When seeking a loan, you must understand the ins and outs of the lending process, the lender’s qualification requirements, and loan terms to secure the capital you need without compromising your business’s future. As you compare various lenders, consider the following elements to ensure you choose the right loan.
Loan Application Ease
While you evaluate lenders, ask how long or detailed the application process is. Your lender will collect information about your business income and debts and use that to assess your ability to repay the loan. Some lenders require a lot of paperwork, while others don’t, depending on the loan size and term length.
If you need money quickly, select a lender with an online application and relaxed requirements about necessary documentation. Speed up the approval process by having certain documents ready, including your business’s tax returns, bank statements, financials, articles of incorporation and franchise agreements.
Many online lenders offer educational tools to help you understand common business loan mistakes that may be holding you back from securing a business loan.
Small business loans accrue interest, which is the price you pay for a loan. Rates are either fixed or variable. Generally, alternative lenders offer a fixed interest rate. Your interest rate will depend on the lender you partner with; your business’s financials, credit score and years in business; and your personal financial history. It is important to weigh the cost of the loan against the benefits of borrowing. If the cost does not make sense for your needs, seek a lower-cost alternative.
Rules and Requirements
Lenders charge business borrowers money to access capital. That includes interest, an origination fee and other charges such as maintenance and late payments. Pay attention to the annual percentage rate (APR). That tells you the full cost of the loan, including fees.
The size of the loan also impacts how much interest you’ll pay. The loan term is the amount of time you have to repay the loan. Loan contract terms can range from as short as a few weeks to as long as several years.
Depending on the loan type and lender, the qualifications for approval vary. Most lenders look at your business and personal credit score, years in business, annual sales, and business plan. Lenders don’t want to lose money and will scrutinize you and your business to ensure you can repay the loan.
Business collateral is an asset you pledge to secure your loan. If you can’t repay the loan, you forfeit the collateral to the lender. Collateral can be your building (if you own it), equipment, accounts receivables, property, or something else of value. Lenders offering secured loans require the business owner to put up a certain amount of collateral. Unsecured business loans do not require collateral.
Many lenders also require a personal guarantee, a binding legal document in which you pledge to personally pay back the loan if your business can’t. If the debt is nondischargeable and you file personal bankruptcy, you’re still obligated to repay the loan.
It is important to know when you’ll have the loan funds in your bank account so you can plan accordingly and avoid a cash crunch for payroll or other business operating expenses. Some alternative lenders can fund your loan the same day you’re approved, while others take a few business days.
Some lenders require you to provide additional documentation, such as tax returns, photo ID, bank and credit processing statements, or a voided check. Each lender has specific requirements.
There is much to consider when applying for a small business loan, such as costs and terms. The more information you have before shopping for a loan, the better prepared you’ll be to make a good choice and properly manage your business’s finances.