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 four 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, 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.
Most small business owners aren’t financing experts, but there are a few things about securing financing that most successful business owners understand and have at their fingertips. Taking the time to learn more about small business financing before the need for a loan is an important thing every small business owner should do. It’s a lot like learning how to swim before the boat sinks.