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5 Vital Steps to Consider before Getting a Small Business Loan

Posted November 2, 2017 by Ann Mosley to Financial Advice 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Small business loan open many perspectives to the executives. They provide the financial foundation for the effective development, sales increase, quality enhancement, the discovery of new territories, help to attract new clients, etc.

There are five important steps to consider before and in the way of receiving a small business loan.

1. Choose the Type of Loan

There seven types of small business loans that suit different executives depending on what they look for and what they need.

  1. The small business line of credit. It’s a type of the loan that has a specific previously defined sum (e.g. $200,000) that a borrower can use for different purposes (usually to manage cash flow and cover unexpected expenses). The interest refers to the funds that a borrower actually withdraws. Businessman pays off the principle during several years.
  2. Working capital loans. These short-term loans (usually from 30 days to 1 year) cover common expenses or financial difficulties due to seasonality. Borrowers can usually expect to get from $5,000 to $100,000. Most of the working capital loans are unsecured.
  3. Small business term loans. These loans are good for small companies that require a growth. Small business term loans also finance capital expenditures and common expenses. The interest can be either fixed or variable, the loan can be either secured or unsecured and the principle is repayable (from 6 months to 3 years).
  4. SBA small business loans are one of the most difficult ways to get a small business loan (strict requirements and long process). Still, it’s possible to get from $5,000 up to $5 million on the very affordable conditions.
  5. Accounts receivable line of credit is based on the accounts receivable by the company. It’s good for urgent expenses. The borrower pays the whole sum with the funds received from his clients.
  6. Equipment loans finance the purchase of equipment, vehicles, and software and allow applying for up to $500,000. This type of small business loan often requires the down payment of 20% of the purchase cost.
  7. Small business credit cards are also suitable for short-term small business loans. Some of them even offer 0% for short period (6-9 months).

2. Look for Suitable Lenders

After you understand what type of loan you need, look for the lender, who will be able to provide it to you:

  1. Peer-to-peer lenders act as middlemen between lenders and clients who want to apply. Such companies as NorthnLoans have a huge database of possible payday loan lenders.
  2. Direct online lenders work without middlemen. The application process is simple and fast. It’s possible to get up to $500,000.
  3. Commercial banks such as JP Morgan or Citibank. Still, their requirements are stricter.
  4. Local community banks whose goal is to help local businesses grow.
  5. SBA bank lenders work on the SBA basis and offer very reasonable tempting loan terms.

3. Check Financial Statements

Before applying for a small business loan, you should check out whether your financial statements are in order. All lenders check out this information thoroughly. Financial statements include:

  • Balance sheet
  • Income
  • Loss statements
  • Cash flow statements

Usually, lenders ask questions about cash flow, accounts payable, debt-to-equity ratio, gross margin, accounts receivable, EBITDA, etc. Make sure that your accountant considered this information.

4. Prepare Business Documents

Along with financial statements, all documents should be in order. Make sure that you know/have such information as any DBAs of your company, federal tax ID, LLC, S corporation, C corporation structure, certificate of incorporation, foreign corporation fillings, standing certificates, copies of liability insurance policies, business credit report, business plan, executive summary, etc.

It’s better to contact the representative of the lending side and ask about the detail list of required documents. Sometimes they can vary.

5. Analyze the Terms of the Loan

There is a wide choice of possible lending institutions and you can choose the one offering you the most affordable loan terms. Don’t be impulsive in your decision. Consider the loan terms of different companies, banks, programs. Analyze the pros and cons with the accountant. Consider such issues as interest, fees, repayment period, penalties, limitations, etc.

A good thing would be to prepare the list of questions to the lender to not to forget anything and figure out all details.

image: https://unsplash.com/photos/uXWPg9uMwt8

About Ann Mosley: Author bio: Ann Mosley is a freelance writer who keeps a personal finance blog. She enjoys learning new money management tendencies and eagerly shares her ideas with other specialists and her readers. 

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