If you own a business—or already thinking of starting
one—you have three main loan options: traditional bank loans, government-backed
loans and loans provided by alternative lenders.
When you are looking for small
business loans, you need to choose your lender carefully. The good news is that
access to small business loan is becoming easier with each passing day, thanks
to the proliferation of alternative financing options available in the market.
Choosing the right lender can be a herculean
task because you have to make sure that the small business loans financing
option you have chosen is the right one for your business.
Many business owners still don’t know how to
choose the right loan for their specific needs. Therefore, before committing
yourself to a loan, you need to make sure you understand the terms and ensure
it meets your needs. Be mindful of the fact that some lenders have devious
options that have hidden fees, unfavorable lock-ins and self-serving disclosures,
making some small business loans unfavorable to entrepreneurs and small
business owners.
Here are some few important considerations
small businesses should keep in mind when searching for small business loans.
1. Understand your financial position
Now that you have settled for the need to
apply for a loan, it is important to thoroughly review your financial position
to ensure your business will be approved. Most lenders will ask for
documentations to determine what your chances of repaying the loan are.
A detailed documentation of your expenses,
income, profits and projected revenues is crucial when it comes to small
business loans. There are many book keeping tools like QuickBooks, Xero and
sage that can help you to keep records of your business financial performance.
You can also hire an accounting firm/professional to take care of the books.
As a small business owner, you may find
difficulties when it comes to separating your business and personal finances;
however it is crucial to place a clear distinction so that you can easily
demonstrate how financially strong your business is. By all means, don’t mix
your personal finances with business finances if you are looking for small
business loans.
2. Know how much you’re paying
Be attentive with how small business loans
lenders frame their terms, as it might end up confusing you. For instance, an
alternative financier might quote a 3% rate of interest but there might still
be some additional fees and charges that could push the cost of the loan high.
It is important to bear this in mind so that you are both financially and
psychologically prepared. For instance, 3% annual rate loan might actually turn
out to be a 10% percent effective annual rate if you add the upfront fees and
installment payments.
Before you get a loan, it is important to ensure you know what you’re
getting into. Many people think that small business loans constitute is free
money that they will only need to repay back later (without taking into
consideration interest). The truth of the matter is that borrowing without plan
can get you into trouble.
You should only borrow when you are ready and not borrow for the sake of
borrowing. Understanding what you are going to do with the loan is the single
most important thing you need to consider before making the application. Small
business loans decisions should be made in a hurry.
3. Anticipate financing needs
In order to avoid taking a sneaky loan deal
when you need it, anticipate your financial needs and start taking proactive
steps now. As a matter of fact, many lenders will want to look at your books
and require that the reports are accurate before giving you a loan.
Next, it is important to identify very
specific cash flow pain points that could adversely affect your repayments. For
instance, if you are dealing with a B2B company or a government entity, you
could encounter a cash flow gap as a result of a long payment cycles.
You
may also anticipate a holiday season where payments come in a bit late. Therefore,
it is important to prepare yourself on how you are going to recover such gaps.
Failure to prepare and anticipate financing needs has landed many small
business loans borrowers into trouble with their lenders.
4. Shop around—use free online tools
Taking a less-than-optimal loan when better
options are available is what can be described as bad financing. If you want
low cost small business loans, you have to take time to scavenge the market in
order to discover funding options with friendly terms such as low interest
rates, faster turnaround time and reasonable repayment and grace period. Talk
to several lenders to figure the best option given your business needs. If
speed is of essence, take a look at cash-flow loans.
5. Sort out your financial house
Typically, lenders want to reduce the risk of default as far as small
business loans are concerned. Even if you have sufficient security to cover for
the loan, not many lenders are excited about lending to a business with no
clear guarantee that the money will be paid. The process of going through the
process of loan recovery is something they are unwilling to do because it is
costly and wastes a lot of time. In that regard, the best time to approach a
bank for small business loans is when you are making a profit.
Most lenders require businesses to be profitable in at least the past 6
months. You also need to keep an eye on your credit history because most
lenders will look at it before making a decision whether to offer you a loan.
6. Be more organized. It pays
Although many banks/lenders are using the services of automated loan
management software, many lenders still use outdated loan application
processes. Therefore, it pays to be a bit more organized in your loan
application. This increases your chances of being approved. Clear documentation
and organized financial statements reduces the chances of mix-up and loss. In
other words, the more organized you are, the more chances you have of being
approved for a loan.
Commercial and industrial lending is increasing for larger companies;
however, the share for small business loans has wildly fluctuated. Applying for
and getting a loan is not an automatic thing and requires one to understand
what they need to do to increase their chances of getting a business loan. One
also needs to apply due diligence when looking for a lender.
0 comments:
Post a Comment