For a lot of people, securing a loan for their business seems like a scary and complicated procedure. Afraid of rejection or mismanaging their money, many don’t try, but as it turns out, getting a loan from a bank is easier than you think.
Over the next few articles, we’ll discuss all the tips, dos, and don’ts for securing a loan, but for now, here are the basics on the different types of loans and what banks look for before granting you one.
Backed by the government, this loan is common for small businesses looking to cover a broad spectrum of uses, and can be granted by both banks, credit unions, and other lenders.
Another popular option, particularly for small businesses looking to expand, purchase assets, refinance, or gain capital, term loans borrow on a timeline – with long-term loans tending to be larger amounts, paid off monthly, and with lower interest rates than short-term loans.
Typically easier for a small business to acquire, term loans can be either “secured” if using a particular asset as collateral should the business fail to provide repayment, or “unsecured” if the lender approves the loan based off of credit history and reputation alone.
Lines of Credit
Working much like a credit card for your business, lines of credit are indefinite loans of a typically smaller amount when needed. As interest rates tend to be high, however, most businesses use lines of credit as a sort of emergency cash fund to use during times of unreliable cash flow, keeping the business going or purchasing assets when times are tight.
Not all loans have to come from banks. Through various forms of alternative financing, some lenders like cash merchants can dole out short-term cash loans when needed, but small businesses should be wary as not all such lenders are reputable, while interest rates tend to be steep – sometimes even 30-40%!
Peer-to-Peer Loans (P2P)
A recent trend made popular with the likes of Kickstarter and Indiegogo, P2P loans work a lot like crowdsourcing, with small collections of loans made by individuals, that are repaid through a percentage of credit card receipts. Helpful with amassing a small business “fan base” of loyal patrons, businesses should be careful though, as like alternative financing, interest rates can be high.
Working much like P2P loans and also made popular through the internet, marketplace lending goes beyond the individual to tap into insurance companies, hedge funds, family members, and other non-bank lenders – though again there are high interest rates.
What Lenders Look For
Curious what banks will be looking at and for on your records, and how to make yourself seem more reputable?
Make sure you:
• Have good credit history;
• Maintain a steady, positive cash flow (having more money at the end of the month than you started out with);
• Follow a business plan, putting your money to good use;
• Bring in loan documentation such as business tax returns;
• Possess collateral, like your home, car, or place of business;
• Have a history of paying debts on-time; and
• Are clear on clientele value, specifically how much profit they can bring your business.
Just like term loans aren’t the only option available to businesses, so too are there multiple types of lenders. Take your time, do your research, choose what’s best for your business, and if one doesn’t work, you can always try another!