Businesses need money to make money, and unless you have angel investors clamoring to fund your company, you will probably need to borrow money at one time or another. That's where small business loans come in.
There are many types of small business loans, and knowing which one will be best isn't always a cinch. Fortunately, I have some strategies that can help make the process easier and more cost effective.
1. Ask for a loan before you actually need the money.
If you take just one tip from this article, make it this one.
Applying for a small business loan should be all about preparation and deliberate decision making, rather than a desperate scramble for cash because you're unexpectedly having trouble paying the bills. Success breeds success, and by arranging to borrow money before you're broke, you're demonstrating that you're a good credit risk.
Before you make any decisions about a small business loan, assess your business and its profitability... Get your company in good shape before you plow borrowed money into it.
Also, traditional loans aren't typically handled overnight. If you figure out how you're going to borrow money ahead of time, your small business loan is more likely to have terms that are favorable to you, and you'll be able to put your energy toward growing your business rather than fretting over where the money's going to come from when you need it.
2. Get the right kind of small business loan.
There are a ton of ways to borrow money, each with its own set of pros and cons. Let's look at a few types of small business loans:
- Traditional installment loans: These typically offer relatively low interest rates and the longest terms for repayment. The drawback is that you may not meet credit rating requirements, and they may take longer to process than other loans.
- SBA loans: Loans from the Small Business Administration generally have even lower rates than traditional loans, but their requirements may be even more stringent. They also may take a while to process.
- Invoice financing: This kind of “loan" is actually just an advance on money owed to you by your clients. You sell outstanding invoices, get the money right away and you pay a fee to the company that purchases your invoices. Pro: You get money a lot faster. Con: The fees eat into your profits.
- Business credit cards: With a business credit card, you can make purchases and defer payment. Simple. Some cards can carry hefty annual fees and charge high interest rates, but there's no substitute for the convenience. Also, some business credit cards have amazing rewards programs.
- Online lenders: Just like everything else in our lives, things are changing because of the internet. While our parents may have had to physically walk into a bank for a small business loan, you can now do it while your drinking coffee in your pajamas. Lenders like BlueVine and Fundera offer a variety of small business loans, some of which can be funded in minutes. You may end up paying more in interest, but, considering your needs, it may be worth it for the speed.
3. Get your ducks in a row.
Just like my advice to explore small business loans before you actually need one, this tip can help make the whole process go more smoothly. Most lenders will want to see your revenue records, your business plan and your tax statements, and they'll want to know what you plan to use the money for. Gathering all your information before you start the application process may lead to a less stressful experience.
4. Pay attention to your profitability.
Yup, it's me…Mr. Profit First. I know it's true that sometimes you have to spend money to make it. But I also know it's true that throwing borrowed money at an unprofitable company won't necessarily solve problems. Before you make any decisions about a small business loan, assess your business and its profitability. You should be socking away some profit every month. Get your company in good shape before you plow borrowed money into it. Getting a small business loan can be a little scary, but it doesn't have to be. Going about it in a methodical way and ensuring that your company is basically sound can help set you up to turn your loan into dynamic growth.
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