If you're an entrepreneur with an excellent idea for a new businesses, you're definitely going to need funding to get it off the ground. And if you're already a small business owner, there are any number of reasons you might need a loan.
Fortunately, there are lots of different types of loans out there, meaning there’s surely one that will meet your financial needs. But because there are so many options, it’s important to do your research to find the loan product that will work best for you.
Here are five tips for sorting through these options so that you’re confident in your choice before you sign on the dotted line.
1. Broaden your horizons
When you think “business loan” do you automatically think “big bank,” too? If so, it’s time for you to ditch that notion and start thinking about alternative, online lenders.
Banks have very strict parameters regarding who they’ll lend to, and many small businesses simply do not have the credit history, liquidity, or financial strength to be able to qualify for a loan from a bank.
With the advent of online lenders, all of that is changing. Many small businesses are now able to apply for and receive financing. Online lenders offer a variety of loan products, from lines of credit to term loans to equipment financing, so there’s a great deal of flexibility there for borrowers to find the type of loan that best fits their needs.
2. Determine the type of loan that works for you
Because online lenders offer a variety of loan products, it can be difficult for a first-time borrower to navigate their options and chose the one that’s the best fit.
If you need access to cash immediately, there are certain loan products—like a business line of credit—for which you can be approved in a day or so. If you’re looking to use the loan to finance a particular purchase, on the other hand, an equipment loan might be the best fit.
Weigh the pros and cons of each offering and find the one that makes the most sense for your current financial needs.
3. Calculate what you can afford
Before you sign on for a business loan, you want to be sure you have a comprehensive understanding of how much the loan will cost you over its lifetime, and that you’ll have the ability to pay that back.
The first step here is calculating your Debt Service Coverage Ratio (DSCR) by dividing your monthly cash flow by your projected monthly loan payment. If the number is greater than one, you and your lender can rest assured that you’ll be able to comfortably meet loan payments.
The second step is to do a loan performance analysis. This allows you to understand whether the loan that you’re considering will actually be worthwhile for your business long term and not create bigger financial headaches for you in the future.
4. Understand the costs
Of course, when you’re considering a loan, you take note of the interest rate. But the costs associated with a loan are greater than just interest.
There are often a number of fees, from origination fees to closing fees to others in between, that will factor into the overall cost. That’s why the number you should be focused on is the APR, rather than interest.
APR stands for annual percentage rate, and it gives you a picture of the total cost of borrowing. Take a look at a business loan calculator to understand the full cost of a given loan product so you don’t encounter any surprises about your payments once you’ve already signed on.
5. Gather all of the materials for your application
Once you’ve considered all the pros and cons of each type of loan, it’s time for you to actually apply. This can be a daunting process because different lenders will ask for different information.
Lenders don’t want to finance a business that they see as too risky, so they’re going to ask to see a record of your company’s financial history, which might include profit and loss statements, bank statements, and balance sheet. It’s also likely, particularly if your business is newer, that they’ll ask to see your personal financial statements and credit score. Before you sit down to fill out the application, make sure you research which documents you’ll need and have them on hand.
There are a great number of financing options available to business owners, particularly in the ever-broadening world of online lending. This means that with a little bit of research up front and a solid understanding of your current financial situation, you can find a loan product that’s tailored to fit your business’s needs.