Whether you are just starting out in business or you have an established company, there are times when you may need to turn to lenders for a cash injection in the form of a business loan. Before completing an online application or booking an appointment with the first loan company you find, it pays to understand the current climate and your best option for obtaining funding.
When the last recession hit, lenders understandably became quite nervous about lending money to startups and relatively new businesses. Lending to startups is inherently riskier than lending to a more established business, and banks are also subject to paying the same underwriting charges for small loans as they are for larger loans. The good news is that the percentage of loan applications approved by major banks is rising, with 22.8 percent of loans being approved in 2016.
So, how do the uninitiated obtain funding for their business, and how do established businesses get approval for extra cash when they need to expand or take their business in a new direction?
THE BANK: When it comes to obtaining a business loan, the first place you might think of is your local bank. This is often a sensible choice. Bank loans are one of the cheapest and most accessible financing options. However, the application process for a bank business loan can be long, strenuous and riddled with obstacles. Small business bank lending is also at an all-time low and you'll need a squeaky clean credit file and pristine financials to be approved.
CREDIT UNIONS: If you are looking for a business loan that will help you to grow your company, a credit union could provide the financial lifeline you need. Credit unions are nonprofit financial organizations that are controlled and owned by their members. As credit unions are nonprofit organizations, they are not liable to pay dividends and can often offer better rates, lower fees and superior service.
SBA LOANS: The Small Business Administration (SBA) offers SBA loans that are designed to offer funding for the purchase of fixed assets such as machinery or buildings. These loans work by distributing the loan across three individual parties. A conventional lender, such as a bank, will put up 50 percent of the loan, a Certified Development Company (CDC) puts up 40 percent and the business owner is liable to put up a minimum of 10 percent. While these loans can cost slightly more than bank loans, they are still an affordable means of borrowing and can be applied for online. If you are in need of a loan fast, an SBA loan could be the ideal solution.
ONLINE LOANS: There are many online lenders offering business loans, and for the business loan seeker, it can be a tricky market to navigate. If you are finding it difficult to qualify for a bank or SBA loan or can't wait around for lengthy approval processes, an online lender could be the solution. Most have looser qualification criteria and can help you to get your hands on the cash you need fast. There are a number of online loan products available, from long-term and short-term loans to business lines of credit and invoice financing products. The product you choose will largely depend on how much you want to borrow, how you want to borrow and what you need your loan for.
While the lending criteria for business loans may be more relaxed with some lenders than others, you will still need to prove that you have the means to pay back your loan in a responsible way. Your current financial standing and your credit score are usually the first place a lender will turn, so make sure these areas are as healthy as possible.