Note: This is a guest post by Adam Hoeksema, the Founder of ExecutivePlan and co-founder of StringHub. ExecutivePlan helps entrepreneurs and small business owners write powerful business plan executive summaries in order to raise capital.
A few times a month a business owner will call me to ask about our SBA Microloan Program because they need a loan next week!
Unfortunately, I have to let them down because you simply can’t expect to call about a loan one week, and have a check in your hand the next week.
Related Content: 7 Things to Do Before Applying for a Business Loan
The purpose of this article is to encourage business owners to consider securing a business loan long before they need one.
3 Reasons to Get a Business Loan Before You Need it:
1. 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.
2. 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.
Related Content: How to Get a Peer-to-Peer Loan [Infographic]
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.
3. 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.
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.
See what Business Loans Are Right For You
Create a Free Lendio Account