At some point, many businesses find themselves in a situation where they need to seek funding. Maybe they need to get some new equipment, or perhaps they’re experiencing a lapse in cash flow. In any case, they might not always have the capital to cover these costs. Fortunately, there are many options to choose from when shopping for small business loans, but there are even more variables to consider.
You might be a bit overwhelmed or confused by all these factors. Well, don’t worry. We’re going to go through the common mistakes and things to consider when shopping for small business loans so that you can make the best choice for your business.
Types of Small Business Loans
Before we get in to common pitfalls to avoid, let’s briefly review some of the most popular types of small business loans that you will encounter. We realize you may be familiar with these, but it helps to know them reasonably well so that you know if they might apply to your business’s needs.
SBA loans are the cream of the crop of small business loans. The Small Business Administration partially guarantees SBA loans, and because of this, lenders are willing to lend to qualified small businesses and with better terms. SBA loans come with exceptionally ideal terms and features, but because of this they also come with stringent qualifications. If you’re wondering more about the loan application process, you can learn more about it in this article.
Traditional Term Loans
Term loans offer a straightforward, affordable funding solution for small businesses. When someone thinks of a business loan in the general sense, they’ll likely think of a traditional term loan. A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The set repayment term length will typically be one to five years long. Most business owners use the proceeds of term loans to finance a specific, one-time investment for their small business.
Equipment financing is a form of business loan used for acquiring equipment. It allows you to gain access to the equipment your business needs while avoiding significant upfront expenses. You can finance everything from software to heavy machinery. If you qualify for equipment financing, you’ll be able to finance up to 100 percent of a piece of an item’s value.
The equipment itself functions as collateral for the loan, and thus makes equipment financing less risky for the lender and more affordable for the borrower. If you have shorter-term plans for using your equipment, equipment leasing may be a better choice.
Short Term Loans
These working capital loans are just how they sound, for short-term expenses. You’ll receive a lump sum of cash and pay it off just like a regular loan, only you can get these more quickly and the timeframe of repayment is quick, usually a maximum of two years. Given the shorter timeframe, these payments are made weekly, rather than monthly.
Business Lines of Credit
A business line of credit is a revolving line of credit that one can draw against on an as-needed basis. It can also be used for short-term working capital to help improve cash flow or to finance the costs of surprise expenses. A small business line of credit is revolving, and this is the primary distinguishing characteristic. Another characteristic is that a subsequent draw(s) taken after the initial funding are only restricted by the approval amount and not a pay-down requirement.
Mistakes to Avoid When Shopping for Small Business Loans
So, you might know what type of business loan you’re looking for, but you’re not entirely sure how to prepare or what to avoid. There are many things to consider, so we’ll lay the most important ones out below.
Not Being Aware of Your Business’s Current Financial Situation
This mistake is probably the most important to avoid. Besides being in good financial standing, it’s critical to be aware of your business’s current overall financial status. You need to make a note of your cash flow, time in business, annual revenue, assets, and, most importantly, your credit. When we mention “credit,” we are referring to both business and personal credit scores. It’s important to be in a good position with your credit score and, if you’re not, then don’t worry. There are ways you can build your credit up and there are lending options for those with less-than-stellar credit.
Not Remembering to Provide All of the Required Documentation
Whether you apply for a small business loan or are just shopping for one, you should be meticulous about collecting all the required paperwork. Usually, business lenders will require bank statements, tax returns, an outline of your assets and investments, business plan, statement of time in business and intended use of funds, and revenue projections. More or less may be required depending on the lender or type of loan. SBA loans require a particularly large and detailed amount of paperwork. Ensure that your records are up to date and that you have access to all of the required documents.
Getting the Wrong Type of Business Loan
This one seems somewhat obvious but it’s actually an important mistake to note. Make sure that the loan you choose is appropriate for your business’s needs and situation. The term length should be an appropriate amount of time and it should be the right type of loan for your business’s predicament. For example, you wouldn’t pick an equipment loan if your business really needed a merchant cash advance. So, before committing to a particular one, make sure to research the various types of business loans and apply to whichever one which best matches your business needs.
Asking to Borrow Too Little or Too Much
It’s best to know exactly how much you need when borrowing from a business lender. If you ask for more than you’re comfortable paying back, then you risk missing a payment or breaking the allotted time on your term. If you ask for too little, then you will have to quickly return to the same lender to get another, shorter-term loan. Then, the lender will likely question your business’s ability to manage its money and be less likely to lend to you again. If you’re not sure about a specific figure, it’s best to aim for a small amount more than you think. It’s always better to have slightly more funding than you need, as opposed to not enough.
Not Going with the Best Lender for You
There are different types of business lenders and each of these lenders has a different set of benefits. Perhaps a private lender suits your needs better than a bank. Maybe one business lender’s programs suit your business’s needs better than another’s. In any case, it’s best to assess many different options when shopping for business loans before deciding on one. Some businesses even apply to several different lenders, wait until they receive offers back from them, and see which terms are best.
Having No Plan
Some lenders and lending programs require that you send them a business plan. Even if they do not, it’s still a good idea to develop one. Showing lenders that you have a solid business plan reassures them that you have a plan and will be able to manage the capital they lend to your business in an organized and responsible way.
It’s possible to make many mistakes while shopping for small business loans. Fortunately, almost all of them are easily preventable with a little bit of preparation. Once you feel like you’ve found the right lender and program for you, reach out to the business lender and show your interest.
At Crestmont Capital, we offer a wide variety of business loans, and our experts can help you with any questions you may have. If you’re ready to apply, our application process is fast and simple. If you’d like to learn more, fill out a quick quote or contact us today!