credit before applying for loans. This is for sure not a quick process, but it will save you time, money and frustration in the long run.
If you are just starting a new business, or if said business is very small, you may want to take a personal loan to use for business purposes. This will mean that your own financial health will be the only thing evaluated. The loan amount will most likely be smaller, but so will be the lending criteria involved.
Lenders have a strong position when it comes to small business loans, but you should still shop around and browse all the different options before you start a lengthy application process.
The very first option you should consider is trying your own bank, especially if you have a long, responsible relationship with that lender. A bank that knows your backstory might be more sympathetic to your needs. Also, consider credit unions, they might be willing to listen to your case and provide a more flexible plan for you.
Online lenders will match you up with lenders who are down to make you an offer. After you answer questions about your needs and your business needs specifically, you’ll receive the name of lenders that might be a good fit, all of that without picking up the phone.
If you are targeting online lenders, be sure to compare eligibility requirements and interest rates. Small business loan calculators found online will help you make sure you’re comparing apples to apples.
Most online lenders stand no chance with the low AORs that big banks can offer, but they make it easier for small businesses that might have been ignored by big-name banks to get funding. Regardless, you’ll still want an interest rate that you feel comfortable with, transparent terms and fees.
Here are the major factors that you should consider when picking the best loans for small businesses.