Applying for a business loan is a significant step in the financial realm. One can’t merely just pick up the file of financial documents and start filling the online application. As a business owner and a borrower, you have to consider your lender options, types of business loans, eligibility criteria, fees, various other factors. Let us review all the main points that one must acknowledge before applying for small business loans. We are determined to make this process as easy as possible for you!
For starters, let us revisit the mechanics of a small business loan. It is an amount lent to the borrower by the lender and the borrower signs a contract stating that he or she is obligated to make timely payments, including the interest and failure to do so might result in adverse financial consequences. Your lender can be a traditional, alternative, or from a marketplace or the Small Business Administration. The lending criteria of each lender differ from the other one!
Each lender is offering the same types of small business loans. If business managers need the extra cash flow, they can apply for working capital loans for any type of lender. Likewise, you can get a large sum of money to update your gadgets from alternative, traditional lender, or the SBA. So, if all lending companies are offering every type of business loan, how can I choose among lenders and make a wise pick?
As it is said before, the loan criteria of every lender are different. To explain the point, the alternative lender can offer the loan to a small business with a poor credit score, but banks are hesitant to fund startups and businesses with a bad credit score. Due to this risk factor, the traditional lender has relaxed eligibility criteria and low-interest rate. On the other hand, the alternative lender takes a leap of faith and funds businesses with a bad credit score, however, those borrowers have to pay a higher interest rate and follow a strict repayment schedule. Moreover, the latter provides funds faster than the former.
Be mindful of the factors such as financial need behind a small business loan, interest rate, Annual Percentage Rate, loan amount, repayment schedule, early payment fee, hidden costs, and all the internal fees, when choosing among lenders and business loans. To help you make a sound decision, let us explore the four most-asked questions regarding small business loans.
Prevalent Questions about Small Business Loans
After going through the answers to these questions, we are certain you can get rid of the remaining confusion regarding small business loans.
Which is the best option: an online lender or a traditional bank?
It all depends on the age and the financial position of your small business. For new businesses or businesses less than two years old, an alternative lender is the best funding option. As the cash flow is inconsistent in the early days, so private lenders can fund your business, but you have to pay a high-interest rate. Another plus point of the alternative lender is that you can easily fill their loan application just by sitting on your lounge sofa, and funds will be in your bank account in three to four business days.
So, if you prioritize ease, fast access, and security over low-interest rate than pay a virtual visit to an alternative lender.
What documents do I need to qualify for a small business loan?
Lenders look for the five factors such as collateral, CFS (cash flow statement), credit score, business tax return documents, and your ability to make the payments on time. A credit score of 700 gives you access to any small business loan, and most importantly, with a payment term of your terms.
If you explore the other scenario, meaning if you have a credit score lower than 500, a co-singer would increase your chances of approval. A co-signer is someone who understands your business as much as do and is willing to make the business loan payments in case you fail to do so. Make sure your potential cosigner has a financially stable business and has been running a stable business for at least two years. With this guarantee, you can easily secure a business loan.
How can I use a small business loan for the betterment of my business?
You can use, a small business loan for multiple reasons, from using the funds to cover the mandatory operating cost of putting some cash aside for a rainy day. Only a few traditional loans come with the restrictions on the usage of the funds. Other than that, a borrower has complete autonomy over the loan usage.
You can use a small business loan in the following ways:
- Hire and train and employees and cultivate healthy company culture.
- Repair the broken machine or purchase a new one to stay ahead.
- Spend some funds on the branding, marketing, and advertising of your product or services.
- Hire and professional and launch a website.
- Stock up on inventory. Pay the rent of the building or use the funds to cover the salaries of the employees.
So, a borrower can use a small business loan can cover any type of financial need.
What is a Merchant Cash Advance and a Business Line of Credit?
If you run a retail store, then apply for a merchant cash advance rather than a business line of credit. A merchant cash advance is the lump sum of the cash offered to the borrower by the lender. In technical terms, a merchant cash advance is not a loan as the lender takes a small percentage of cash from the future credit card sales of the borrower. If you have a low credit score, you can still apply for a cash advance. Cash Advance lenders are only interested in consistent cash flow.
Secondly, a business line of credit is revolving credit and lender can withdraw cash from his or bank account depending on the fixed and agreed upon amount. Revolving credit means if the borrower makes the payment including the interest rate, the account recharges to the original amount. You apply for a loan, use the funds, make timely repayments, and the funds are there for you to use again. It is a vicious cycle that keeps on going.
So far we have covered four main questions that might be in the mind of the borrowers. Before signing the contract, go through all the major points, and ask questions from your lender to get rid of any confusion.
Merchant Advisors is striving to make the funding experience easy for small business easier. Head over to the official website, and apply for a small business loan. For more information about financial documents and tips and tricks to get the most ideal funding, follow us on Facebook and Twitter (@Onlinecheck). If you have any question, feel free to call us on our toll-free number at (833) 827-4412, our loyal and keen financial advisor will answer your every question and guide you throughout the way.