For many people, owning a small business is a dream come true; the culmination of years of hard work and passion. This year has been tough for many of the country’s 30.7 million existing small businesses, and many owners are turning to loans as they adapt to the changing climate. But if you’re just starting out and wondering how hard it is to get a first time business loan, rest assured that by avoiding the following missteps, you can make the process a whole lot smoother.1. Not Factoring in Hidden Fees
If a loan seems too good to be true, you might be overlooking a number of hidden fees. A loan origination fee will normally be included in any business loan you take out, and will typically be charged at around 3–4% of the amount you are borrowing. Put simply, if you borrow $10,000, you’ll probably incur a fee of $300–$400. While this may not seem like a bank-breaking amount, it could alter the true interest rate you are paying, particularly if you pay the loan back slowly.
A number of other fees that could also be lurking in the small print — everything from application fees to due diligence fees, administrative charges and contract costs. Make sure you factor in these numbers when weighing up your options.2. Not Checking Your Personal Credit Score Before Applying
Of course, having a decent business credit history will greatly boost your chances of landing a favorable rate, but if this is your first time applying for a business loan, you may not realize that many lenders will also look at your personal credit score before agreeing to lend you money, whether you are planning a startup or have been in business several years. This is so the loan provider can get a sense of how you manage your finances.
If your personal credit history has suffered any setbacks in recent years, it’s a good idea to spend a little time working on it before applying for a business loan. This doesn’t have to mean postponing your application by months; ScoreMaster can help you achieve a higher score in just 20 calendar days. With a gamified dashboard to track fluctuations combined with actionable, measurable steps, your ideal score is closer than you think.3. Not Spending Time on Your Business Plan
Even if you have a sparkling credit history and a fantastically successful business, your application for a business loan can still be derailed by the lack of a coherent business plan. Lenders will want to see that your business is sustainable and viable, so they can be assured that you will pay back the loan.
As an established business, you’ll have to include previous years’ profits, while a newer business will have to include carefully calculated projections. Your business plan should be clear and concise enough for a loan officer — who doesn’t necessarily know your industry inside out — to understand. Paint a picture of the products or services you provide, as well as the competitive landscape and the number of employees you have.4. Not Shopping Around for the Best Rate
There are many different types of business loans you can apply for, and they all come with different ballpark interest rates. To ensure you get the best possible deal for your business, it’s important to research the types of loans available to you, as well as compare rates on offers from various providers.
Here are some typical rates with popular types of business loans.
- Short-Term Loans: For loans of up to $500,000; rates as low as 8%.
- Business Line of Credit: For loans of up to $500,000; interest rates from 8–24%
- Business Term Loans: For loans of up to $2 million; rates as low as 6%.
- SBA Loans: Small Business Association (SBA) loans can go up to $5 million and are backed by the government. Interest rates vary between types of SBA loans, which include SBA 7(a), SBA Express and SBA 504.
Whichever type of business loan you plan to apply for, it’s important to request a realistic loan amount. Most lenders will consider loans that amount to 50–100% of your monthly revenue and cash flow. That means if your business turns over $5,000 a month, you are unlikely to secure a loan of $7,000.
To make sure you land the best loan available for your business, do your research and check in on your credit score. Remember that ScoreMaster can give your score a boost in as little as 20 calendar days, so there’s no reason to bury your head in the sand.