Are you looking to start your own business or ready to refinance your endeavors? Understanding loans is something that can help every business owner or entrepreneur, so we’ve gathered a few tips to help you make the best decisions and secure the perfect loan for your business.
Answer Some Questions
Before you get started, you’ll need to be able to respond to the following:
- How much money do you need?
- What do you need the money for?
- How quickly do you need the money?
- How long will it take you to pay it back?
- What is the current financial shape of your business?
The answers to these questions will prepare you to gauge the level of loan you’ll need and help you feel more confident throughout the entire loan process.
Choose Your Lender
There are a few types of lenders to choose from, and each has its pros and cons.
If you qualify, the Small Business Administration (SBA) is an option. According to the SBA, a small business is any business that has fewer than 500 hundred employees and less than $7 million in annual receipts. SBA loans come from its partners (banks, community organizations and micro-lending institutions) but include set guidelines that protect both business owners and lenders. These loans reduce risks for lenders while including more flexible terms for borrowers.
Your local credit union might also be a source of a small business loan. Credit unions tend to be more flexible and supportive of small businesses, as the money is directly impacting their members and the communities. Since credit unions are not-for-profit organizations, they often offer lower interest rates and charge fewer fees. Since credit unions are run locally, the decision-making and approval process around business loans often takes into account your relationship with the credit union and how your business will serve the community.
Small business loan from a bank are similar to SBA loans, without the guarantee from the government of repayment. These loans carry low-interest rates and, because they cut out the middleman, the approval rates are faster than SBA loans. However, bank loans usually include shorter repayment times, and they are harder to get approval for.
Alternative lenders offer loans to those without a stellar financial history, since their approval requirements are more relaxed. These institutions offer online applications and make funding available within days; however, alternative lenders charge significantly higher interest rates than those that are offered by a bank or credit union.
Consider Your Circumstances
Have you looked into special loan offers based on gender, ethnicity, or business type? Women-owned small businesses can qualify for special loans, training, and assistance, and there are also programs available for Native Americans, minorities and veterans. The SBA also offers low-interest disaster loans to small businesses recovering from declared disasters.
Understand the Terms of Your Loan
Once you’ve decided on your lender and your loan’s been approved, make sure you fully understand all of the provisions before you sign on the dotted line.
- Know the interest rate on the loan and whether that rate is fixed or variable.
- Determine if you can make your weekly or monthly loan payments on time.
- Understand any fees (origination, underwriting, admiration, loan processing, etc.)
- Be Aware of the circumstances that the lender can call a default on the loan.
- Review the security or collateral required.
- Know the regulations on paying your loan off early.
- Be Aware of any limits on how the loan can be used
A lot of planning and financial knowledge goes into securing a small business loan. Your local credit union will help you discover your options and discuss the best course of action for you and your business.