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Important Things to Know Before Choosing a Business Loan Company

McCall Martin
McCall Martin | Senior Editor

Do you dream of becoming your own boss? Or perhaps you’re already your own boss and want to expand your company. Those daring enough to take the plunge and apply for a business loan will find it can sometimes be a complicated process. To find a loan that fits your company, consider all the factors you’ll encounter when applying. Here are a few helpful things for you to know when looking into business loan providers:

Understand various loan types and lenders

Finding the right loan for your business is a daunting task. There are a plethora of business loans, each with unique aspects and requirements, such as loan amounts, minimum credit score prerequisites, and repayment terms. Keep in mind all the factors that could affect your loan such as personal and business credit history, sufficient collateral, profitability, and cash flow. However, don’t let this discourage you. Don’t be afraid to ask questions and look around until you find the right lender and loan. Make sure to ask your lender what financing options they offer and what types of loans will best help your business. The most important thing is to find a loan that will best benefit you and your company’s needs.

Financing options can vary from a merchant cash advances to business lines of credit to commercial real estate loans. Each type will require research on your part to determine if it's right for you.

Prepare to answer questions and provide proof

Lenders will want to know everything about your business. Take the time to tell them about your business, clients, and industry. You can also share how you plan to spend the loan money and where you want to be in the next 5 to10 years. Additionally, be sure to bring any documents that can speak to the credibility of your business, including business and personal credit histories, business plans, proof of collateral, bank statements, tax returns, and any other legal paperwork.  

Be patient

Imagine that you filled out your business loan application a few months ago and have been waiting to hear back about the decision. However, the lender calls to inform you that your business loan was rejected. This news would bring anyone down and cause them to feel discouraged. In fact, this is the case for many people attempting to get a business loan.

Some people never even figure out why their application was rejected. Sometimes it can be that your business involves too much risk or there wasn’t a clear business plan. Most of the time it is something that can be changed and fixed. Before you submit another application, make sure to revisit all aspects of your business proposal to make sure they meet the requirements. 

Explore all of your options

Traditional bank loans are probably the most common choices you'll explore when starting to apply for loans. However, just because they are one of the most common financing options doesn’t mean that it is the best fit for you and your company. Finding the right business loan company takes time and patience, so be prepared to shop around. Focus on lending options and companies that are best suited to your current needs. 

Know what lenders will look for

Be aware of the following items that a lender will look for in your business loan application:

Personal credit score —Your personal credit score plays a key role in whether a lender decides to grant you a business loan. Lenders want to try to guarantee that you’ll make your monthly payments and pay back the entire loan. A personal credit score allows lenders to make a judgement call about whether they’ll approve the loan. Generally, most lenders prefer a credit score of 700+, but there are exceptions.

Amount of time in the business industry — Lenders will consider how long your company has been operating. Most lenders require that your company be in business for 1–2 years before they’ll consider you for a loan. 

Collateral — Before giving you the loan, lenders will want to know that they’ll have something tangible to sell if something goes wrong. Collateral can be a car, real estate, work equipment, cash, accounts receivable, or other assets. Lenders tend to undervalue collateral as it lessens the risk they have to take. Undervaluing the collateral requires a borrower to provide more assets to secure the loan.  

Get familiar with common business loan terms

  • Accounts Payable — Can also be referred to as “current liability.” Accounts payable is the amounts owed to a certain vendor or supplier.
  • Accounts Receivable — The money that is owed to your company. This is based on the services or goods provided to a customer.
  • APR — Stands for the Annual Percentage Rate. The APR not only takes interest into account but any other fees to measure how much your business loan will cost you each year.
  • Blanket Lien — Agreeing to a blanket lien gives a lender the right to seize you or your business’s assets (in any form) if you fail to pay off the debt.
  • Collateral — Collateral is a tangible asset that is valuable to you or your business. If you fail to make the loan payments, the property that you signed as collateral will be given up to your lender.
  • Consolidation — Paying off multiple debts with the funds from one loan.
  • Entity Type — Every business must declare an entity type. This ensures that businesses operate within the correct laws.
  • Fixed Interest Rate — The interest rate will not change during the entire lifetime of the loan.
  • Insolvency — A state of not being able to repay your debts.
  • Lien — Using something you own as a guarantee to repay back your loan. If your lender takes out a lien on your car and you don’t pay back your loan, the lender has the right to take your car.
  • Line of Credit — Functions like a credit card. You will be given an extended line of credit where you’ll be able to spend up to that credit limit. Then you will have to pay off whatever you spent.
  • Long-Term — Any debt that will be paid back in more than one year.
  • Principal — Refers to the original size of your loan.
  • Refinancing — Paying off your debt with a new loan. This is done to save on interest.
  • SBA — Small Business Administration, a government agency to help smaller businesses secure financing.
  • Short-Term — Typically refers to debt paid off within one year. However, there are a few lenders who allow short-term repayment intervals of up to two years.
  • Subprime Borrower — A borrower who has a credit rating below normal. Usually, subprime borrowers are charged a higher interest rate.
  • Unsecured — A loan that doesn’t have any collateral. This type of loan can be tricky to qualify for because the lender doesn’t have any way to recover their losses if you don’t pay back the loan.
  • Variable Interest Rate — Interest rate that will vary as the market changes over the entire lifetime of the loan.
  • Working Capital — Current assets minus current liabilities.
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Business Loans Frequently Asked Questions

What types of business loans are there?

Depending on the company and industry you’re in, there are various types of loans. Each loan lender will specialize in different kinds of loans, and not all of them will be right for your company. Some loans are customized for startup companies, seasonal companies, companies that need equipment, companies that want to increase their working capital and more. Reading business loan reviews and talking to these companies personally will help you determine which loan options are best for you.

Why should I get a business loan?

While loans can be risky, they can also benefit your company. You can get a business loan for a variety of reasons: 

  • Hiring more employees or hosting more customers — Some businesses are ready to expand and this requires a new building site or multiple locations. Lenders see this as a positive sign as it usually means business is going well, and they are more likely to approve your loan.
  • Purchasing new equipment — Taking out a loan to purchase necessary equipment will improve the quality and service of your company.
  • Boosting inventory — It can be challenging to purchase inventory before you’ve made any profit. To compensate, companies will take out a small loan to stock their shelves and pay it off using the profits earned from sales. 

How can I increase my credit score and qualify for larger loans?

Many small business owners choose to take out smaller, short-term loans. Consistently making on-time payments will build your business’s credit score and credibility, making it more likely for you to qualify for larger loans in the future. You can always talk to lenders to decide if taking on smaller, short-term loans would be better for you or if it would benefit you more to take out larger, long-term loans. 

How long does it take to get a business loan?

This can depend on a number of factors, but don’t expect to walk out of your lender's office with a handful of money on day one. Assuming all documents are correct and present, it can still take weeks or months for business lending to be accepted. Research each lender’s application and approval process before taking out the loan, just in case it takes longer than you thought. 

What’s the difference between a bad business credit score and a thin business credit score?

A business credit score is based on various factors, including your payment history, bankruptcies, liens, etc. A bad credit score shows that you have failed to make your scheduled payments, otherwise known as payment defaults. Whereas, a thin credit score means you don’t have a sufficient amount of business credit history, making it hard for lenders to determine creditworthiness. In both cases, it can negatively affect whether you get the loan. 

How can I fix my bad/thin business credit score?

Fixing your credit score will take some time, but there are several steps you can take to improve your credit. Be aware that it could be a while before you see any drastic results. 

First, pay all your bills on time or, even better, pay them early. A late payment will lower your score, and it only gets worse the longer you leave it. Second, be on good terms with your vendors. Your suppliers can make a big difference in your credit score. Some vendors will report your on-time payments or early payments to credit bureaus, which will raise your credit score. Another tactic to fix your credit score is to open more than one credit line.

Or, you may want to try getting a secured credit card. Secured credit cards allow you to set up a security deposit that acts as collateral. If you put down a $500 security deposit, your card limit is $500. Making regular, consistent payments to this card will positively affect your credit report. Last, keep your personal finances and business finances separate. A simple way to do this is to open two separate accounts, one for business and one for personal. 

When should I look into online lenders or traditional lenders?

Some experts consider online lenders more capable of evaluating small businesses that deserve funding, discouraging bank loans because of the lengthy application time, avoidance of small loan amounts, and avoidance of any potential risk.

Consider applying online if you need a faster loan or if you are a fairly new business; online lenders are much more likely to take a chance on you.

However, because bank loans require thorough proof of profitability, traditional lenders are more comfortable lending larger amounts with lower rates.

What is the best business loan company for me?

First, identify what your company needs. If your company is looking to expand and needs business financing, don’t apply to a loan company that focuses on equipment financing. The best thing small business owners can do is take the time to find the right lender. Reading business loan reviews, calling and asking questions, and reaching out to those who started their own businesses will help you find the best lending option for you. All business loan lenders will have different requirements and qualifications, so taking the time to conduct your own research is key to finding the right business loan company.

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