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When you’re researching your financing options, you have several factors to consider that will help you narrow down your selection.
Loan Process
When small business owners need cash, they often need it quickly. The last thing you want to do is get stuck with a lender that requires reams of paperwork or takes too much time getting the funding into your bank account. With many alternative lenders, it takes minutes to apply for a loan and some offer same-day funding once you’re approved.
Term
The term refers to the loan repayment period and the schedule for when you need to make payments. You may have six months to pay off a short-term loan, for example, or five years for a long-term loan.
Qualifications
Qualifications vary by lender but, in general, they look at your credit score, the financial health of the business and how long you’ve been in operation. Some lenders work only with borrowers who have a very good credit score while others are open to higher-risk borrowers. You should understand a specific lender’s qualifications and know that you’re eligible before you apply for financing from that lender.
Collateral
Depending on the loan, you may need to offer up personal or business collateral, such as paper assets like stocks or corporate bonds or property, such as buildings, equipment or vehicles. If you default on the loan, the lender can come after that collateral. It’s important to understand the lender’s collateral requirements and the inherent risk before agreeing to the terms.
Fees/Repayment
The interest isn’t the only fee you’ll pay back to the business lender. Lenders can charge various fees that impact the cost of the loan, such as application fees, origination fees, late-payment fees, prepayment penalties and monthly and annual maintenance fees.
Time to Deposit
This is the time it takes to get money in your bank account once you are approved for the loan. Before you choose a lender, you should obtain an estimate for time to deposit. Some alternative lenders can get the funding into your bank account within several business days.
Special Documentation
Some lenders require you to provide documentation before they will move forward with your application. These include your business financial statements, such as a balance sheet, income or profit and loss statement and your statement of shareholder equity.
Lenders may require three months of your checking account statements. You’ll also need to provide your income taxes for the last three years, paperwork pertaining to any businesses you have a financial stake in and your business license or certification. If you’re renting office space or equipment as part of your operations, you’ll want to have those leases easily accessible as well. Knowing ahead of time what paperwork your chosen lender requires ― ideally gathering and preparing it before you start the application ― will ensure a smooth and quick process.
Most small business loans require you to provide a personal guarantee. This means that, if your business defaults on the loan, the lender can come after your personal assets.
For more information about business loan terminology, check out our glossary of business terms.
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