Money is the lifeline of any business, whether you’re ready to start one – or you already have one you want to grow, securing financing is a major factor, especially for small businesses. Many entrepreneurs and business owners find the task of finding the right business loan daunting and don’t even know where to begin.
Here at Lendio, we’re going to fix that. We’ve created a simple – yet practical guide for searching, finding and preparing to apply for the perfect small business loan.
Options for Business Loans
Basically, there are three different loan options business owners have: government-backed loans, traditional bank loans, and loans provided by alternative lenders. But before you begin applying for a loan, you need to be able to answer a variety of questions that will help you determine which of loan is best for you.
Government-Backed Loans – SBA Business Loans
The U.S. Small Business Administration (SBA) is a federal agency committed to supporting the growth and development of small businesses. The SBA does not personally provide any of the loans, however, they establish the guidelines for them and then guarantee a percentage of the loan, (in case of default) which minimizes the risk for their lending partners.
Businesses have a variety of loan types to choose from when pursuing an SBA loan, each comes with its own specifications on how the capital can be used and when it must be repaid. In addition, SBA loans have an abundant amount of additional paperwork that needs to be filed, extra fees that need to be paid and the applications take much longer to get a decision on versus other sources.
Traditional Business Loans
Conventional banks are still some of the best places to get a small business loan if you are able to find one. They can be a better option – typically because they are able to offer the lowest interest rates and many have good reputations as trustworthy lenders. They may also offer longer repayment terms if you need them.
All of this sounds great, but loans from big banks require a lot of collateral and can be extremely difficult to secure. The nation’s largest banks have only been approving roughly 20% of small business loan requests they receive, and that’s just people that fill out the application.
Another vertical involved with traditional banks is the application and approval. You will have to complete an ample amount of paperwork, put up to 30% down, and possibly wait a few months before you hear an answer or see any money.
These institutions help small businesses that normally would be turned down by traditional lenders find financing in other areas. Alternative business loans from these lenders provide business owners with the loan amount they need along with a quick turnaround to maintain their business operation. Platforms such as Lendio have proven to be quite lucrative for small businesses that don’t have a stellar financial history.
Borrowers are able to get money much more quickly using these platforms, even while not having great credit ratings. Alternative lenders are more willing to provide these businesses with the capital they need but more often that not will have higher interest rates on their flexible loan products. These lenders take a bigger risk providing capital to small businesses.
What Are Lenders Looking For?
Different banks and lending institutions may all have different standards with what they require, in order to consider your application for a small business loan. Below we have listed a variety of factors that are prominent for almost any lending institution. Here’s what lenders will be looking for in a potential loan applicant:
Can You Prove Creditworthiness
Why? Because lenders need to make money, after all, that is why they provide the services they do. Your credit score is an indication of your willingness to pay. There is a solid difference between being able to pay and your willingness to pay – if you happen to not have perfect credit. This is where your opportunity lies. The trick is to demonstrate, that you are a creditworthy business owner.
When a business owner is attempting to secure a loan, collateral is a must. Basically, some form of property or asset will secure the loan, so the lender may seize the property if you fail to pay back the amount. This helps minimize the risk for the lender while they extend you capital. This useful life of the collateral will have to at least meet or exceed the term of the loan. Short-term assets for short-term liabilities, such as accounts receivable or inventory for a line of credit and long-term assets for long-term liabilities, such as equipment or real estate for traditional business loans.
Probably, the primary concern of any type of lender will be the business’s daily operations and whether or not it can generate enough cash to repay the loan. This is an obvious goal of every business – increasing revenues, but when applying for a business loan with poor cash flow – this insight will show the lender your business’s market demand, business cycles, management competence, and any significant changes in business over time. Due to the attention that revenues receive, you may want to consider improving your positive cash flow before applying for a business loan.
Each lender will have different views allocated to the assessment of a borrower’s character. Many small business owners have found success “selling” their reputation and good character to smaller lending institutions who may be more willing to provide capital. In addition, many lenders consider the amount of investment the owners themselves are committing to the business as evidence of a borrower’s “character.”