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5 Things Every Small Business Owner Should Know Prior to Securing a Loan

5 Things to Know Before Getting Business Financing

Small businesses are often referred to as the engine of our economy, driving as much as 64% of new private-sector jobs in the United States. When small-business owners face the dilemma of obtaining financial backing to sustain operations, expand the business, or purchase inventory, they frequently turn to small-business loans.

Nearly three-fourths of all small businesses rely on additional financing every year, with nearly $600 billion borrowed by small-business owners from banks in 2015.

Getting a small-business loan is a complicated choice, and the process can be intimidating. For first-time business owners—who are often unfamiliar with the inner workings of the banking and credit industry—the loan process can invite the risk of predatory lending tactics.

Whether you’re an entrepreneur funding a new venture or a small-business owner expanding a successful operation, you’ll benefit from this advice gleaned from industry experts and other small-business owners who have secured their own financing.

Here are five tips to ensure you obtain the right financing for your small business.

1. Borrow the Right Amount

First, decide if you need a loan to accomplish the goals of your business strategy. As part of the loan application process, you’ll typically be asked what the funds will be used for—but take this a step further on your own. Analyze whether your investments will provide the best growth opportunity. 

For instance, using a small-business loan to update your storefront or office space to attract customers is a legitimate priority. But instead of asking for a smaller amount, you could opt for a larger loan that would allow you to relocate.

Sinking money into sprucing up an unfavorable location is a short-term Band-Aid, while leveraging a larger amount to secure a modern, better-trafficked space can mean more business and, hopefully, profit in the long term. Considerations like these help you identify how much financing you need to reach your business goals.

2. Consider SBA-backed lenders

The Small Business Administration (or SBA) is a government entity, and while it doesn’t directly offer loans, it does partner with lenders to guarantee a portion of the loan amount—reducing the risk to you and your business. Often, small-business owners overlook these kinds of loans because they incorrectly believe they won’t qualify. 

There are eligibility requirements for an SBA-backed loan, including the type, size, and location of your business, but you’ll be surprised to find you may meet these thresholds. The downside to SBA loans is the rigorous application process as well as some restrictions about how you can spend the funds.

The SBA also has specialized loan programs including microlending and loans subsidized by disaster relief funds in certain areas of the US. There are also loans and lenders specifically geared toward supporting financing for women-, veteran-, and LGBTQ-owned businesses.

3. Know Your Terms

Before you walk through the doors of a lending institution, whether it’s physical or virtual, it pays to do your research. Predatory lenders may offer a convenient application process and guaranteed funding, but the fine print could cost you your business. Here’s a quick glossary of the terms you’ll need to know so you won’t get taken advantage of during the loan application process.

Annual Percentage Rate (APR): This is the loan cost, including any interest and fees, broken down as a yearly rate.

Collateral: Any assets the borrower puts up to secure a loan. If the loan holder defaults on payments, the lender can secure these assets. Fixed assets include things like property, equipment, and even inventory.

Principal: The actual amount being borrowed without interest or fees.

Total Cost of Capital (TCC): The total you’ll pay in interest and fees for the loan.

 

Learn more about small-business loan terminology.

4. Shop Around

Securing funding can be intimidating, but remember that risk is a two-way street. You’re interviewing potential lenders as much as they’re interviewing you. Research your loan options and negotiate terms that favor your business.

Even if you get declined by traditional banks, there are online lenders and other lines of credit you can still secure. Just be wary of the higher interest rates that these opportunities usually offer and carefully assess whether your margin of profitability or capital can support the expense.

It’s also important to understand that you might qualify for many types of loans, including lines of credit and merchant cash advances. The type of financing that’s a good fit for your business will depend on your situation, your industry, the overall health of your business, and the amount of risk you’re willing or able to assume.

5. Get Professional Advice

As a professional in your field or industry, you know the value of informed expertise and guidance. It’s tempting to try to cut expenses at a time when you’re considering taking on a small-business loan, but this decision isn’t one you want to shortchange.

Instead, bring in a financial adviser to consult about the best options for expanding your business and achieving your goals. Not only will they work to secure favorable terms for financing your small business, but these professionals can also advise how to improve the financial health of your operation.

If you’ve decided to secure financing to expand your business or start a new venture, navigating the process fully aware of the pitfalls will help you avoid risk and keep your operations in the black. When leveraged properly and with the right business strategy in place, borrowing money can sustain your small business in uncertain times and eventually help it thrive.

 

Author Bio: Madison specializes in content related to small business digital marketing and building brand awareness. She has a passion for helping entrepreneurs grow their business and set long-term goals.