You may have seen the occasional business loan ad, often hanging up at the top of an online article that you’re reading, promising you a loan of up to $150,000, or some other pie in the sky number. If you’re starting a business or already have a company, especially if it’s new, you may well wonder if you should take out a loan.
Maybe so, and maybe not. But whatever you do, there are a number of steps you should take before taking out a business loan.
Shop around. Don’t get too enticed by a promising loan offer. Maybe it is a great deal, but what if you can get something better?
“Business loans aren’t black and white and different situations will have different options,” says Eyal Lifshitz, the founder and CEO of BlueVine, a lending company based out of Redwood City, California.
According to Lifshitz, business loans, just like virtually every loan out there, can have wrinkles you may not expect, like hidden fees.
“In addition to upfront fees, it isn’t uncommon for lenders to add on fees down the road depending on how quickly you pay your loan back. You don’t want to get caught with unexpected fees that could break your business,” Lifshitz says.
He also points out that instead of a loan, you might want to get something like a business line of credit.
If you think you may need a loan someday, apply for it now. Dylan Gallagher owns a tour company in San Francisco called Orange Sky Adventures, which he started in February 2016.
“I learned about loans the hard way,” he says. “I made the mistake of asking for a loan once my original investment was gone. And because the company was so new, only one year of tax returns was not enough for the banks. I tried to go for a personal loan and was rejected, too. My income was too low because I was self-employed.”
The moral of the story, Gallagher says, is to ask for a loan before you need it.
That might sound crazy at first, or misguided. After all, if a bank isn’t going to give you a loan a year into owning and running a company, why would they before you start a business? Indeed, a bank may not, but you may hit that sweet spot where a lender believes in your business model and that it can be a success. If you’ve already opened for business, but it’s already struggling, that can be a harder sell for a lender.
Carl Gould, a New York City-based entrepreneur and public speaker who owns a consulting firm, 7 Stage Advisors, agrees with Gallagher.
“You borrow when you don’t need money to give you operating capital. It also helps you build business credit and good relationships with banks who will think of you as a good credit risk,” Gould says.
Gould advises using operating capital for sales and marketing, making your business more efficient or fueling growth.
You’ll need a business plan. Not all lenders require a business plan – some online lenders, for instance, don’t – but if you want a business loan, virtually every traditional lender will want to see that you have a comprehensive plan to make money.
It’s also the reason why you ideally ask for a loan before you need it and not when your business is struggling. Lenders like seeing a business plan that shows how a company will make money, and how a loan can help the company make even more money. If your business is struggling, fair or not, it suggests to the lender that your business plan isn’t so hot.
For instance, it may surprise you to learn that “lenders are not required to provide APRs on business loans. Sometimes the way the cost of financing is presented can be confusing, or even misleading,” says Gerri Detweiler, based out of Draper, Utah and the education director at Nav.com, a website that helps business owners manage their business credit and get access to funding.
Detweiler also points out that you should see if you can get the business loan in the name of the business, instead of your own.
“This can help protect your personal credit from the activities of your business,” she says.
That said, most small business owners take out business loans in their own name, Detweiler says.
Of course, part of that is because of how a small business is structured. Many small business owners are considered sole proprietors rather than having a company that is incorporated.
You may want to seek out one-on-one advice. An article like this can hopefully help prepare you to get a business loan, but talking to a live human being who can answer questions can obviously help even more.
Andrea Roebker, based out of Chicago, is a regional communications director for the U.S. Small Business Administration, and she suggests heading to the website, Sba.gov, and eventually a local SBA office (which you can find through the website), where you can get free advice and be directed to a mentor. If nothing else, you can get advice on how to get an SBA loan, Roebker says.
That said, Roebker points out that the SBA doesn’t actually lend money for SBA loans. Banks do.
“SBA guarantees that these loans will be repaid, which eliminates some of the risk to the lending partners and the loan terms are more favorable for the business owner,” she says.
Which is the type of information you might miss if you don’t talk to a professional who can guide you through the lending process, whether someone at the SBA, your bank or a financial advisor. In any case, being a business owner can be tough going, especially when you need more money, and there are resources out there that can help guide you through the lending process. So why not use those resources? You may need a loan, but there’s no need to be alone.