If not explicitly complicated, the process of obtaining a business loan can be difficult.
The aim of the business loan is to provide the funding the company needs to cope with its activities.
Having the wrong loan might place you in a position to end up unable to repay the debt. The business loan process should therefore aim to find the right business loan for the needs of your company.
With well over 5,000 borrowers selling more than 12,000 commercial loan options, it’s not easy to get a loan. In this article we’ll concentrate on tips to help a borrower handle the lending process for business.
1.Prepare before you need:
It can be very straightforward or very difficult to obtain a business loan depending on the type of funding the company is looking for, the sort of lender they submit for, and the needs for the business loan.
Depending on the type and capacity of the credit facility a small business is applying at, the time frame will vary from 1 day to 3 months from submission to financing.
Rather than trying to apply for the last minute, a business owner will realize the financing needs to come and apply before the need is inevitable.
2.Know their choices:
Understanding all the credit options available is essential for a small business owner so they can make the best decision for their company.
The reality is, the rates for small business loans and the terms and fees associated with the loan vary greatly. Knowing all of your financing options allows small businesses to make smart decisions that will assist with the duties and development of the company.
3.Better rates look:
That should go without asking. But to shop for the best rates, conditions, amortizations and penalties, a small business owner has to do their study and diligence to get them fully informed about all the available options.
Remember: for every extra dollar expended on rates and fees, it’s a dollar that could have been invested on other business uses, or even direct income for the business owner.
4.Make sure you have a reasonable use:
What a business owner shouldn’t want to do is borrow money just to borrow money.
While a lender or broker can attempt to sell you why you need quick money, the capital comes with a cost.
And the repayment schedule can hinder the cash flow of businesses, resulting in the need for additional debt financing.
5.Pay for enough money:
In regular day-to-day business operations there are always unexpected costs that occur.
The last thing you want to do as a small business owner is to borrow money that isn’t enough to fulfill the requirements.
If the first time you don’t get enough money, you may find yourself looking for additional business loans that will be far more costly than the first one.
6.Go beyond region:
The preferred way to get money is to walk into the local bank of the small business and apply for a traditional bank loan almost all the time.
Sadly, the approval rate for such small banks is very poor (between 20-40%). Search for a partner beyond the immediate community can open up the possibilities and prospects for acceptance.
There are thousands upon thousands of business and trade borrowers – each with their own niches and qualifications.
If you had trouble finding a lender to lend to your particular industries for some reason, an alternative would be to look for lenders beyond your state or region and locate a lender with an emphasis on your industry.
8.Know what borrowers are searching for:
Each lender has its own specific financing requirements. Some borrowers also put a heavy emphasis on company and financial records.
Many small business borrowers are relying more on the potential cash flow and productivity forecasts.
However what a borrower is calling for is the willingness to pay back the loan. The most critical thing you can do when applying for a small business loan is to prove that you have the ability to fully repay the loan easily.
9.Next, pick mainstream options:
Standard loans from small businesses have the best rates, conditions, amortization and fees than alternative loans.
Having a small business loan from a bank or credit union will save you a large amount of interest rates, and since the conditions are fixed, you’ll be able to service the mortgage even better than traditional short-term business loans.
After you’ve succeeded to get a bank or SBA loan, but still find yourself locked out of conventional interest-rate loans, using an external lender is probably the next best option for a small business.
While there are many titles for loans that are the midpoint between a bank loan and a high-interest advance (such as mid-prime loan, retail loan, or Fintech loan) the prices and conditions all look pretty much the same, with levels varying from 8-25 percent to 2-5 years.
10.Cash advance last:
This method of small business credit should only be discussed after all other financing options have been discarded because of the high rates associated with retailer cash advances.
While a merchant’s cash advance has its advantages in that it needs very few paperwork, much lower credit ratings than standard lending, and can finance a typical loan in a fraction of the time, the price paid for a cash advance is sometimes prohibitive.
11-Consider an SBA-enhanced loan:
Small Business Administration guaranteed loans have some of the best rates and incentives accessible for increasing small businesses.
The intent of the SBA funding system is to allow conventional borrowers to provide financing to small businesses that would not be able to obtain a bank loan without a component of the loan being supported by the SBA.
12.While you may be shopping for a loan, suggest contracting too:
Instead of buying a piece of equipment and face getting stuck making payments for machines that might end up obsolete until payments are finished, the alternative might be to actually lease business equipment and machinery and reduce the upfront capital expenses needed to purchase the equipment.
13.Stay up to date on your commercial real estate mortgage:
Many business loans need conceptual details, especially when looking to refinance and/or reduce their mortgage debt.
But this information is required not only for commercial real estate loans but for almost all loans. Before providing financing, a lender can like to ensure the borrower is present with their original mortgage.
Being behind on one’s debt for credit will almost certainly stay worsening.
14.Prepare for an down payment:
While most alternate borrowers (fintech, factoring, retailer and company cash advance) do not need an down payment in order to obtain credit, almost all traditional lenders may request.
Some kind of downpayment in order to ensure that the investor has some skin in the game and to guarantee that they do not continue their underwater loan.
Usual down payments on conventional loans (especially when dealing with commercial real estate) vary from 10-25 per cent based on equity, liquidity and debt servicing capacity.
15.Show business profitability:
Rentability is one of the criteria used by traditional and some unconventional borrowers to assess funding.
Borrowers would look at the following earnings, and then focus on what future profits might be.
From there, they determine how much interest the company will be able to manage safely, and then use it to help calculate the amount of support along with the costs and conditions.
16.Show the success of your company:
While an investor may look at how your firm has been doing in past years to decide whether to accept the loan and then commit to the facility, they are still lending based on future profits.
Showing a positive trend in both development and net income is a major plug to both get accepted and get the best rates and conditions for your small business.
17.Good balance of bank accounts:
The cash advance lending firm must log in to the bank account of the small business and check that the information provided during the underwriting was correct in order to get approved for a retailer cash advance.
What they’ll also be looking for is whether the business has a positive balance right now. If your bank accounts are poor, the lending company may very well refuse you funding.
18.Make sure you don’t have tax liabilities:
Another way to make sure your company loses access to the great rates and conditions typical borrowers provide is to have income tax liabilities.
Tax links are almost always an automatic disqualifier to standard lending and totally disqualifies the corporation for SBA loans because the Small Business Administration, needs any firms requesting an SBA loan to be in good standing with the government.
Types of Small Business Loans
Conventional: Banks and conventional lenders can provide lower rates than all other commercial lenders as well as provide terms that are longer than those provided by alternative lenders. Furthermore, bank fees are much cheaper than some of the competing higher-rate borrowers.
SBA: Financing provided by conventional lenders taking advantage of the SBA enhancement program – aimed at encouraging conventional lenders to provide affordable financing for small businesses which would not have received it without the enhancement.
Alternative: retail lending, market place borrowers, and fintech sector lenders providing non-bank loans. Alternate loans typically provide affordable rates, even though the prices are not quite banking.
AR financing: A form of asset-based financing in which you leverage the accounts receivable from your small business for collateral in order to obtain short-term loans or business line-of-credit to use for working capital. We use the pending receivables as security.
Factoring: Unlike AR financing, this form of business finance in that invoices are used as a source for receiving funds.
The distinction is that the invoices are not used as leverage for factoring but are instead sold directly to the factoring company in exchange for business funding.
Private Business Loans: Private lenders are generally loans offered to fast growing small businesses by a group of investors, and businesses with substantial assets.
Many private lenders focus exclusively on commercial real estate loans such as leases, bridge loans and hard-money lending.
Commercial real estate loans: Financing used to acquire or refinance commercial real estate or investment property.
Commercial property collateralizes most of the commercial real estate loans themselves.
Asset-based loans: A way for a business to obtain working capital for its uses of operations by monetizing the assets on the balance sheets of the businesses.
Many common forms of asset-based lending depend on the ABL as security for real estate, receivable accounts, supplies and/or inventories.
USDA Loans: A type of business loan administered by the U.S. government intended to encourage financing of small businesses in rural communities with a population of less than 50,000.
Bridge Loans: a type of temporary short-term lending used until a more sustainable funding plan is done.
Bridge loans are used both for commercial financing of immovable property and for working capital.
ACH Money Advance: It means selling future business income from your organization in exchange for cash funding.
The repayment to the lender is made with an ACH loan by having a set amount taken from the business bank accounts of the company every day until the advance is repayed.
MCA Split Advance: Compared to an ACH advance, the selling of the company’s future receivables is also an MCA split.
The receivables used in an MCA advance are credit card transactions, so redemption is accomplished by dividing the credit card purchases with the funder each day until repayment.