Everyone has dreams of starting their own business so that they can be their own boss. This can be rather difficult as taking on the task of being an entrepreneur comes with its own challenges. Not only will you need to come up with a good idea for a business but also look for ways to finance your plans.
With that being said, there are actually a multitude of funding options that are available for budding entrepreneurs. Indeed, business lenders are always looking to provide individuals with an opportunity to create something that they can call their own. However, not all business lenders are created equal.
This is why you’ll want to be thorough when selecting a business lender to work with. So how do you spot a good business lender? Well, the key is in the terms that they offer and how well these terms work for you. You have to understand that there is a considerable risk when taking out a business loan as there is no guarantee that your business will succeed.
If you want to learn more about this topic, then we have just the thing for you. Read on as we break down everything you have to know about spotting a good business lender!
Evaluating Business Loans
In order to determine the best business lender, you’ll have to take a deep dive and examine the different factors that make a business loan good. Many of these factors are rather obvious such as interest rate and the terms of repayment, but some of them may surprise you as they may not be things that you think of when applying for a business loan.
Here are the four main factors that you’ll want to take into consideration when evaluating a business loan:
The first thing you want to consider is the interest rate. The interest rate refers to the amount that your lender will charge you for any form of debt given. The lower the interest rate, the lower the risk involved with the loan. Consequently, higher interest rates are considered to be more high risk.
Average interest rates hover around 3% to 7%. However, this differs wildly among different institutions. This is why you’ll want to examine as many lenders as you can in order to find one with interest rates that best match your financial situation. With that being said, it’s important to remember not to fixate on interest rates as there are other factors that you’ll need to consider.
Interest rates aren’t the end all be all when it comes to business loans. While it would be good to have low interest rates, the repayment terms are just as important. Repayment terms refer to the length of time wherein you will be making your payments. Good repayment terms can be the difference when it comes to saving you hundreds, If not thousands, of dollars.
Not all business lenders will accommodate you. Ideally, it would be best to look for a lender that will help make payments as convenient for you as possible. You’ll want to look for a business lender that will adjust to your desired repayment terms.
Finding a lender is only the first step, as you will then need to apply for a loan. Now, many people are unaware that some lenders actually require you to pay an application fee just to have your applications processed.
Now, this isn’t as simple as automatically writing off lenders that charge an application fee. Sometimes the application fee is due to costs that are tied to process your applications. This includes running your credit report and having your collateral appraised. Be sure to look into this aspect before deciding on which lender to go with.
Lastly, you’ll also want to look at your business’ financial situation before deciding on which lender to go with. It’s your financial situation that will determine whether or not it would be wise to go with a particular lender or not.
To add to this, lenders will also be taking your financial situation into account in order to decide whether or not you qualify for their loans. Your credit score and your debt-equity ratio are some factors that they’ll take into consideration during your loan application.
How to Qualify for Business Loans
In line with that last point, it’s also important to talk about how to qualify for business loans. What you have to understand is that lenders are also looking for borrowers that pose the lowest risk of defaulting on their loans. There’s no guesswork that goes into this, as borrowers look at key metrics that help determine whether or not a borrower is a good candidate for a loan.
Here are the factors that affect your chances of qualifying for a business loan:
One of the main things that lenders take into consideration to determine whether a borrower is risky or not is their potential to make a profit. This shouldn’t be too surprising considering that this will pretty much determine your ability to make payments.
Aside from looking at the nature of the industry your business is in, lenders will also examine your ability to generate profit in relation to your operational expenses. Profitability becomes more of a factor for long-term business loans.
Another metric that lenders will be looking at is your credit score. This is one of the most important factors when it comes to getting approved for a business loan as it pretty much indicates how you manage debt, loans, and bills.
You’ll want to make sure that you are in excellent credit standing when applying for a business loan. Similar to choosing a lender for mortgage refinancing, there’s also a minimum credit score requirement for business loans. To maximize your chances of being approved for a loan, it would be best to get your business credit score to around 600 and up.
Lastly, having strong collateral to put up also helps mitigate the risk for business lenders. While no one plans on defaulting on their loans, it is something that lenders always have to take into consideration when loaning out money to borrowers. What this means is what you put up for collateral can heavily factor into your chances of being approved for a loan.
Common Types of Business Loans
Finding a good lender will mean very little if you end up applying for the wrong type of business loan. This is why you’ll want to familiarize yourself with the most common types of business loans so that you can apply for the one that best suits your needs and financial situation.
Small Business Administration Loans
This type of loan was specifically designed with small business owners in mind. The Small Business Administration (SBA) offers different types of loans for budding entrepreneurs. These loans have their own pros and cons that will work better depending on your business.
7(a) Loan Program: This is one of the most popular loans that the SBA offers. It is characterized by its long repayment time, which can go up to 10 years. This type of loan also boasts lower than average interest rates. Lastly, borrowers won’t be required to put anything up for collateral when applying for this loan.
Microloan Program: The SBA also offers small loans for businesses that are trying to get off the ground. The biggest advantage that this type of loan has is that it offers a quick distribution time. You can expect to have the money within 30 days after applying. The main downside to this type of loan is that it is often smaller than typical loans.
Disaster Loans: Lastly, the SBA offers small businesses a special loan when their business has experienced a manmade or natural disaster. These loans have a higher than usual maximum loan amount that goes up to $2 million with very lenient payment terms. However, it’s quite difficult to qualify for this type of loan as your business must be located in a disaster zone.
While SBA loans can be useful, not everyone qualifies for them. If your business doesn’t qualify for the SBA loans then traditional loans are the way to go. While they aren’t as flexible as the SBA loans, these can still be quite useful when it comes to helping your business.
Equipment Loan Financing: This type of loan is one of the more flexible ones in terms of payment. You’ll also gain access to the funds much more quickly than usual. The downside to this is that it is limited to equipment and has a relatively higher interest rate.
Personal Loans: Personal loans are used for business purchases and expenses. They offer decent interest rates but come with a hefty origination fee.
Secured Loans: Lastly, this type of loan is backed by an asset. This can be your building, land, or even the equipment that your business makes use of. What this means is that you’ll be getting favorable interest rates and repayment terms. The only catch is that your assets can be seized if you end up defaulting on your loan.
Did we miss out on anything related to finding a good business lender? Let us know in the comments below!