If you’re starting a business or need some money for an existing one, applying for a loan can be extremely stressful. There’s such a large range of options available now that deciding which type of financing is best for your needs can seem overwhelming. The first thing to do is ask yourself what your priorities are and what you’ll qualify for. Do you need your cash immediately or can you afford to wait for the best rate? Do you need a set amount of funding for a certain time period, or would an available line of credit be more suited to your businesses’ needs?
The top factors that lenders will consider when evaluating your business are:
- Its age - most lenders have a minimum two-year requirement before even considering you, except in the case of start-up loans. The reason for this is statistical-- around 20% of new businesses fail before their first 24 months.
- Revenue - without exception, lenders will look at your cashflow, and evaluate both how much money comes in every month and how much goes out
- Personal FICO score - each and every lender will look at your personal credit score because generally, small business loans don’t require collateral, and determining their safety in the loan process is through your personal history of repayment and financial responsibility.
- Amount of proposed loan - if your needs can be met with a relatively small, short-term loan, you’re more likely to get approval than if you’re looking for a larger commitment
- Purpose - what are you going to use the money for? Some of the loans backed by the SBA have very specific usage requirements, and often, private lenders also offer different terms, depending on what the financing will be used for.
If you’re starting a business, getting a start-up loan is going to prove very difficult. Most lenders won’t even consider financing you, since it’s such a high-risk proposal. Additionally, banks have been getting out of the small business loans market for the past decade, because it costs basically the same as processing a large loan and carries very little benefit. For these and many other reasons, most startups are funded by a combination of friends, family and the owner himself. The third question of our FAQ gets into this in more detail, as well as offer some alternatives.
If, on the other hand, you’ve an established business more than two years old, and are looking to get some help managing day-to-day expenses, then the best loans for you could be:
- Invoice Factoring - If you have a good amount of outstanding invoices, this type of loan turns them into immediate cash when you sell them to a factoring company. They get paid when they collect from your customers, and you have the advantage of having money in hand.
- Business Line of Credit - In many ways similar to a credit card, a line of credit provides you with access to cash, but doesn’t charge interest or fees unless you actually access the funds. This is best for handling ongoing capital needs. Ideally, you would get a line of credit before the need for one arose, as a sort of safety measure.
- Short or Long Term loan - Private lenders generally offer up to $500K, with repayment periods of between 6 months to ten years. This can be used for expenses, inventory or for purchasing equipment, but make sure to look very carefully at interest rates and costs. Best for a large, one-time expense.
- Business Expansion Loans - Some lenders also provide financing for growing your business by expanding to a new location, adding a new service or product, or buying expensive equipment. Make sure that the term of the loan doesn’t exceed the life of the product you’re buying. You don’t want to be in the position of paying for equipment you aren’t using anymore.
The next thing to evaluate is who your lender should be.
Traditional lending institutions such as banks and credit unions can be useful when:
- You can provide collateral
- You have excellent credit
- You don’t need cash immediately
- Can prove good revenue and cash flow
These lenders can be counted on to provide term loans, lines of credit and commercial mortgages to buy properties or refinance, and these can all be guaranteed by the SBA, which in turn helps you lock down lower interest rates and better conditions.
Microlenders are another option, best suited for companies too small to qualify for a traditional loan. They’re generally non-profits that are geared towards helping disadvantaged communities, and offer loans of $50K or less to both startups and established companies. Since their focus is mission-based, they usually also have pro-bono consulting services and training on how to build credit. Because of how these loans are structured, you should be aware that there are funding constraints, strict borrower guidelines, and the number of loans on hand are limited by the grants, donations or government guarantees and allocations of the non-profit issuing the loan.
And now we come to the online lending community. This is most suited to companies that lack collateral, have been in business for less than two years, and/or need funding quickly. Their APRs tend to be higher than traditional lenders, but they can get you the funding you need quicker and more efficiently.
Find out if you qualify. Gather together your credit score, business plan, tax returns, legal documents, revenue statements, and collateral. Every single lender, no matter the type or the amount of the loan, is going to look very carefully at your cash flow, your debt ratio and the rest of your financials, to evaluate how much they can reasonably expect you to pay monthly, biweekly, or daily --different loans have different terms--.
Lastly, start applying, and build your business: a good place to start is our top 10 list!