6 Things to Know When Choosing a Small Business Loan

Unless you have saved up a lot of cash or found a perfect investor, you’re going to have to find another financing source. Stuff such as crowdfunding and incubator startups are legitimate options, but loans are by far more common. Although many businesspersons rightfully claim that loans should be avoided like the plague, this is mostly owing to their own bad previous experiences; in truth, there are many small business loan options to choose from, and if you pick the perfect one, it might just serve the purpose.

1. Know why you’re borrowing

This seemingly trivial factor is important for two main reasons: if you really think things through, you might find a better solution than getting a loan, for one! If there is any other way to obtain financing or if you have enough wiggle room to wait until you’ve earned the required amounts of money, do it!

Secondly, traditional lenders will likely require you to provide an in-detail explanation with regards to how you’ll be using the obtained funds – do you need the loan for business growth or simply as a compensation for unpredicted cash flow issues? Know your problem through-and-through if you want to get a loan.

2. Know your financial situation

You qualify for loans based on your place on the credit spectrum. In order to get introduced to your credit score, get a credit report from either one of the three major credit bureaus: Experian, TransUnion and Equifax. Bear in mind, however, that this is free only once per year.

For instance, in order to borrow from a bank (they tend to offer the least expensive loans), your score should be 680, at the very least! If your credit score is below this threshold, you should start considering other options.

3. Know how quickly you need it

If a loan does come through, but does so too late for the business opportunity you needed the loan for in order to thrive, you’ll be at a loss – obligated to pay off the borrowed amount at an interest rate, you will have gained nothing. It is, therefore, important that you clearly outline when you need your loan to come through. There are many options for fast business loans out there that allow fast approval, require more than a reasonable credit score and that will, generally, deliver much quicker than your regular bank.

4. Know how much you need

Saying that you need a loan for a small business is definitely not specific enough. For instance, according to the US Small Business Administration, or SBA, the median small business loan is around $660,000.

In truth, SBA loans may be as small as $5,000, but may also amount to as much as $5,000,000! When it comes to alternative small business lenders, they provide access to financing smaller than $5,000, and as large as $250,000.

It is evident that you need to know how much you actually need – options vary hugely.

5. Know whether you can make the payments

Loans aren’t something you should be taking leaps of faith on – if you aren’t 100% certain that you’ll be able to pay off a loan and meet your deadlines, don’t borrow it. Knowing whether you can make particular amounts in payments is also a crucial factor in choosing your loan type – always go with the option that is more certain.

As a rule of thumb, your total income should amount to at least 1.25 times the total expenses, and this does include the new repay amount. Here’s an example: your business’s income is $10,000 per month and your expenses, including the payroll, inventory and rent amount to $7,000. In this instance, you shouldn’t go north of $1,000 per month in loan repayment.

6. Know your documentation

Loans are very official business and will require proper documentation. Although this varies from lender to lender, you should prepare business and personal tax returns and bank statements, business financial statements and business legal documents, such as the commercial lease, franchise agreement, articles of incorporation, etc.

The thing with loans is you should really get to know them way before you’ve actually taken them out. Everything from the reason why you’re borrowing and the amount that you need, to your financial situation, documentation and how much you can afford should be a part of your knowledge, well before receiving that lump sum.