When most people think of a small business loan, they think of a term loan at the bank—but there are dozens of other options available to small business owners today. Finding the right loan isn’t as simple as going into the bank anymore. Asking yourself the following four questions will help you find the right loan (and the answers may even lead you to the bank—or maybe even someplace more appropriate):
1. Why do I need the loan? This is the most important question you’ll ask. It will help you answer the other questions as well as help you determine what type of loan you need. Do you need a short-term loan, a long-term loan, or a special purpose loan (like equipment financing or franchise financing)? It will also help you avoid wasting time looking for the wrong loan.
2. How quickly do I need the capital? One of the most overlooked considerations when looking for a small business loan is how long it takes to get the funds. It’s not uncommon for it to take weeks at a traditional lender to find out if your loan application is even approved. For example, after filling out all the paperwork associated with an SBA loan, it can sometimes take weeks to get approved and months for the loan to get funded. This can be a problem if you’re trying to access capital to take advantage of a special deal on inventory or need to address a short-term capital need.
On the other hand, many non-bank small business lenders can have you approved and funded in as short a time as 48 hours, and equipment-financing companies can have you financed in less than a week. Knowing what you need the money for will help you look in the right places for a loan—it could be the local bank, but it might also be someplace else.
3. What will I qualify for? Understanding which financing options you have a realistic chance of qualifying for before you start looking for a loan will help you avoid wasting time looking in the wrong places. For example, if you have a personal credit score of 650, it will be nearly impossible for you to get a traditional term loan at the bank. And, if you have good credit but don’t have any revenue—the new breed of online business loan probably won’t be a good fit.
Before you jump into the process, take some time to evaluate the situation the same way a potential lender would:
• Revenue: What are my annual revenues?
• Personal Credit: What is my personal credit score?
• Collateral: Do I have any collateral?
• Time in Business: Have I been in business at least a year?
• Profitability: Is my business turning a profit?
Traditional lenders heavily weight your credit score when they consider you for a small business loan. In addition to your credit score, online lenders like OnDeck look at other business data points to determine if they can offer you a loan—your personal credit score is only one of them.
Nevertheless, every lender has a minimum credit score threshold they will not go below, regardless of how your business otherwise stacks up. Yet, if you have a healthy business, make regular deposits, and have been around for at least a year, there are options.
4. What interest rate is right for me? Any time you borrow you need to make sure it’s a good financial decision for your business. It makes sense to look at interest rate, payments, and the total cost of the loan to determine if it’s a good fit.
If you borrow $10,000 and pay back the lender $11,500 (the amount you borrowed plus your interest payments)—the loan costs $1,500. Depending upon what you need the money for, this may or may not make sense. In addition to questions about interest rate and monthly payment, you need to ask yourself, “What is the total cost of the loan to my business?”
Additionally, while a longer-term loan is a good option for starting a business, purchasing real estate, or buying equipment that can be depreciated over several years, it’s probably not the right option for purchasing inventory or filling a short-term cashflow need.
Asking yourself these four questions will help you determine where to start looking and what type of loan to start looking for. And, it will help you avoid wasting time looking in the wrong places. Recently the Federal Reserve Bank of New York reported the average small business owner spends roughly 26 hours looking for a loan. That’s a lot of time away from the important work of the business and can become very expensive very quickly. If you think in terms of how much your time is worth, doesn’t it make sense to improve the odds and save time when looking for a loan?