There are 28 million small businesses in the United States alone. Many of these businesses will require a loan at some point, be it to get started, purchase equipment, or to help keep their doors open. Whether it is a brick and mortar business or completely online, it does not matter. Almost every successful business has taken out some sort of business loan for various reasons. Regardless of why you might need a business loan at the moment, there are six questions you should ask yourself before starting the loan process to increase your chances of being approved, and find out if you qualify for a business loan.
Here are some questions to ask when considering a business loan
1. What is My Credit Score?
A credit score is a number that is given to someone based on their past credit history. If your credit score is 670 or above, then this is considered a good credit score and you will be more likely to be approved for a business loan. If it is below 670, there probably is a reason for it. You may have a poor credit score because you are occasionally late on payments, or perhaps you have a high balance on one of your credit cards. It’s generally good to have an idea of your credit score before you fill out an application for a business loan. And if your credit score is low, there are certain things you can do to build it back up. It may take a bit of time, but approaching a bank or other financial institution with a good credit score will be able to give you some leverage when asking for that business loan.
2. What Type of Business Loan Do I Need?
There are numerous kinds of business loans so knowing which one you want can simplify the process. Listed below are some of the more common loans that many business owners will be seeking.
Line-of-Credit Loan: You can use this loan for purchasing inventory, operating costs, working capital, or a variety of other reasons. However, you can't use it to purchase equipment, construction on your store, or anything like that. It is a short term loan that is meant to be paid back quickly. Because of this, the interest rate is usually lower. A constant credit line is something that most businesses can use.
Installment Loan: Probably the most common type of loan, an installment loan is one where you receive the full amount from the bank or other financial institution and in return you make monthly payments to pay off both the principal and the interest. The payments may last anywhere from a few years to ten. It all depends on how large of a loan you need and the monthly payment you can make each month.
Personal Loan: A personal loan is made to individuals, but you can still attain one to help out your business. You might have received personal loans in the past at various times for purchasing a car and other similar items. For a business, you could use the loan for your business but the loan would still be under your name personally.
Some recommended business loan solutions:
LendingTree is a respectable company that can get you that personal loan you want. However, only use them if you are serious about acquiring a loan quickly. Once you fill out their application, you will be contacted by numerous lenders wanting your business. Being able to play them off of one another so you can get the best rates would be ideal.
LendingClub is another online company that can assist you in finding a personal loan. They can offer personal loans up to $40,000. LendingClub will offer you good rates as well if your credit score is on point. It only takes minutes to fill out the application and could well be worth your time.
- Reputable marketplace with solid customer service
- A lender network of over 30 lenders and partners
- Multiple types of nationwide funding
- Get help from a loan representative
3. Do I Have a Business Plan in Place?
Before you will even be considered for a loan, most lenders and financial institutions will want to see a business plan in place. They want to know that you are approaching improving your business in a tactical manner. If you don’t know the first thing about making a legitimate business plan, you are in luck. There are free programs online that can assist you in creating a business plan. It does not have to be overly complicated, but you should make the effort to prove to the lender that you have a thought-out plan for how you will use their money. Walking in and asking for a business loan without a solid plan in hand is like showing up for an exam without studying - not a good idea.
4. Do I Have Collateral?
Collateral is something you will forfeit to the lender if you do not pay the loan back within the determined timeframe. The collateral is usually something that is worth equal value to or more than the amount you are borrowing. If you don’t have collateral, it could be more difficult to acquire a loan. Are you willing to put your car or house up as collateral to receive the loan?
If you do not feel you have adequate collateral, a cosigner on the loan could be able to help you out. This person would legally have to pay the amount of the loan if you ever default on it. I’ve seen times where the cosigner has been left to pick up the pieces and has had to pay the rest of the loan back. If you need a cosigner, choose wisely. The pressure of the situation could end a relationship if things go south.
5. Will I Receive a Good Interest Rate?
The interest rate on your business loan could make or break you. A high-interest rate could leave you with a monthly payment that doesn’t fit in your budget. Even one percentage point could potentially raise your monthly payments by hundreds of dollars. To get a lower interest rate, you will have to have patience and shop around. Using a marketplace to search for a loan is a good way to receive offers from multiple lenders, so you can compare the best rates. Don’t settle for the first business loan that is offered your way. As with most things, it’s good to shop around. A comparison site like Lendstart will help you become familiar with the lenders available.
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6. How Much Money Do I Really Need?
When figuring out the loan amount you need, you have to take all things into consideration. You want to ask for enough so you don’t have to take out another loan in a few months, but you don’t want to ask for too much that will bury you in steep monthly repayments. Determine the correct amount that is right for you to borrow based on what you are trying to accomplish. Once again, if you have a strong business plan in place, it will assist you in coming up with the numbers so you can budget wisely.
Be Prepared and Think Positive
If you believe this loan could make your business a success, then you should go through the steps needed to acquire it. You owe it to yourself and your business. Don’t put off asking for a business loan just because you don’t think it will go through. There are also a number of great free tools where you can fill out a short questionnaire to see if you would qualify, such as LendingClub. If you think there is a chance that you may not receive the business loan, try your best to avoid getting rejected. You may just be pleasantly surprised with a loan that has great terms and will not affect your bottom line all that much.