Thanks to the rise of alternative lending, small businesses are actually spoilt for choice when it comes to applying for small business loans. However, with so many alternatives funding options that are accessible, it can be very hard to understand where to start, leading some business owners to just accept the first offer that comes in their way.
To make sure you end up with a loan that works for your small business, there is more to keep in mind than the amount you have to borrow. Here are some of the major things to ask before applying for funding.
- Do You Qualify For A Small Business Loan?
Before getting a small business loan, we advocate that you ask the lender about their minimum requirements. Many will list the minimum required credit score, the cash flow required, and time in business and some other qualifying factors. Furthermore, many lenders offer online calculators that assist you pre-qualify your small business.
- How Much Amount Do You Really Need?
A lot of new business owners get excited when applying for a small business loans and end up asking for more than what is certainly required. Before approaching a lender, make certain that you have a good understanding of how much cash your small business actually want. The last element that you have to do is asking your lender for $70,000 and noticing that you really need twice of that amount.
- How Much Amount Can You Really Borrow?
The fact that you need a $100,000, it does not imply you make the grade for the full amount. Many traditional lenders will approve your loan request based on collateral against your resources. For instance, in case you plan to buy an equipment worth of $100,000, this doesn’t indicate that you will be able to borrow $100,000. A lender might lend you up to 75% of the value of new equipment. That is a $75,000 borrowing capacity.
- Do You Have Good Cash Flow To Pay Back A Loan?
Small business lenders will ask you to present business’ financial projections before offering you funding — this is a process called the debt-to-revenue ratio. A debt-to-revenue ratio is one factor that lenders usually measure a business’ potential to manage monthly payments and pay off debts. The debt-to-revenue ratio is measured by dividing the total amount of recurring monthly debt by gross monthly income, and it is articulated as a percentage. You need to make sure to include your debt repayment plan in your small business’ financial projections. If your projections display that you have very little scope for operation, you are in all likelihood to fright lenders away.
- Will The Funding Help Your Small Business To Grow?
In case you are going to borrow up to $50,000 to get yourself out of an oppressive scenario or to pay for running expenses, you are not using that loan to develop and you will find yourself in the same place few months from now. Each dollar you borrow need to be put into business.
- How Good Your Business’ Credit Score Is?
A couple of people understand that just like they have a personal credit score, a business has one as well. You may find your business credit score at Experian, TransUnion, or Equifax.
In case you are late paying your vendors, have any outstanding liens or debt against your business, then the credit score of your business is not going to be as wonderful as you anticipated it would be. Lenders will observe your business credit score, and it’ll fright them off after they discover some issues on your record.
- How Good Your Personal Credit Score Is?
In case you are wondering why would a lender examine your personal financial situation for a business loan, here is the reason why? Unless your small business has been running for years with terrific revenues, lenders will rely heavily on your personal credit score, personal credit card debt, mortgage payments and previous bankruptcies.
Don’t forget that each lender has special lending criteria. Make certain that you understand all the nitty-gritty facts before pursuing a small business loan as it can ruin your business.