Written by: Guest | Best Company Editorial Team
Last Updated: February 24th, 2020
Guest Post by Emily Wilson
In order for any small business to get on its feet, it is often necessary to have some form of additional financing. This usually comes in the form of a loan. Specifically, small business loans are specially made for, you guessed it, small businesses just starting. When looking to expand our business, we need access to financials beyond our current means. Whether for new employees, materials, space, equipment, marketing, etc., the need is always there. Most new businesses start at around $10,000. But not all aspiring business owners have the financial capacity to single-handedly make everything take off. And that is where business loans come in — preferably low rate personal loans, adequate for us to manage while repaying. Naturally, not everyone will just hand us money and wish us good luck. There always seem to be requirements we need to meet in order to qualify for such a loan. Fortunately, most of those are quite straightforward, common, and sensible. Here are some of the most important requirements you’ll encounter when applying for a loan:
1. Loan scale
The amount that we desire needs to be conveyed to lenders clearly and is the first stop on our list. Every lender has a maximum amount of finances it is willing to provide. Traditionally, banks have the most capital and can issue loans north of six figures, but that does not concern us, yet. But if we need smaller amounts of money, which is typically less than $250,000 banks are not the best option to go with. Banks have the same fixed cost associated with servicing a $1 million loan and a $10,000 one. So logically, they focus on the former ones and are much more interested in making large loans. This is where alternative lenders such as OurMoneyMarket come in handy for smaller loans (under $500,000). These organizations make it easy, simple, and fast to apply for a loan. Because of those conveniences, they do charge higher interest rates than banks. These are short-term loans compared to loans that banks offer. So, while we could pay higher interest rates, we are holding to those loans for a shorter amount of time. Ultimately, it boils down to paying a few dollars less in interest.
Lenders always need to know what the loan will be used for. It may not be so obvious for us, but it is important for them, especially when it comes to legalities. The more data we provide, the better. If it is an equipment acquisition loan, specify what type of equipment it is. If it is for new staff, give an estimation of how many people you plan to hire, etc. The list of uses for a loan seems to be endless— funding projects, refinancing existing debt, fixed capital acquisition, and many more. Lenders want to make sure that the amount aligns with the purpose of it. For instance, if we are a single-story company it is a little suspicious to take a multimillion-dollar loan for office supplies. Clearly stating the purpose also helps us plan out our debt. We will have to pay it back eventually, after all. This is one of the first steps one should consider when looking at taking out a loan and arguably, the most important one.
3. Personal and business credit scores
Applying for a loan, personal or business related, can be a very personal ordeal. We will be asked by the lenders for our credit history. Also, financial information will have to be provided to assess the probabilities for us not paying back our loans. Lenders would be negligent if they didn’t do their due diligence. These scores determine the likelihood of a loan approval as well as the interest rate. But, if we are applying for a business loan, why are personal scores taken into account? It is because our ability to handle personal finances also reflects on our responsibility in business. This is especially important when the company is only starting up and does not have a long track record. There is not much to go on, other than the founder’s personal credit scores. The better our personal score is, the more options will be available to us, at lower interest rates. And if it is not at an optimal level, you can improve it in just a few months.
4. Industry and niche
When applying for a loan, small businesses will be asked to identify the industry in which they operate. The industry will dictate loan eligibility and interest rates because every industry has different risk levels when it comes to investing. Some lenders will not even consider lending to certain industries. Adult and firearms businesses are among those at the top of the usual blacklist. Lenders have their reputation to protect and might not find it suitable to do business in such industries. And if they are willing to bend a few rules, the terms and conditions will most likely not be favorable for the loan seeker. Clearly defining the our niche is paramount. Failing to do so might delay the application, or even cause it to be denied by mistake.
Acquiring a necessary business loan can, at first, seem intimidating. It would be so simple if there were a one-size-fits-all solution. But that is never the case, especially with something as important and finicky as investing in our company through loans. All of these factors are taken into account by any lender. They are considered carefully and a decision is made based on the total picture, strengths as well as weaknesses. By preparing ourselves accordingly we maximize our chances for a more favorable deal, which will benefit us in the future.
Emily Wilson is a business psychologist with a passion for finance. Researching, exploring and writing are her favorite things to do. Besides that, she loves animals, music and traveling.