If you are searching for small business funding, you will come across a wide array of options. From SBA loans to merchant cash advances to business credit cards, they all offer a variety of rates, terms, and other factors that affect the overall cost.
It is important that you make sure you will get the right loan to grow your business so you can save money at the same time. Your goal should be to get the lowest cost of funds available for your particular business no matter which loan you choose to go with. In this article, we will discuss different ways you can avoid overpaying for your small business loan.
Determine if your business is ready for a loan before you apply
Save time before you apply for a loan by determining if your business is loan ready. Some of the following details are what you need to check before applying:
- Credit score: banks want borrowers that have credit scores of at least 680. If your credit score is below this umber, consider online small business loans for borrowers with bad credit or loans from a nonprofit.
- Length in business: lenders consider how long you have been operating your business. You need to have been in business at least one year to qualify for most online small-business loans and at least two years to qualify for most bank loans and SBA loans.
- Income: your annual revenue should range between $50,000 and $150,00 annually.
- Payments: look carefully at your business’s financials — especially cash flow — and evaluate how much you can reasonably afford to apply toward loan repayments each month.
Do not wait too long to seek financing
Applying at the last minute when you need money is not a great strategy. The application and approval process to get a small business loan can be time consuming. Monitor your cash flow using a cash flow statement to help track revenue inflow and expenses outflow so you can anticipate when you will money going out and coming in.
Another thing to consider is financial forecasting. It can help you stay on track because it involves developing a comprehensive set of projected statements and can help you pinpoint when funds are needed.
Limit the number of loans you apply for
You might be tempted to apply for several loans with the hopes that one will come through. Some credit inquires can lower your credit score and some do not. Here is what you need to know to avoid getting dinged during prequalification.
A hard inquiry, also called a hard pull, is when a lender checks your full credit history. Having a hard inquiry on your report can lower your credit score. A soft inquiry, also called a soft pull, occurs when your own credit report, when you give a potential employer permission to check your credit.
Borrow the right amount
It is important that you borrow the right amount because too much is not good and too little is not good. When you find the right amount, borrowed funds can drive increased returns on investments and add value to your business.
Determine your payments and the affordability of your small business loan. Ask if the loan will generate enough income so you can comfortably pay the loan back over time. Also, determine your goals and ask yourself where you are headed in the future.
Avoid prepayment penalties
When you pay a loan off early, the amount of interest the lender earns on the loan is reduced so some will charge a penalty. The fee is usually a percentage of the outstanding balance of the loan. Prepayment penalties can also be calculated on a sliding scale where the earlier you pay, the higher the penalty will be.
Determine the true cost
It is important that you read the fine print because it can be hard to determine if the stated interest rate reflects the true cost of the loan. Business owners can end up paying much more than they realized and get stuck in a loan they can’t afford to pay.