You scraped together the capital necessary to launch your small business, but you still need some help with funding while your business gets up and running. While there are many sources of funding available to you, you might seriously consider pursuing some form of small business loan. Loans come in many shapes and sizes, and there are many different types of lenders to ensure that you can acquire the right type of funding you need for your business in its current state. However, before you apply for a loan, you might want to learn the answers to some common questions about business loans, as follows.
Table of Contents
There are various types of small business loans, and each type works differently. The type of loan most people imagine when they think of small business loans is a term loan, which awards borrowers with a large sum that accrues interest and must be repaid before a certain deadline. Typical term loans have repayment terms lasting up to a decade, but there are short-term loans that can be faster and easier to obtain but must be more rapidly repaid.
Another type of small business loan is a line of credit. Functioning somewhat like a credit card, a line of credit provides you with a certain amount of money that you might draw upon during a specified period. You are only responsible for paying back the money you utilized — but the entire sum of your loan must be repaid as soon as the draw period concludes.
Finally, there are types of business loans that allow you to acquire money based on income you expect your business to earn. Invoice financing, merchant cash advances and similar loan products utilize your future income as collateral for a loan, so you can act sooner to grow your business. Some of these loans require repayment by a specified deadline and others will recoup the principal and interest by automatically taking portions of every sale. You can learn more about the details of these options by talking to your lender.
What Factors Should You Consider?
There are many factors that go into how a loan works, and you need to consider almost all of them before submitting a loan application. Some of the most important factors include:
Terms. How often do you need to make payments? When is the loan finally due?
Interest rates. How much will the loan cost by the end of the repayment period?
Uses. Are there restrictions on how you can use the loan?
Lender reputation. Does this lender have high ratings from past borrowers? Is this lender notorious for predatory practices?
Do You Need Perfect Credit to Acquire a Business Loan?
High credit scores are always useful, so you should always do what you can to build and maintain good credit. Because your business has not operated for enough time to develop a credit history, lenders will look at your personal credit report (and the credit of any other high-level leaders) to determine your organization’s creditworthiness. That said, not all lenders operate using the same standards for creditworthiness. While banks tend to accept entrepreneur borrowers with only the highest credit ratings, you should be able to work with an online lender even if your credit score is poor.
What Is the Best Way to Get a Small Business Loan?
“Best” is incredibly subjective. The truth is that what is best for one entrepreneur might not be best for you. Before you submit any applications for business loans, you need to determine what details are most important for your business success. What size loan do you need? How quickly will you be able to repay the loan? How soon do you need the loan? Questions like these should help guide you to the best loan product and lender given your unique circumstances.
What Is the First Step in Seeking a Business Loan?
Your first step to acquire a small business loan should be to gain as much knowledge as possible. In addition to reading these FAQs, you should consult with trusted lenders to learn more about loans available to you as a startup entrepreneur. You might begin taking steps to improve your personal credit, and you should factor loan repayment into your business plan to determine how it might affect your plans going forward. Finally, you can begin amassing important documents that you will need for your loan application, such as tax returns, bank statements, legal documents and the like.
Small business loans might be a frightening prospect to an entrepreneur with limited experience, but established business leaders understand how to harness business loans to achieve success. The sooner you start utilizing loans for your business, the sooner you can benefit from this incredibly useful financing option.