Small businesses have exploded in recent times. The pandemic has forced many to reevaluate their career choices and has given many the time and push they need to start their own business. If this is you, and you are looking to acquire a loan for your small business but find yourself confused and frustrated by the process, this guide is for you. Here is everything you need to know about small business loans.
How To Qualify
There are a few standards you will need to meet to qualify for a loan, and we give you here a detailed insight on how you can achieve them.
Personal Credit Score
Your personal credit score is usually the first thing potential lenders will look at. Your personal credit score is more important if your business is new and this is your first business loan application. With a new business, lenders cannot tell how well you manage business debt. By looking at your personal finances, they can gauge and gain an understanding of how well you manage money.
If you don’t keep track of your credit score, you may want to start. A missed bill can affect your credit score even if it was accidental. By keeping track of your score, you can ensure that everything on your record is correct and up to date.
Lenders will often have a look at your business’ history. The longer you’ve been in business, the better your chances of being approved. Demonstrating to potential lenders that you can survive the baby stages helps them see that you are committed and more likely to stick to your business plan.
As well as your personal credit score and how long you’ve been in business, you also need to show how much revenue you’re bringing in. You will need to illustrate that you can meet the minimum repayments. To demonstrate this, best ensure you have professional accounting done, so you can easily show this to lenders. The more revenue you’re bringing in, the more chances of being approved. Still, you shouldn’t let this stop you if you think that your business isn’t quite there. You may want to shop around and make detailed comparisons, as advised by specialists at Nav matching small businesses with financing, since doing it this way can help you find the right loan for you. There are a variety of loans out there catering to all kinds of business’ and situations.
This refers to assets you are willing to put up to secure a loan. By using assets, your loan will be a secured loan, which is an advantage as they tend to have lower interest rates than unsecured loans. Of course, putting up your assets comes with risks, and you will need to assess that as well. If you are unable to repay the loan on time, the assets used as collateral will be taken and sold. The money made from this is then used to pay the loan.
Examples of assets that can be used as collateral include your car or house. If your asset has outstanding loans such as a mortgage, this can still be used as collateral. In this case, the bank will take over the mortgage and claim the title.
Type Of Loan
When considering a loan, you want to understand the different types being offered to ensure you opt for the best one for you.
Term loans tend to be the most popular type. This is a standard loan where a lump of money is borrowed for a set amount of time, with interest accruing over that time at a fixed rate. You will make monthly payments on both the principal and the interest. These are popular as they are pretty straightforward. You will usually receive a pretty significant amount of money for a long period, with fairly low-interest rates. However, to receive a term loan you will usually need to meet pretty high standards.
Short-term loans are also available; these are similar to the term loan but the amount of money that can be borrowed is usually less and is over a shorter period. As the term is shorter, you can end up paying less interest, although the rate can be pretty high, so this depends on each lender. Approval tends to be quicker and easier than with standard term loans. You are also able to receive your money pretty fast which is great if your business needs a quick cash injection.
It’s worth bearing in mind that some lenders may charge you a fee if you end up paying your loan before the end of the agreed term. This is because they are losing out on the interest you would have ended up paying.
Business Line Of Credit
A business line of credit is like a credit card for your business. You are given a pool of funds that you can withdraw from whenever you need it. You only make repayments on the money taken and interest on the sum you’ve used. A business line of credit is great to deal with temporary cash flow issues, accessing more capital, or emergencies.
The terms and interest rates are a lot more flexible, and it is a good way for your business to build up its credit score. Most business lines of credit will automatically renew once you’ve repaid. However, not all will, and you may need to reapply each time. As long as you have payments on time, this shouldn’t be too difficult.
Merchant Cash Advance
Merchant Cash Advance (MCA) is not exactly a loan but is pretty flexible and simple. This is similar to the line of credit without the involvement of banks. MCA’s can also be approved in around a day or two. There is no collateral involved and no repayment schedule. MCA’s are repaid through a small percentage of your revenue being used every month to make repayments until the loan is paid off. The advantage of this is that if your business is having a slow month, your repayment amount will be less.
When choosing a loan, assess your needs and current circumstances. How much do you need and what for? Being able to clearly define your ‘why’ will help in persuading potential lenders. Do some homework around what terms work best for you and the advantages of each type for your particular business.
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