Business lending is one of the go-to sources of capital for both small and large enterprises. However, most SMB entrepreneurs view the lending process as frustratingly complicated. On top of that, many small businesses and start-ups often get turned down for bank loans, making business financing seem like a game of chance. Perhaps you’ve experienced this frustration and disappointment firsthand when trying to apply for a small business loan.
But is business lending really that difficult? Well, in some ways, yes. For one, business funding solutions come in all shapes and sizes, from long-term loans and lines of credit to non-debt financing. Second, different lenders and products have different qualifying criteria, terms and policies, financing structures, and application procedures. With so many factors and choices to consider, it can be hard to make the right funding decisions for your business.
Admittedly, business financing can be confusing and daunting at times. But it all becomes clear and straightforward once you learn the ropes. In the spirit of learning, here are the top 10 things you should keep in mind when seeking external business funding.
1. Business financing is not just for banks
Although traditional banks dominate the financial market, they are not the only source of business funding. As a matter of fact, more borrowers prefer to engage alternative (nonbank) lenders instead of commercial banks and credit unions. Industry insights indicate that bank financing is generally losing favor among SMBs mainly due to long waits, cumbersome application processes, strenuous qualification requirements, high interest rates, and low chances for approval.
Compared to conventional banking institutions, alternative funders allow for more lending flexibility, friendlier terms, and better approval rates (over 60% against 28% for large banks).
2. Understand the lending requirements
Every lender and lending product has a set of vetting criteria for qualifying eligible borrowers. These are the minimum requirements the borrower must meet to prove their creditworthiness or ability to repay debts. Qualifying requirements vary widely between lenders and funding products. Here’s a list of the common qualities that most lenders look for in a small business:
- Good business credit (above 669 on the FICO scale)
- At least a year in business
- Substantial revenue or cash flow
- High-value collateral (for secured loans)
- Solid business plan
- Low debt load
Ensure you only apply for the funding products your business actually qualifies for. Otherwise, your application will likely be rejected.
3. Choose the right funding solution
Business lending options come in many different flavors, such as loans, lines of credit, merchant cash advances, equipment financing, and business credit cards, just to mention a few. Each solution is unique, has its pros and cons, and is ideally suited to particular purposes or business models. The trick to landing convenient and practical business funding is figuring out the type of financing that best fits your enterprise or the need at hand.
4. Financing terms are not set in stone
Did you know that you could negotiate with lenders for better deals? That’s right. You can talk your way to lower interest rates, higher limits, and better repayment terms. And when struggling to pay off a loan, you can simply arrange for a custom repayment plan involving consolidation loans or debt settlement.
Most alternative lenders are quite flexible with their funding structures and terms. So, negotiating for a more favorable offer is always worth a shot.
5. Business financing cost is relative
Financing cost is a major pain point for many borrowers. The cost of debt-based financing is typically given in interest rate (usually expressed as Annual Percentage Rate) and the sum of charges, which may include underwriting, origination, facilitation, and transaction fees.
Interest and fees vary between products and lenders. The total cost is also relative, depending on the reasons for borrowing. The best way to determine the cost and value of a business loan is to calculate its ROI.
The ROI gives you a big-picture view of the financing cost against its value. For instance, a financing offer might seem overly expensive but still make economic sense in terms of returns. Generally, an annual ROI of 5% and above makes for economically sound business funding.
6. Ask for exactly what you need
Do not be afraid to ask the lender for the exact amount you need. Just make sure you can justify the ask with the loan's purpose and, of course, a realistic repayment plan. It’s always cheaper and more convenient to work with one lender instead of signing multiple deals with different lenders just to meet your borrowing target.
7. Get the timing right
Timing is critical in financial management. You must anticipate your business’s financial needs in order to work out the best time to borrow money. And remember to factor in the financing's timeline: application window, approval time, disbursement schedules, grace period, term length, etc.
8. Work out a solid repayment strategy
Make sure you have a reliable repayment plan before taking out any debt-based business financing. Ideally, you should repay the debt using the business’s revenue or the returns generated by said financing. In some cases, especially with business term loans, the lender might want to see your sales projections, profit margins, and expenditure to gauge your repayment ability. Most lenders will reject your application if they doubt your business’s capacity to service existing or new debt.
9. Avoid bad debts
According to Robert Kiyosaki, the author of Rich Dad, Poor Dad, a bad debt takes money out of your pocket. In business, this definition fits any debt that strains your cash flow or takes more than it gives. Bad business debts can arise from any of these situations:
- Having too much debt
- Relying on a failing repayment strategy
- Stacking loans
- Making the wrong business lending decisions
- Underestimating financing obligations
Just to be clear, a bad debt is not necessarily one you're struggling to settle but one that’s placing undue pressure and expense on the business. The takeaway is to avoid unnecessary loans and debts you can’t afford. There are much safer ways to fund a business without risking bad debts.
10. Shop around for the best funding deals
We’ve saved the best for last; this is probably the most important thing you need to know about business lending. Financing terms, costs, and products vary immensely between lenders. So, never settle for the first offer that comes along. Take your time to research competing lenders and financing products to ensure you get the best possible deal. In fact, shopping around for financing can make all the difference between bad and good business debt.
Try business lending with Lendzero
In theory, shopping around is the easiest way to get the best funding deals. In practice, however, combing the vast lending market for business-friendly offers can be nerve-racking and time-consuming. But shopping for business financing doesn’t have to be frustrating at all, thanks to Lendzero.
Lendzero is an automated online lending platform that lets you easily explore and choose financing offers at your own convenience. It lists dozens of prequalified and pre-negotiated funding deals from various lenders at the touch of a button. With Lendzero, you don’t have to manually scour the internet or haggle with lenders to land a much-needed financing deal. Get a head start in business funding by talking to us today.
