One of the most challenging aspects of launching a new business is securing the financing you need to get up and running. For most entrepreneurs, this typically involves acquiring a small business loan, and while it may sound similar to applying for a personal loan, there are some key differences.
The following should help serve as a guide to some of the key distinctions you should be aware of when securing financing for a new small business.
How does one apply for a small business loan?
If you didn’t know better, on the surface it would seem like all you really need to do to secure the right loan is to find a sympathetic lender, fill out an application, and wait for the funds to be deposited into your business account a few days later.
Of course, there’s just a little more to it than that; important considerations need to be made at each stage of the process, meaning you would be well advised to do your due diligence when it comes to researching the options available to you.
- When shopping around for a lender, make sure you don’t just call it a day after finding the first candidate who sounds good to you, no matter how enticing their offer may appear to be. Rather, you need to get a good lay of the land by investigating every reasonable option available to you. Once all your options are laid out before you, you may find that what seemed to be so amazing at first glance isn’t really so great after all.
- You also want to make sure that you approach potential lenders with a clear understanding of what you’re looking for. How much money do you need and how much time will you likely need to pay it back? Don’t be seduced into accepting a much larger sum than you truly need. Your business simply may not be capable of keeping up with the greater payments you’ll have to honor under the different scenario.
- Before contacting a lender, make sure that all of your finances in order, both business and personal. You’ll need to produce comprehensive lists of your business’s assets, along with detailed tax information about your personal finances.
- How much money do you earn now, how much are you expecting that to change in the immediate future, and how much do you expect your profits to increase as a result of this loan (in both the best and worst case scenarios)? If you can’t provide good answers or provide enough adequate supporting evidence to back up your claims, you should probably wait until you can before applying – and committing — to a small business loan.
How do you compare small business loan terms?
When investigating terms and comparing lenders, there are several elements you’ll need to pay particularly close attention to, including interest rates, annual percentage rate (APR), the loan’s length (number of years), and repayment terms.
If you’ve ever taken out a personal loan or borrowed for a big-ticket item like a house or new car, you should already be familiar with how interest rates and APR work. You need to be very careful about not getting tripped up by numbers that appear very low or possibly even too good to be true.
The fine print can be just as important as a headline sometimes, far too often listing a number of fees and additional considerations that could wind up costing more than you thought you were saving in the first place.
Repayment terms may seem simple on paper, but a great deal of research is necessary in order to figure out the right fit for your business. If two lenders offer you similarly-sized loans but dramatically different repayment schedules, then further examination of your finances may be in order.
A longer plan may seem attractive on paper, but the extra interest adds up, not to mention whatever fees and exceptions may come into play should you start to miss payments.
What to do if you get rejected?
Should your loan application not be accepted there’s no reason to start despairing just yet. There are changes you can make that will increase your chance of success next time, but you might be able to make a few immediate alterations to your application that could grant you acceptance right away.
Often, just upping the collateral on your end will increase the likelihood of your securing the loan. If you can reduce the potential risks to your lender enough, they may be prepared to overlook some of the factors that made them leery of you in the first place.
If that doesn’t work, you’ll either need to find a different lender or apply for a smaller loan. Finding a lender who is set up to work with clients who have lower credit ratings may be all that you need, but lenders who accept more collateral can work as well.
If your solution is to ask for less money, then you may find you’ll need to obtain multiple loans from multiple sources in order to acquire the level of funding you’d originally budgeted for.