When you’re setting up your business, there are a lot of things that you have to bear in mind.
From working on your management and business models to marketing to finding loans, there are a lot of things that will occupy your mind for the next few months as the owner of a small business. Texas is attractive to entrepreneurs because of the tax environment in the state. In Texas the state does not tax personal or corporate income, however the state does have a relatively high sales tax when compared to other states. For more information, consider this resource on how to start an S corporation in Texas. In relation to finding the right type of loan for your business, you might face a bit of trouble there, especially if that’s your first time applying for a loan, but don’t worry, though, as this guide will explain the steps you’ll need to take to do this.
The first thing you’ll need to know is which type of loan your business actually needs. Knowing this piece of information is crucial, as lenders will need a good reason to lend your business with this great sum of money. Usually, small business owners will need the money for a variety of reasons, like to aid in starting their business, help it grow, provide a safety net, or manage day-to-day expenses. If you’re starting a business, an online lender or bank won’t give you a loan, as lenders require that you have a consistent cash flow in order for you to pay your installments. Failing to do that will disqualify you from financing and will affect your credit score. You can in that case use business credit cards, crowdfunding, or personal loans.
When it comes to small-business loans, many lenders will happily provide you with an adequate loan: online lenders, microlenders, and banks. The funding specialists over at AdvancePoint recommend that you carefully consider the pros and cons of these options in order to make the right decision. These following points will help you do so.
You can apply for a loan from online lenders when you lack time in your business and need quick funding. Depending on the lender, the size, and the type of loan which you’re applying to, your length and repayment term will be determined. Your credit history can also play a major role in affecting the length and repayment deadline.
Microlenders are your way to go if you’ve just started your company and can get an adequate loan because your business is still too small. Microlenders and non-profits will usually provide you with a short-term loan that is less than $50,000. However, the APR on these loans will be higher than that on bank loans.
If you can provide collateral, don’t need instant cash, and have a good credit score, then you are qualified for a bank loan. The US Small Business Administration (SBA) provides business owners with a special loan program, short-term microloans, and disaster loans. These SBA loans can be anywhere between $500 to $5.5 million.
Before you apply for any type of loan, you should know the basic qualifications that you’ll need to obtain. Not having some of these qualifications doesn’t mean that you can’t apply for a small-business loan, but it will certainly limit your options. Your options may even be restricted to certain types of loans that have high interest. Thus, make sure that you have these factors.
1. Credit Score
A credit score is associated with various types of loans. The higher your credit score is, the better types of loans you can get. To know your credit score, you must retrieve a credit report, which you can get for free from any of the three major credit bureaus: Experian, Equifax, and TransUnion. Banks usually provide low-rate business loans for borrowers who have a credit score that is not less than 680. If your credit score is below that number, you’ll have to look for other options, like microlenders. During that time, you can apply some strategies that can enhance your credit score.
To know whether or not you can afford the payments of your business, you must take a look at your business’s finances and evaluate how much you will be able to afford to make your loan repayments. Your findings should be based on solid data and not mere projections. A good rule of thumb is that your income should be 1.25 times your expenses in order for you to be able to fulfill your loan repayments.
3. How Long You’ve Been in Business
In conjunction with these factors, lenders will also want to know how long you have been in business. Unfortunately, being a small business can imply little to no experience, which can prevent some lenders from providing you with a good loan. Ideally, a business should be operating for at least 1 year to guarantee an adequate loan from online small-business lenders. It should also be operating for at least two years in order to qualify for a bank loan.
Qualifying for a loan is nearly half of the process. In order to ensure that you’re getting the right type of loan from a trustworthy lender, you’ll need to do your research. The internet is now a vast source of information, so can find the information you need just with a few clicks. Your lender must be transparent, experienced (with at least 10 years’ worth of experience), have great customer service and stellar reviews, and apply small interest rates.
Sometimes, lenders will attempt to hide the actual Annual Percentage Rate (APR) with obscure pricing information and flashy web design. They can also obscure this important piece of information with generic words such as factor rate, cost, or rate. Because 15% of the factor rate can change to 50% of interest rate in a matter of seconds, you must find a transparent lender who explains what their actual APR is.
Now that you know how to find a loan for your business, you’ll be able to easily qualify for one. There are various options out there, but you should study them carefully to choose one that will work in your favor. When you apply for a loan, make sure that you pay attention to other costs, like processing fees, origination fees, etc. in order to have a well-rounded idea of what your lender will require from you.