The time to investigate small business financing is before you need it. It’s no secret. Finding adequate capital to finance small business initiatives is one of the biggest challenges faced by small business owners. Part of what makes it difficult are the things most small business owners don’t know about finding a small business loan. This is evidenced by the fact that only about 10 percent of the small business owners who go to their local bank looking for a loan are actually successful at finding one there. Here are some reasons it’s important to start looking before there is a critical need: You Need to Understand Your Options When most small business owners start looking, they head to the local bank—where they have their business accounts. Unfortunately, very few find success there. Since 2008, regulations (among other things) have most bankers looking upstream for bigger and potentially more lucrative customers. Let’s face it, the small businesses on Main Street are more of a risk to bankers who are very risk averse. That’s not to say the local bank isn’t a good option, it is. Provided the business and the business owner have a good credit score, two to five years in business, and adequate collateral. Those business owners will find bankers willing to provide a fixed-term, low-interest rate loan. If the business owner doesn’t measure up to those criteria, he or she will have to investigate other options—which can be time-consuming if capital is needed right away. A good place to start is the Lendio Loan Types page, it offers a brief description of a number of popular traditional and non-traditional loans. You May Need Time to Determine What You Need the Capital For and How Quickly You Need It Although a traditional term loan from the bank is what most business owners think of when they’re looking for a small business loan, there are other options depending upon the financing need and how quickly the capital is needed. Of course, quick access to capital from non-bank, alternative lenders can become expensive, so it’s important to have a plan for what you intend to do with this type of loan. Unfortunately when a business owner needs cash flow and can’t qualify for a loan at the bank, he or she often accepts terms they otherwise might not in normal conditions. In my opinion, the loan products offered by many alternative lenders should be utilized for specific purposes to fill short-term capital needs and not used as an alternative to a traditional term loan from the bank. Finding the Right Lender Doesn’t Happen Overnight Although there might be dozens of potential small business loan options, not every small business loan or lender is created equally—particularly if you’re looking at non-bank lenders. Every lender offers different terms, which often makes it difficult to compare apples to apples. In the heat of battle, it’s sometimes tempting to take the first legitimate loan offer that presents itself, but this might not be the best approach. Finding the right loan that addresses business needs and current financial situation may require a business owner to leverage the experience and expertise of someone who works in the space every day and can help navigate the pros and cons of any loan offer. This is a particularly daunting challenge when a Google search for alternative loan options can yield millions of results (depending upon the loan type). Lendio is not the only company that offers this type of service, but we do offer multiple loan types and lenders so small business owners can see all their loan options in one place. You May Need to Focus on Improving Your Credit Situation Although they all weigh things differently depending upon the loan type and terms, every lender wants to validate that a small business owner is able to repay a loan, is willing to repay a loan, and has a contingency plan in place should something go wrong. That’s why time in business, credit score, and asking about collateral is standard practice when applying for a loan. Although credit score might not really be the best measure, it does give lenders some insight into whether or not a business owner will repay a loan based upon what he or she has done in the past. Every small business owner should know their personal and business credit score before they apply for a loan. And, if the credit score is less than perfect, you should spend the time needed to improve the score. In as little as six months of contentiously making payments on time and judiciously using credit, a business owner can improve his or her score by as much as 100 points. What if the Bank Says No? Look, I know that you fully intend to pay back the loan, but if you have no collateral, a credit score under 700, and no history of operating your business profitably, it might take a while to find a bank willing to take a risk on you. In many situations, business owners get a large project or job they may not have expected, and then they need a loan immediately in order to begin work. I understand you don’t want to take out a loan and pay interest if you don’t need the loan right now, but if you secure a small loan now, pay it back in full, and apply for another loan later, you are more likely to be approved. Terms Are Unfavorable For Your First Loan Again, it might make sense to secure a small loan now (even if you don’t need it) so that when you do need a larger loan, the lender is willing to give you more favorable terms. Peer-to-peer lending websites are a perfect example. For your first loan on a peer-to-peer lending website you will be limited on the size of the loan, and your interest rate will be toward the high end of the range simply because you have no credit history with that specific lender. After you pay back the first loan, your terms for the second loan should improve. You will probably be able to secure more money, for a longer period of time, and at a lower interest rate. Start the process now, so that when you need a loan, you aren’t forced to accept bad terms on the loan. Building a Credit Relationship is Priceless I have hinted at this in the points above, but building a relationship with a bank or other lender is priceless. Once you have built a relationship of trust where the lender is confident you can and will pay back the loan, they will be willing to lend to you more and more as you grow. If you think you might need a large loan at some point in the future of your business, then I urge you to start borrowing now whether you need it or not. It is unlikely that anyone will lend $500,000 to someone who has not first demonstrated the ability to pay back a $50,000 loan. Your Business Looks Better Now Than In A Crisis Your business looks great right now. With sales up and costs down, small business lenders are much more likely to extend you a line of credit or consider you for a loan. Because you’re viewed as less of a risk, your interest rate is going to be a lot lower than someone in a crisis situation. A lot of business owners don’t realize there are a lot of different kinds of business loans. Now is a great time to see all of your loan options, because you’re going to have a lot more choices when the going is good. In Crisis Mode, You Don’t Have The Time To Find A Loan Imagine what would happen right now to your business if you lost half of your sales. What would your mindset be, how busy would you be? Does that seem like the best time to fill out a lot of paperwork? Here at Lendio, we’ve drastically cut down the time it takes to get a loan, but it’s still a process that takes some of your time. If you’re needing the money by next week to keep your lights on and your doors open, it’s not only going to put a lot of stress on you, it also takes out a lot of loan options. A Line of Credit Or Loan Provides Ease Of Mind And Builds Credit If your business is doing well, you have a little bit of a buffer. Now imagine that buffer is increased by $50,000 dollars. How much better would you sleep at night? Getting a line of credit established with a lender when your business is doing well is a great move that is going to keep your business healthy. A line of credit is great because you don’t have to use it, and you only pay interest on the amount you use. If you decide to go with the loan route, you could use it to expand your business. Whether you invest it in personnel, equipment, or marketing, you could use that loan to build your business to a place where it’s running even more efficiently. Ways to Use Your Small Business Loan “Small-business owners must set goals to operate and grow a successful business, despite the products or services offered,” explains The Balance Small Business. “Business owners must set both short-term and long-term goals that include everything from funding and income to expanding the business and reaching customers. In addition, both short-term and long-term goals must be realistic, specific and measurable so the business owner can measure success on a monthly and yearly basis.” So how should you use your small business loans? That’s entirely up to you. The essential factor is that you have a plan in place. You should identify where you want to go and how much money it will cost for you to get there. It’s not enough to have a plan that lives only in your head, however. Research reveals that the act of writing something down brings lasting benefits, though only about 20% of us consistently take the time to do it. By writing down your plan, you’ll be better positioned to remember it and express it to others—and ultimately, to accomplish it. A study highlighted in the Harvard Business Review confirmed these facts and showcased just how impactful it can be when small business owners formalize their plans. The researchers discovered that when your plan has been written down, you’re 16% more likely to bring it to pass. Here are some ideas to prime the pump and help you to begin thinking about the most strategic ways to put financing to work for you: Repair and upgrade your business’s propertyExpand to a new business locationTake advantage of a promising new business opportunityPurchase essential furniture for your home office, if that’s a work arrangement you’ll have in the futureRepair a piece of crucial equipmentPurchase new equipment or technologies that can upgrade your operationsPurchase new vehicles to diversify your fleetResearch and develop a new product or serviceLaunch a new product or service with a robust marketing campaignInvest in new marketing initiatives for your businessExpand an already successful marketing campaign to new channels and audiencesBolster your inventory in preparation for the busy seasonRecruit and hire additional employees for the busy seasonBoost your payroll so that you can give raises to permanent or temporary employees who deserve itAdd new features to the benefits you offer employees—and get their opinion on which features to considerSupplement your cash flow during a lull in businessDevelop a disaster plan and purchase training resourcesInvest in new customer service technology and trainingPurchase updated software for your marketing, bookkeeping, project management, or video conferencingHire a designer to refresh your logoUpdate your website with new copy and designAttend additional conventions or trade shows in order to spread the word about your businessSee if your business qualifies for the Employee Retention Credit So where do you find your first small loan? My suggestion is to start with Lendio. They will match you with the lenders (from traditional banks and credit unions to alternative loans like peer-to-peer loans) who are best suited to finance your request. You can see your matches for free, so give it a shot, and take out a small loan now, so that you are better prepared to handle the large contracts that may come in for you in the future.