The time to investigate small business financing is before you need it.
The last few years have seen big changes in the world of small business financing. Because of those changes, most small business owners don’t know what they don’t know—it’s changed that fast. Although I believe anything that gives greater access to capital has the potential to be a good thing, the current state of small business lending requires a more savvy small business borrower, because there are lenders and options that might not be a good idea for you or your business. With that in mind, here are four things you should know before you start looking for a small business loan:
1. Know Your Options: The first place many small business owners start looking is their local bank, where they have other business accounts. Although that could make sense in some circumstances, depending on your situation and what you need the money for, it might not be the best place for you. There are a number of reasons you might want to consider other options. You should start by asking, “What do I need the money for?” Does it make sense to take a five-year term loan to fill a short-term need? Interest costs add up fast—would you ever take a 30-year mortgage to purchase a car? No matter how ridiculously low the interest rate was or the monthly payment, it just wouldn’t make sense, right? An online business loan, line of credit, or other specialty financing like an equipment loan might be a better option. Although some of these options might be more expensive than others, diving into the cost per dollar borrowed, in addition to annual percentage rate, will help you determine whether or not the loan term makes sense for your situation and your needs.
2. Know How Quickly You Need the Capital: Some loans are better suited to a small business owner who doesn’t need the capital right away. For example, it can take weeks or even months to apply for and obtain an SBA loan. The interest rate will be favorable and the SBA doesn’t require the same credit norms of a traditional bank loan, but if you need capital next week to overcome a short-term cashflow bump, for example, it’s likely not the best option. Granted, quick access to capital might cost a little more, but if it makes economic sense, there are many online options that can help you find the cash you need in days instead of weeks—sometimes as quickly as 24-48 hours.
3. Researching the Right Lender Takes a Little Time: My Dad gave me some great advice as a teenager looking for my first used car that applies to finding the right lender, “Don’t buy the first car you see.” That advice has served me well when car shopping and will help you find a good lender. Because there are so many different lenders and loan types, it’s often hard to compare apples to apples. If you’ve asked the first question, “What do I need the money for?” it will help you narrow your search, but you’re not finished when you’ve found a lender—remember not to buy the first car you find. Ask for references, do an online search to make sure they are reputable, check with the Better Business Bureau. Make sure they fully explain the terms (so you understand them). If they won’t or can’t, keep looking. Finding the right lender is part filling your need for capital and part finding the right company.
4. Take the Time to Learn More About Business and Personal Credit: Every business owner should know their personal credit score and how their business credit stacks up before applying for a small business loan. In fact, it’s a good idea to monitor your credit on a regular basis and watch for mistakes and other events that might pull your scores down. If you have a weak score, work to improve it. Understanding how credit works and how your personal score and business credit interact can be important when it comes time to apply for a small business loan.
Most small business owners don’t start a business because they are financing experts, but there are a few things about small business financing they need to have at their fingertips. Taking time to educate yourself about small business financing before you need a loan just makes sense. The resources at BusinessLoans.com are a great place to start. It’s a lot like learning how to swim before you jump into the pool.