4 Important Things to Consider When Getting a Small Business Loan
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Want to open your own business but don’t have the money to get started? Many would-be entrepreneurs think there’s an easy solution to this predicament a small business loan. While small business loans are a wonderful way to obtain the capital you need to start or grow a small business, the act of getting one that meets your business’ needs may not be so simple. If you’re considering a loan for your small business, keep these four important things in mind.
1. Your Business History
Having a history can often feel like a Catch 22 for new entrepreneurs. You can’t start a business without money, but you can’t get the money (at least a traditional small business loan) without a business history. Many bank lenders won’t even consider a business for a loan unless it’s been successfully operating for two years. On top of that, most traditional lenders require robust business credit scores, which are obtained by achieving a near-perfect payment history with vendors, suppliers, and other creditors. In most situations, the only way around this is to seek your initial financing from an alternative source, such as crowdfunding, your retirement accounts, friends and family, or online lenders.
2. Your Personal Financial Situation
Even though your goal may be to keep your personal finances and those of the business completely separate, this can be difficult when you are first starting out. When you do obtain a loan or another form of credit for the business, you will most likely have to guarantee it personally, which means that if the business can’t pay its debts, you will personally be responsible for payment. Additionally, your personal credit score and financial history will be considered when applying for a loan or other credit until your business has built up a history of its own. That means before you apply for a loan, you will want to be sure your personal finances are in good shape. Pay off any outstanding debt and do what you need to do to improve your credit score.
3. Your Timing
The loan application process can be lengthy. There is a lot of paperwork involved, and you must provide documentation that can take a while to compose and compile, such as a detailed business plan, balance sheet, and income statements. Most businesses will need to submit several applications before they find a lender that is a good fit. There can be a waiting period between when an application is submitted and when it is approved. After an approval, it can take time for a loan to be processed before you have access to the cash. All this is to say that the traditional business lending process doesn’t happen overnight. Don’t expect to walk in to the bank and walk out with the money you need. Patience is a virtue when it comes to getting a small business loan.
4. The Fine Print
Sometimes business owners are so eager to get a loan, they neglect looking at the fine print, including the interest rate, term, payment schedule, and fees. These are all major considerations when accepting a loan. You should not get into a loan contract if you are not sure you can comfortably make the payments. Additionally, there are scenarios in which a loan’s fees and interest are so exorbitant, it might not be worth it to pursue that particular offer. Adjustable interest rates are another complicated element to consider. Be sure to weigh all the options and don’t necessarily jump at the first loan approval that comes your way.
Securing capital for your new and developing business can by a challenging task, but if you go into the loan process with realistic expectations and proper planning, it can be painless and rewarding experience.