Making a decision to get a small business loan requires thoughtful consideration. While it’s not always something that you want to do, it’s often a necessity to either grow your business or cover an emergency expense. In fact, a small business loan can also help you with daily expenses, such as required inventory or payroll.
In order to make a decision about getting a loan for a small business, you should be familiar with different financing options for small businesses. For starters, you can consider a term loan, SBA loan (U.S. Small Business Administration), a line of credit, microloan, merchant cash advance or a personal loan, among other options. You’ll need to be clear on the purpose of the loan because this will dictate the type of loan for which you’re likely to qualify.
If you choose to pursue a traditional loan product from a bank, there’s a good chance that you will be required to have high credit scores. You may also be required to provide collateral. Given the sometimes lengthy process involved in getting a bank loan, it’s a good option when you don’t need emergency funding.
Online lenders and microlenders are a good option if you need money right away. Additionally, they don’t typically require collateral and they are often more willing to fund a loan if you haven’t been in business very long. However, each lender will have different criteria. It’s best to get everything in order because you have a better chance of approval when you understand and satisfy lender requirements.
An Overview of Common Lender Requirements
Credit Scores: As previously mentioned, some lenders require exceptional credit scores. Information about your credit is obtained from three credit bureaus, including Equifax, Experian, and TransUnion. However, you can get a free copy of your credit report once a year from AnnualCreditReport.com. It’s a good idea to know your credit score in advance.
Length of Time in Business: If you have been in business for less than two years, there’s a good chance that you won’t qualify for a traditional bank loan. However, some of the other options previously mentioned are often lenient in this area.
Annual Revenue: The minimum required annual revenue varies greatly for small business loans, but it’s not uncommon for lenders to require $50,000 to $200,000. Ultimately, lenders want to know that you have enough revenue to make the payments on the loan with ease.
Documentation: While some lenders will not require as much documentation, banks are more likely to require an extensive amount of information. You should be prepared to provide business financial statements, articles of incorporation, lease agreements, personal bank statements, and personal tax returns.
Minimizing the Cost of the Loan
During the process of obtaining a loan for a small business, your goal should be to get a loan with the lowest annual percentage rate (APR). Another way to ensure you’re getting a good deal is to compare two to three lending options that fit your needs. Having access to financial resources is a necessary part of being a small business owner. As long as you ensure due diligence throughout the process of pursuing a loan, then there’s a good chance that you’re making a wise business decision.
Sometimes an infusion of cash enables you to do what’s necessary to drive business growth and boost revenues. It’s a decision that many small business owners have had to make. The information provided can be used to mitigate some of the angst associated with pursuing a small business loan so that you can move forward with confidence.
