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Loan FAQs: Common Questions About Getting Business Loans

Loan FAQs Common Questions About Getting Business Loans

Business News Daily spoke with finance experts to answer nine frequently asked questions about small business loans.

  • Small business loans may be easier to obtain than you think.
  • Whether banks are the best option for obtaining a business loan depends on the circumstances of your business.
  • Interest rates are just the beginning of small business loan considerations.
  • This article is for small business owners looking for small business loans from conventional lenders and alternative lenders.– Getting a loan for your small business is a great way to cover major costs or grow your business when the time is right. You may have heard some complaints about small business loans: they are hard to get; your credit must be flawless; Don’t ask for too much money or they will disown it. Fortunately, these prevailing ideas about small business loans aren’t necessarily true.

Managing debt properly is important, but doing so can help grow your business at a faster rate than skimping and saving. To help you get a small business loan for your business, Business News Daily spoke with financial experts to answer nine frequently asked questions about small business loans.

1. Is getting a business loan the hardest thing you will ever have to do?

No. Like other forms of financing, getting a small business loan requires preparation. Ensuring your books are transparent and keeping reserve liquidity to encourage the lender to be able to consistently pay off your debt on time will lead to success. And experts agree that the best way to avoid unnecessary inconvenience is to prepare for the application process.

“Much of the frustration surrounding obtaining small business finance can be alleviated by performing due diligence,” said Michael Adam, founder and CEO of Bankmybiz, a site that connects business owners with small business lenders. “Be prepared and have all your documents ready to present to the lenders.” [Read Related Article: Small Business Financing Trends]

2. Do you need perfect credit to get a business loan?

No. A low credit score is a problem for some lenders, but banks aren’t the only lenders out there. In fact, it is far from impossible to get a bad credit business loan. Alternative and private lenders can often offer more flexible terms, including the level of creditworthiness they can approve.

“While traditional banks can be restrictive when it comes to obtaining credit, there are alternative options,” said Michael Kevitch, founder of Small Business Funding. Alternative lending sites, such as Small Business Funding, tend to base lending decisions on the financial realities of a business rather than the financial history of the business owners. In particular, Kevitch said, alternative lenders closely look at business performance, industry type, time spent in business, and cash flow before making a loan.

3.The best way to get a loan for your business through a bank?

Not always. Entrepreneurs have more than one option for obtaining finance; Banks aren’t the only game in town. There are alternative and private lenders, as well as creative types of loans such as invoice factoring, which can help business owners support their capital without going through the lengthy and restrictive application process required by conventional lenders.

For entrepreneurs looking to borrow a relatively small amount ($ 5,000 to $ 250,000), getting a bank loan is likely to be more troublesome than it’s worth, Kevitch said. Banks are better suited for businesses interested in borrowing a large amount of money and repaying the loan over a long period of time at a relatively low interest rate. Kevitch advised entrepreneurs to make sure they fall into these categories before applying through a bank.

Instead, Kevitch said, alternative loan sources often provide faster approvals for shorter loan repayment periods; companies can sometimes access funds in as little as seven days, he said. As the terms are more flexible, interest rates are generally higher.

4. Is the worst way to get a loan for your business through a bank?

There is no “worst” type of financing; It depends on the circumstances of your business and your ability to reliably repay any debt you take on. Just because you can get financing elsewhere doesn’t mean conventional lenders and bank loans aren’t for you. Sometimes a bank offers exactly the financing option you need. In fact, for established companies looking to grow at a modest pace, traditional bank financing is often a great option, Adam said. It’s when a business doesn’t meet those criteria that business owners should consider shopping around.

“If you are a younger business with no income or low income, but expect to grow very quickly due to the industry you are in, such as healthcare, IT or software consulting, a traditional bank loan can limit your growth. “. Adam.

To decide if a bank loan is right for your business, look for both traditional loans and alternative funding sources. It is also important to know your business inside and out.

“If you expect steady growth over the next few years, a traditional bank might be the best,” said Adam. “If you are growing like crazy and know that you will need to keep increasing your loan amount in large increments every quarter, then consider a non-bank lending partner, as banks may not be able to keep up with. your needs “.

5. Is it true that the more money you ask for, the less likely you are to be approved for a small business loan?

No, the principal loan amount requested should not have a negative impact on whether or not your application is approved. Lenders are generally willing to cater to large loan demands for the right borrower; however, it is more profitable for them in the long run. Don’t be afraid to ask for the amount of money you really need!

According to Jess Harris, social media and content manager at commercial lender Kabbage, banks prefer to lend larger amounts because they make more long-term profits from large loans. In turn, the banks are cutting smaller loans. [Kabbage is our first choice for small business lines of credit. Find out more in our Kabbage review.]

Evan Singer, president and CEO of the Small Business Administration’s SmartBiz Loans online lending program, said a company should request the amount it needs, no more, no less. He recommends considering how much money you really need to grow your business and how much money you can afford each month.

“Make sure you have cash flow to make the loan payments,” Singer said. “This is the most important thing a [lender] will verify: that [the business owner] can actually afford the loan payments.”

6. Is the interest rate the most important factor to consider?

It is easy to place too much emphasis on the loan interest rate. Basically, the interest rate determines how much the loan will cost at the end of the payment period. It is certainly crucial information, but it is only one aspect of the whole business.

While the interest rate is an important aspect to consider when choosing a lender, there are many other factors to consider. Harris suggested asking what the terms of the loan are, how long you have to repay the money, and what you can use the loan for.

7. What is the first step when looking for a business loan?

The first step when trying to get a business loan is gathering everything you need to apply. These needs include tangible items and process considerations, such as the following:

  • Knowledge on how well bank term loans, SBA loans and alternative lenders do or don’t fit your needs
  • Proof of your credit history, small business age and yearly revenue (many lenders set minimum thresholds for these values)
  • A sense of how much you can afford per month in loan repayments and attendant fees
  • An idea of which items you might put up as collateral, if necessary
  • A list of potential lenders
  • Documents such as tax returns, bank statements, financial statements, legal documents and a business plan

8. What is the best way to finance a small business?

While there is no objective answer to this question, it could be argued that small business loans are a superior option. After all, they are used so often for a reason: if you plan them correctly, you can schedule monthly payments quite easily. On the other hand, you may prefer angelic investors or venture capitalists as they may not ask you to pay them if your business fails. But you give up some corporate control and capital to work with these investors.

You can also use loans from friends and family, credit cards, crowdfunding, or corporate lines of credit. Each of these options has its pros and cons. For example, think about what could happen in your personal life if you don’t pay a loved one. Credit options also have problems: they can have high fees that make them unsustainable. Furthermore, crowdfunding does not guarantee the achievement of the desired level of funding.

9. How long does it take to pay off a business loan?

The answer to this depends almost entirely on the term of the loan. A five-year loan should take that long to pay off. That said, if you can pay off your loan early, that’s a good thing, as long as you don’t have to pay an upfront fee to do so. If there is a fee, you may want to hold that loan a little longer. Your monthly expenses may be lower than the potential rate.

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