Almost every small business needs a business loan at one time or another.
However, that doesn’t mean that almost every small business loan is created equal – far from it.
When you require finance, it’s vital that you secure the loan that’s right for your company and its individual circumstances. So, it’s essential that you put a number of options on the table and compare them carefully.
But what are the steps you should be taking when performing your due diligence?
Understand exactly what you need – and why
The type of loan that would be most beneficial to buy a key business asset may be quite different from the form of finance most suited to avert a cash flow crisis.
In general, you should aim to apply the matching principle. If the loan is intended for short-term purposes (such as getting you over a cash flow hump) it should be repaid quickly, and if it is to finance longer-term business growth you should spread the cost over a number of years.
Talk to a range of lenders
Since the financial crash of 2008, banks have significantly tightened their lending criteria, making it far harder to obtain finance.
Further, they have tended to centralise decision-making, so whilst in the old days a manager who understood your business and its challenges would reach a careful and considered decision, it may now be a case of the computer saying no using one-size-fits-all criteria.
For this reason, you should make sure you talk to alternative lenders like Cashsolv, as we apply different criteria (for example, placing less emphasis on your credit score). Only when you have spoken to both banks and alternative lenders will you really know what options are on the table.
Investigate the different types of business loan available
When most people hear the word “loan”, they think of a conventional bank loan, whereby one borrows a fixed amount of money and repays it, plus interest, over a fixed period.
However, there are plenty of other options. You could, for example, choose a line of business credit, which acts like an overdraft, enabling you to borrow and repay at will against an agreed credit limit.
Alternatively, a merchant cash advance allows you to borrow and then repay via a fixed percentage of your daily credit card sales, meaning you’ll never face a large repayment during a quiet period for the business.
Alternatively, invoice factoring and discounting allow you to borrow against the value of your invoices, the instant you issue them – so it’s like getting paid immediately.
Weigh up flexibility against cost
As a general rule, the more flexible the borrowing method, the higher the cost.
For example, a line of credit gives you a great deal more flexibility than a conventional term business loan but will almost certainly attract a significantly higher interest rate.
Similarly, whilst a merchant cash advance can be an excellent solution for seasonal businesses, it’s also a notoriously expensive way to borrow. Which is more important to you? Flexibility when making payments or keeping down costs?
It’s vital that you reach a conclusion before deciding what to borrow and from whom.
Make sure you compare the total cost
Once you’ve got a few options on the table, you need to know exactly what they’ll cost you.
Comparing simple interest rates won’t work. You’ll need the APR, and you’ll also need to look at the repayment period. To add another level of complication, some business loans have their cost expressed as a factor of the amount borrowed rather than as an interest rate.
Don’t forget to ask your lender for the total cost payable, based on the agreed loan period, otherwise you could find yourself comparing apples with oranges.
Decide whether you prefer a secured or unsecured loan
A secured loan where you use an asset as collateral, which can be seized by the lender if you fail to repay, will generally attract a lower rate of interest than an unsecured loan.
That’s because unsecured loans are riskier for lenders: they need to jump through hoops to get their money back if you don’t repay, including obtaining a court order to seize your assets in lieu.
However, weigh up the options carefully: less risk for the lender means more risk for you, and think twice before pledging something you cannot afford to lose – particularly a personal rather than business asset, such as your home if you’re not 100% certain you can meet the repayments.
If you need the money fast, focus more on alternative lenders
Banks can be excellent sources of business finance, but they’re not known for their speed in reaching decisions.
In fact, their application processes can be downright tedious, requiring you to amass a ream of paperwork (articles of incorporation, balance sheet, three years’ profit and loss statements, tax returns, business plan, and maybe even directors’ CVs) before they will even start to consider your request.
Once you’ve assembled everything they need, you could wait weeks rather than days for a decision. Simply not viable if you need a sudden injection of cash because you’re struggling to pay your bills.
In contrast, with an emergency loan from Cashsolv you can have the funds in your account in under 24 hours.
Don’t be afraid to ask for expert advice
The range of financial solutions on offer can appear somewhat daunting, but expert advice is on hand if you need it. At Cashsolv, we specialise in all forms of business finance and will work with you to tailor a solution that’s perfect for your company.
Alternatively, you can find independent advice from specialist brokers, who may deal with the full spectrum of potential lenders. Just be sure to find out what commission levels they receive, so they don’t steer you in the wrong direction.
Finally, don’t be too pessimistic
It’s certainly true that it’s much harder to find business finance today than it was ten years ago but hard doesn’t mean impossible.
Even if financial pressures are mounting and you’re faced with bills you cannot pay, you should bear in mind that there are plenty of potential lenders out there who could be very keen to do business with you.
Don’t give up if you’ve approached your bank and been rebuffed. As already stated, banks aren’t the only game in town.
Take the time to talk to alternative lenders like Cashsolv, and you could easily find that we can supply the finance you need to keep your business on its feet.
To discover what Cashsolv can do, please read how we can make business finance work for you.