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5 Things You Should Know Before Taking Out a Loan For Your Business

Today there are more financing options for small businesses than even business owners usually realize. 

It can be challenging to know both what you need and where to get it. Especially when your source of funding can have such a huge impact on the way your business operates, opportunities for growth, and the bottom line: your own return on investments.

This list will give you a breakdown of the 5 most important things to know about the process before taking out a loan.

Use this list to set yourself up to get started.

1. Decide Exactly What You’re Taking Out a Loan For

The answer may seem obvious to you, but also consider what this means for your loan. The two most common purposes for a small business loan are for the purchase of equipment and inventory. But you also must consider how this will affect the conditions of your loan.

For instance, if the capital is being used to establish a new business location, or for production equipment, a loan with a longer term will likely make sense, probably longer than a one year term.

Whereas, if you are purchasing inventory to be sold in the very near-term, a short-term loan will be more cost-effective. Short-term loans will typically require bigger periodic payments but a smaller total cost. 

2. Determine How Much Capital You Need

This isn’t quite as easily determined as it may seem.

Hint: the best answer to “how much do I need?” is not “as much as I can get approved for.”

There is always a cost to borrowing. If you can demonstrate a reliable plan for ROI (return on investment) and/or business growth then your loan should be safe enough to pursue.

It’s important to understand how you can best approach growing your business.

3. Review the details of your credit profile

Approval for a bank loan (or SBA loan) for your business is dependent on your credit profile. The standing of your credit profile is mainly determined by the details of four different factors:

  • Your net worth (the higher the better)
  • Equity for collateral (generally this will be real estate)
  • The business plan
  • Your credit score (700+ is usually required)

Meeting these requirements can be difficult. If you haven’t built up your credit profile yet, it may be possible to secure other sources of funding.

4. Know how fast you need the funds

This is important because loan approval can take several weeks, but sometimes the need for additional funding is time sensitive. 

For instance, you may have the opportunity to take on a new customer but fulfilling an order requires the purchase of inventory within the next few days that you’re just not yet equipped for. 

In this kind of situation you may want to look at other lending options. In a survey conducted by the ETA (Electronic Transaction Association) 63% of those surveyed said the speed of funding was the primary reason they chose an online lender.

5. Learn the Different Lending Options

Traditional bank loans and SBA (U.S. Small Business Administration) loans are typically the hardest to get and slowest way to get the money for your business.

SBA funding programs that may be right for you include: the Community Advantage Program and the Microloan Program.

Alternative small business funding options include:

  • Finding investors
  • Seeking community support
  • Securing money from venture capitalists
  • Using a factoring company
  • Applying for grants

Next Steps

Use this information to prepare yourself for taking out a loan. But before you do, it’s a good idea to familiarize yourself with your other options for raising the capital your business needs.

Learn more about the alternative funding options for your small business.