As a small business owner, you know you’re a part of the cornerstone of the American economy. Large national corporations may be flooding ad spaces everywhere, but we still rely mostly on small businesses. In fact, nearly 90% of businesses in the U.S. are made up of less than 20 people.
With so many small businesses coming to life or gaining more traction each year, it’s not surprising that obtaining a small business loan can be competitive. Before you start the application process, be sure to educate yourself on eligibility factors and various loan options, so that you have a better idea of what kind of funding you can expect to receive.
Here are the must-knows we think each business owner should be equipped with before venturing to find a small business loan.
1. Know the Different Types of Business Loans
Before you start applying to various lending options, it’s vital you know where to start your small business loan search. SBA Loans, which have terms between 5 and 25 years and an APR around 7-8 percent, tend to be the “gold standard” for business debt financing and refinancing. But they aren’t the only option. If you need to purchase equipment right away, for example, you can apply for equipment financing, which puts the equipment itself up for collateral.
Depending on your eligibility in the eyes of lenders, there are different loan terms you may qualify for. Short-term loans are typically paid off between 3 and 18 months through daily or weekly payments; they tend to have higher APRs, between 10 and 110 percent, making them not ideal for most borrowers. Medium-term loans have a term length between 1 and 5 years and an APR between 7 and 30 percent. Be sure to research all the various loan types, as well as your likelihood of eligibility for each type.
2. Understand Your Probable Loan Eligibility
As you can imagine, small business loans with longer loan terms and lower APRs tend to be harder to obtain. Lenders want to know that the businesses they give money to are going to be able to pay them back. This means not only will the businesses have revenue, it will be consistent and predictable enough that the owner will be able to make loan payments on time each month.
There are a number of factors that determine your small business loan eligibility. These include the length of time you’ve been in business, whether you’ve declared bankruptcy (and how long ago), your credit score, any existing debt, and minimum business revenue, among others. Note that SBA loans require you to have a longer history in business and a higher credit score, for example, that short-term loans do.
Be sure to have a firm grasp of your financial standing and probable eligibility before applying for a small business loan. Think of it this way: If you were the lender, would you loan money to you as a business owner? If you’ve applied for a loan in the past and been rejected, use that knowledge to your advantage this time around, and better prepare yourself for the application process.
3. Think About How Much You Really Need
Some small business owners get ahead of themselves and end up taking out a bigger loan than they actually need. While having more cash up-front seems like a nice idea, paying off more loans over a longer period can be disheartening — and unnecessary. Also, asking for more money involves a greater level of risk, as you’re more likely to have your loan application rejected.
4. Understand Exactly What You Are Getting Into
This doesn’t just go for the type of loan you’ll be receiving, but also the fine print. Know your APR, but also know the potential penalties you may face if you prepay. That’s right: Some lenders penalize you for paying too much of your loan back too early. This doesn’t mean you shouldn’t go with that specific lender, necessarily, but remember never to sign anything until you’ve read it all the way through!
Also, be sure to keep an eye out for predatory lenders. Sometimes your only option is to go with a loan that comes with an aggressive repayment schedule, but be wary of any lender that doesn’t fully present their terms in writing up front. If a lender is pressuring you into making a quick decision in accepting their loan offer, that’s another red flag.
5. If You Have Bad Credit, You Likely Still Have Options
Many business owners believe that if they’ve been turned down by one lender, they’ll be turned down by anyone else. While you can use past loan rejections as learning opportunities, all lenders have different criteria. Don’t give up!
The same is true if you have bad credit. If you have a poor credit history, you can often use receivables as collateral against what you borrow. Also, alternative lenders (e.g. Internet lenders) often have more relaxed standards, though they do charge higher interest rates. They can also be less transparent than other lenders, so be sure to thoroughly read through all their policies before going that route.
6. Do Your Research
Finally, don’t simply go with the first business loan option that crosses your path. You want to make sure you get the lowest rate loan possible in your situation, which requires researching and comparing different loan options. This isn’t a “show up and wing it” situation — do the homework!