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Is a Small Business Loan Right for Me?

Ask yourself these 10 questions to decide if now’s a good time to apply for a small business loan.

Loan Advice October 20, 2015

According to a recent financial report from the National Federation of Independent Businesses (NFIB), nearly a third of small business owners borrow on a regular basis. These companies are obviously comfortable using loans to fund cash flow gaps, but the report also showed that 57-percent of businesses do not want a loan.

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If you’re reading this article, you’re likely part of the other 10-percent. You’re not against taking out a loan, but you also don’t regularly borrow. To decide if a small business loan is right for you, we recommend asking yourself these 10 questions.

1. How long has your business been around?

You won’t qualify for a small business loan if your company is less than four months old. Most loan providers require a business to be somewhat established. If yours is still in its infancy, you might be better served by a startup loan or an angel investor.

2. Have you considered loan alternatives, such as cutting costs to increase profits?

Loans aren’t a “one size fits all” solution and there may be a loan alternative that works for your company. We’re not saying that a loan should be your last resort – many businesses use loan money to fund projects that ultimately make them more money in the long run. That said, try these alternatives on for size:

  • Increase profits by cutting costs. I’m sure you analyze your expenses and make smart decisions with that data. If you knew you were wasting money, you would have already stopped. But maybe there’s something you missed. A certified audit can be a useful way to get a new perspective on your company’s finances.
  • Avoid making mistakes that lose you money. Consider tightening up your business plan with a clearer focus on your target market and competition.
  • Re-invest more money into your business. You might be the best loan provider for your business. See if you can move some money around and invest in your own company.

If these changes don’t net you the cash you need …

3. Have you looked into government funding or grants?

Here’s how you should prioritize your search for a small business loan:

  1. Government grant – Back in college, you probably applied for a few scholarships. This was free money that you didn’t have to pay back. That same thing exists for businesses. Grants are worth looking into.
  2. SBA loan – These are loans guaranteed by the Small Business Administration. They tend to have lower interest rates than other kinds of small business loans.
  3. Microloan – Non-profits in your community probably offer microloans to struggling local businesses.
  4. Traditional bank loan – If your business credit rating is high enough, a traditional bank loan can be a good way to get money for your company. It’s not as ideal as the options listed above, but your loan will likely have lower fees than if you used a merchant cash advance.
  5. Merchant cash advance – If you can’t secure the loan types listed above, then a merchant cash advance will likely be your best option. You pay back this kind of loan bit by bit with your future earnings.

Don’t get discouraged as you go down the list. Chances are you’ll be able to find a source of funding from one of these options. Lendza has information about a dozen different loan types. So, there’s likely a fit for you. We can help you find it.

4. How will borrowing money help you make money?

Too often, small businesses reach out for funding before they prepare a budget for paying back the loan. That’s bad business. For a loan to be useful, you will need to use the loan money to make money. Otherwise, you won’t be able to pay back the loan.

5. When will you be able to pay the loan back?

If you rely on the loan provider to tell you when you should repay the loan, you’ll risk agreeing to a loan term that isn’t right for your company. So figure out your ideal loan term before you apply. Then, try to find a loan provider that can match your timetable.

6. How much interest can you afford to pay?

Whatever you do, don’t be overly optimistic about paying back your loan. This is what gets people in trouble. You don’t have to plan for the worst, but you definitely need to plan.

Your loan payments will be an extra expense every month until you’ve repaid the loan. How much can you afford to pay each month and still be able to keep your business afloat? Figure out that number and borrow accordingly.

7. Do other businesses in your sector take out small business loans?

Some businesses couldn’t survive without borrowing money. Most retailers don’t make money until the end-of-year holidays. Most new restaurants take four to five years to pay back what it cost them to open. Without loans, many businesses simply couldn’t survive. Find out what the norm is for your industry.

8. Are you in the process of paying back a loan right now? (Do you already have a business line of credit?)

Small business loans aren’t as regulated as other types of loans. That means if you don’t use a bank, your loan provider might not check to see if you’ve already taken out a loan. So it’s your responsibility to figure out if you’re already have too much debt.

9. How’s your credit score?

A higher credit score usually means a lower interest rate for your loan. The opposite is true, too. If your business suffers from a bad credit rating, then you will likely have to pay higher fees on your loan. Fortunately, there are ways to increase your small business credit score:

  • See if your vendors are reporting your payments. If they are telling the credit reporting agencies good things about you, your rating should rise.
  • Pay off your business credit cards, but don’t cancel them. The more credit you have available to use, the higher your score should be.
  • Know what affects your score. Your business credit score is different from your personal credit score. It’s based on factors like payment habits, credit utilization, number of trade experiences, your business size, and the amount of time your business has been around.

Meet with a financial advisor to figure out more ways to improve your business credit score. A higher score could save you a lot in interest payments throughout the life of your loan.

10. What’s your plan B?

We’ll do everything we can to help you find a small business loan provider. But we do not guarantee you’ll get a loan. Have a plan B in case you don’t. The longer you wait to admit the money isn’t coming, the worse off your company will be.

If a small business loan is the best choice for you, we’re ready to help you find a loan provider. Go ahead and fill out our form to find out which loan product fits your needs.

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