Once you have established that you require a loan for your business, the next steps can seem daunting. Particularly if this is the first loan you’ve pursued, you may well be at a loss as to how you should choose between one provider and another.
Below is a quick guide for budding entrepreneurs and small businesses to run through before settling on a loan provider.
Check Your Credit Score
Whether you’re successful in your application or not will depend heavily on your credit score. It’s the first thing any potential loan provider will check before considering your application. There are many services you can use to check your credit score and offer free credit monitoring as well. You should also check with your bank as to whether they offer a free FICO score with your existing credit card. Major credit cards that offer this service include American Express, Bank of America and Barclaycard.
Decide How Much Money You Need
As obvious as it may seem, this step is crucial; don’t just settle on the first figure that comes to mind. Carefully consider your needs and what you intend to do with the money, be realistic about what you will require and also what you can pay back. It is just as important to avoid lowballing this figure as it is to avoid overestimating your needs. You don’t want to be in the position of owing a substantial amount of money but not having enough to get your business up and running and an income coming in.
Decide What You Need the Money For
Before you even consider taking out a loan you should know exactly what you want to do with it. This is also information that will be useful when negotiating with a loan provider, if you’re planning on approaching a bank rather than a loan agency, they will want to see detailed plans for what you intend to do. Knowing exactly where the money is going beforehand will also mean you can avoid wasting time and will lift a great deal of pressure from your shoulders.
Decide Who You Intend to Approach for Your Loan
There are several options for choosing a loan provider and you should educate yourself beforehand on what these are. A small business administration (SBA) loan can be offered according to government guidelines to meet the financing needs of a range of different businesses. From the lenders perspective, an SBA is low risk as the government guarantees that they will be repaid and so is more suitable for those with lower credit scores. Many banks will offer SBAs to customers who would otherwise be denied a loan entirely.
The downsides to this, however, are considerably more paperwork upfront (a small price to pay to pursue your business dreams), and some extra fees that would not be applicable to other loan types, it also typically takes longer to get approval for an SBA than most other types of loan. A conventional bank loan (CBL) is not guaranteed by the government and so has more stringent requirements for approval such as a higher credit score than an SBA. The advantage of a CBA is that it will have a lower interest rate than an SBA and, because there are no federal agencies involved, the approval process is a good deal quicker. Banks also generally require that these types of loans are paid back much faster than with the SBA.
There are alternatives to both of these if you choose to approach a non-bank entity for your loan, and while these generally offer much greater flexibility in terms of requirements up front, and less restrictions on what you can use the money for once you have it, be aware that the interest rates from non-bank lenders can be much, much higher and some lenders will decide this based on your credit score. If your credit history isn’t stellar then you will be viewed as high risk. Do not commit to anything if you are uncertain about your ability to repay.
Takeaway
Don’t be afraid to shop around for loan providers to ensure that you strike the best deal you can, always remember that your financial security is very important and that failed ventures can make it harder to secure financing in the future.