Tips and Guide for Choosing a Small Business Loan

Small Business Loan Tips

Small Business Loan Tips

Every business will eventually need to seek out financing. There are various reasons why small businesses will need to take out a loan. One reason is fixing cash flow. Another possible reason is expansion. Whatever the reason, what’s important is that entrepreneurs know how to choose the best short term finance solutions when the need arises.

1. Know Your Options

The first step is to learn what options you have. There are various options available for your business’ long term and short term finance needs. Each one has its own set of advantages and disadvantages. Weigh these attributes and decide which one is perfect for your needs or circumstances.

It’s a good idea to learn about your options at a time that you don’t need them. This gives you time to understand each option with a clear mind. Researching about your loan options during times of stress could lead to bad decisions. Picking the wrong loan could worsen instead of improve your business’ finances.

Another advantage of learning about your choices in advance is being able to respond quickly to emergencies. You already know which loan to take out when you need to. All you have to do is grab your documents and make the application. You get to solve your business’ cash flow woes in lesser time and stress. Learning about your loan options in advance helps you avoid surprise charges as well.

2. Determine the Purpose of Your Borrowing

You should determine early what you need financing for. Knowing the purpose of your borrowing will help narrow down your options.

If you want a flexible line of credit for your small business, you might need a revolving credit line. This credit line allows you to partially draw financing out of your total allowable credit. This allows you to borrow only what you need while ensuring that you still have enough credit to draw on when necessary.

On the other hand, business loans are ideal for addressing immediate needs. Equipment financing lets you borrow money to purchase vital business equipment. The Small Business Administration’s 7(a) loan provides financing to invest in real estate, or to refinance existing debt.

This is also a good time to consider if you have assets you could use to secure financing. This improves your prospects. You could secure financing with accounts receivables or pending invoices from your customers. You could get approved for a loan faster when you have collateral to pledge.

This step also helps you decide whether or not to take out a loan. For example, you can decide not to seek financing to purchase equipment when you determine that your current gear is still serviceable.

3. Populate Your Options

A good consumer looks at many options before he commits to a purchase. Similarly, entrepreneurs must look at every option and gather as many choices as possible.

Fortunately, the Internet makes detailed research more convenient. Make sure to find time in each work day to visit lenders’ websites and look at the specifics of what they offer. You could allocate an hour to look at, at most, three lenders’ profiles every day.

You might also want to create an Excel file containing information about each of the lenders that you have profiled. You could use this spreadsheet to record contact information, snippets of product information, and which situations they could potentially help you out. This Excel file will prove to be a very useful reference when the need to get a loan arises.

4. Ask the Lender Questions

Research is key to education. Research also requires one-on-one conversations with the lender as well. Conducting an interview with a potential lender gives you the opportunity to know more about their financial products.

Make the most out of the conversation by asking essential questions about business loans. These questions could include the following:

  • How much interest do you charge per annum?
  • How often do you expect me to pay the amortizations?
  • Do you report my standing to the business credit bureaus?
  • How fast can you release the funds that my business needs?
  • What payment methods do you accept?
  • What are the penalties involved for late payments?
  • Can you tell me about your past and current clients?

The question about interest per annum is the most important question among these. Knowing your interest rate can help you decide if the business can service the loan. Asking about the schedule of payments also makes sure that you don’t miss out on payments. This is crucial since your business has to maintain good credit standing.

5. Gauge Their Customer Service

Lenders must have a 24/7 customer service. It is a sign of their commitment to making sure that their borrowers are satisfied, and that inquiries are addressed promptly. Technologies like automated chats allow them to maintain customer service around the clock. This chat bot can take care of frequently asked questions, but a real agent must also be available to answer questions.

Check out each lender’s website and see if they have a direct number to their customer service team. Make a call, and ask questions. A good customer service representative will demonstrate a thorough knowledge of their financial products. They should also exude a professional yet pleasant demeanor. In other words, they should be able to make you feel comfortable talking to them.

Gauging a potential lender’s customer service quality is important. It is these people who will be dealing with you once you commit to a loan with the provider. You should find conversations with their customer service team a pleasant and satisfactory experience. If their team gives off unpleasant vibes, maybe it’s a sign to try the other lender on your list.

6. Check Reviews and Testimonials

Lenders must also have positive reviews and testimonials aside from a solid customer service. Their official website will have these information published on a dedicated page. However, it’s also important to weigh these reviews against testimonials in third party websites.

Reputation management is a big thing for businesses. Lenders will want to publish only positive reviews on their website. Unfortunately, that severely limits your ability to measure that firm’s trustworthiness. That’s why there are many websites that allow people to post both positive and negative reviews of any service or company. It gives consumers a third-party perspective from which to base future decisions.

Take the time to read over as many pages of reviews as you could. Be meticulous. It’s a good idea to practice a sense of detachment when reading these testimonials. Exercise your sense of judgment because each person’s perspective on the subject vary. Due diligence should help you separate the wheat from the chaff accurately.

7. Determine How Much You Need, and How Much You Can Pay

Sit down and list down what you need to loan for. Calculate how much you need to borrow. Don’t allow yourself to borrow more than what you need. You could end up losing money in the long run by loaning too big an amount. On the other hand, loaning too small an amount might lead you to taking out another debt. Both of these will have adverse effects on your cash flow.

You also need to measure your actual cash flow and calculate if you can afford the loan and the accompanying interest rate. Take your time on this. Get together with your accountants and go over your financial documents. Your goal is to peg down how much in monthly payments your business can afford. You can then decide on how much you should loan from your lenders.

What you need to find is the loan that covers enough of your needs and is not too expensive to repay. You won’t be able to accurately identify your options if you don’t know the exact amount you need, and how much you can afford to repay. You also get to preserve your cash flow as well.

The Bottom Line

Providers of small business loans are very numerous. Most of them are found exclusively online, and there are enough of them to occupy a week of your time researching. The trick to choosing the right one is doing your due diligence. You should look at each option and see if what they are offering are ideal to your needs.

It’s important as well to conduct your research at a time when you don’t need a loan. This widens your horizons, and gives you enough time to learn about your options. Bear in mind that stress is a huge factor for mistakes. You could end up borrowing from the wrong lender or taking out the wrong loan when you’re pressed for time.

Researching loan providers when you don’t yet need one also helps you populate your options. You’ll know which lender to approach, for instance, if you need invoice financing. You’ll also know which the best equipment financing company is when the need arises.You become a better informed businessman in this context.

Loans are inevitable for small businesses. Cash flow limitations and the need to scale up are but two of the reasons for an entrepreneur to borrow money. Loans could tie down a big part of your cash flow, so choose your lender wisely.

Follow the tips above and you should find it easy to pick the right lender for your needs.

About Aditi Singh 214 Articles
Aditi Singh is an independent content creator and money finance advisor for 5 years. She is recently added with Investment Pedia. Internet users are always welcome to put comments on her contributions.

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