Applying for a small business loan is a daunting
prospect for most, if not all, business owners. After all, there is a one in
five chance of their approval, but fearing the worst is not the way to avoid
it. If you are looking to apply for a small business loan, then you need to
equip yourself with the right information, to have the best chance of acquiring
one. This means rigorous research on your lenders and their requirements and
knowing your own business like the back of your hand.
Knowing how to choose a small business loan is one of the most useful pieces of
information to have as a beginner entrepreneur. Here are the points to remember
when applying for a small business loan:
Things to do:
1.
Know the Business Details: This not only includes the details of the loan you wish to apply
for but also the details of your own business. For example:
a.
Know your business credit score (different from personal credit
score) and check it against two to three different credit score calculators to
be sure.
b.
Know your finances, especially expenses incurred and revenue
generated in the past year of operations. It is important not to overestimate
your revenue predictions, or underestimate the expenses since there are always
unknown variables and unforeseen circumstances.
c.
Know your business plan going forward. The first and foremost
concern of a lender is to be sure that they will receive the payback on time. You can convince them by
providing a solid and reliable business plan that will ensure your business
sustains and continues to churn a profit. A good business plan must include
competitor analysis, market environment analysis, strength, and weaknesses of
the business and financial projections for 3 to 5 years.
2.
Know the Lender: Different lenders have different loan terms and requirements. You
need to know which lender suits your business needs, choose the best one. Here
are some common lender options:
a.
Traditional bank loans are still a quite popular way to finance
businesses. They offer short to medium term loans that range from 3 months to 5
years in duration.
b.
SBA loans are available in three main categories i.e. SBA 7(a) loan program,
CDC/504 Loan program, and Microloan
program. They are long-term, slower
financing options.
c.
For faster financing options, businesses use alternative lenders
that are accessible through online lending platforms like Orumfy. They have higher acceptance
rates and more lenient requirements than traditional banks; however, they do
charge higher interest rates.
3.
Know the Loan Details: There are many types of loans out there but only a few may meet
your business needs. That’s why it is important to know which loan to apply for so that you stand a better chance of
acquiring it. Here are some loan details you need to keep the focus on:
a.
The Annual Percentage Rate (APR) is the yearly interest cost of
borrowing the funds. In simpler terms, the interest rates are usually lower for
SBA loans since lenders that are backed by the government provide
them.
b.
The repayment amounts determine how much you will pay back
monthly/yearly. Too high and you may not be able to pay back, too low and you
may take longer than needed to pay off the complete debt.
Things to Avoid:
·
Do not put off payments, as they damage your credit score and hurt
your chances of getting a small business loan.
·
Do not choose faster financing loans if you do not have the reserve
to pay higher APRs.
·
Do not opt for loans that may cost you revenue down the line such
as Merchant Cash Advance. This sort of loan uses a set percentage of your
future credit and debit card sales as collateral for the loan so the higher the
sales, the higher would be the percentage taken by the lender.
·
Do not apply for too many loans, as this would damage your credit
score. Every time you apply fully for a business loan, the lender does a hard
credit pull and too many loan applications would dent your credit score
substantially.
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