When you seek a business loan, you can look at it from the perspective of sales. In this case, you’re selling the idea of your business’s profitability or value to the lender. Your pitch demonstrates how likely you are to return the lender’s investment (the loan) in full and on time. To secure a loan, you must make your business look as enticing as possible.
Many businesses, however, are more accustomed to pitching to their customers rather than to lenders (and rightfully so). That’s one reason it can be so challenging to get the capital they need. The loan application package must be complete, attractive, and meet both the lender’s stated criteria and any underlying criteria they use to make judgements but may not make available to the public. Most lenders also have a preferred borrower profile they like to lend to.
Top reasons lenders deny small business loans:
- The business lacks a formal business plan
- Too many applications to too many lenders at once
- Missing paperwork or errors in the application
- Applying to the wrong lender
Your business’s credit report and time in business play into the lender’s decision, but they’re certainly not the only aspects of your business the lender will look into. Some will also delve into the personal credit of your business’s primary stakeholders and potentially even perform background checks on them. Others primarily concern themselves with the value of assets held by your business.
The bottom line is that you need a lender with an appetite for your category, risk profile, and unique characteristics of your business. Be choosy about who you apply with and careful about how you apply. If all of this sounds a bit overwhelming, fear not. You can make your loan application shine, get lenders to compete for you, and get the capital you need faster by partnering with a broker. Let’s delve deeper into choosing the right lender and how your broker can help you succeed.
Online Lenders
Most of us are used to looking online for things we need. If we need a loan, it’s usually our first line of inquiry and it leads us straight to online lenders. Online lenders appear to be fast, convenient, and free of the hassle of meeting face-to-face. Much of that can be true, but that doesn’t make them the best-fit lenders for your business.
Online lending is mostly for low dollar amounts – $200,000 or less. That’s a problem if you’re acquiring a new business, buying property, or onboarding certain types of equipment. These are called application-only loans because they don’t need to look at your business’s books. That means they don’t get to know you or your business’s specific needs. So, while these loans can close fast, they are rarely thoughtful.
What to Consider
You’re on the hunt for a small business loan, but not just any loan will do. It’s important to look past the flashing dollar signs and see what’s really being offered. Here are some of the main components of a loan to consider before signing on the dotted line.
Speed
So you’ve found a lender who says they can release the funds to you within 24 hours of approval. Sounds great, but what’s really going on here? In most cases, what you gain in speed you sacrifice in interest rates. Because the lender hasn’t taken the time to get to know you, they don’t have a full picture of your risk profile. So, they’re mitigating their own risk by charging you an interest rate that helps them cover their risk.
If you aren’t in a rush, you’ll almost always save money with a slower loan. That can mean a long-term loan such as a commercial mortgage or a thorough application process like an SBA loan. But, if you can’t wait, there are still ways to boost capital without paying a high price.
Amortization
Amortization, in loan terms, is basically how much of your monthly payment goes toward your principal and how much goes to interest. Usually, the percentage of interest is higher when you first start the loan and lower toward the end of the term. The amortization period can also extend past the loan term to give you lower monthly interest charges. However, the remaining interest amount will be due in a lump sum when your loan ends.
Depending on how quickly your business is growing, you’ll benefit from a different amortization period. But a generic loan, like those online lenders offer, doesn’t consider your growth because the lender doesn’t require you to submit that information to apply. A broker who knows your business goals will automatically eliminate loans with an amortization that doesn’t fit, so you don’t waste time on the wrong loans.
Terms
Your loan term is how long you’ll be paying on the loan before it’s paid off. Generally, short-term loans have higher interest rates than long-term loans. If your business is flipping commercial properties, however, you don’t want a standard mortgage. Since you’ll see a return on your investment in the short term, it doesn’t make sense to keep the debt longer. But with a long-term loan, you’ll run into early payment penalties and other fees for paying it off early.
Fees
If you’ve ever read a fee schedule in detail, chances are you had to squint to see the fine print. While lenders are required to disclose their fees, they don’t always do so in the most accessible ways. Fees can be substantial and if you’re not prepared for them, can be an unpleasant surprise to closing your loan.
A good broker knows what fee structures should look like, given a particular level of risk. We will have likely already crossed a lender with unreasonable fee structures off our list of potential matches. It’s just one way we save you time, effort, and money.
Interest Rate
If you’ve received a loan offer, especially if your applications haven’t been successful in the past, you might think you’re stuck with the interest rate on the page. But, that’s not always the case. Even if you are in a high-interest loan right now, you can step down into a lower rate either with the same lender or a new one. Without submitting another loan application, however, how do you know what you qualify for?
We remain up to date on current terms, rates, and underwriting criteria for multiple lenders to help our clients access the best terms and rates given market conditions. We also know which lenders specialize in the financing type you need and the industry you represent. That narrows down the selection to just the lenders who are worth your time.
How Brokers Help
Our primary role is to simplify the search for a loan and properly package your application to demonstrate the value of your business to lenders. Here is a recap of the benefit we provide to borrowers:
- We customize loans to fit your business.
- We help you determine which loan terms are the best fit.
- We clarify lender fees and conditions and weed out bad lenders.
- We build relationships with lenders to get reduced rates for their clients.
- We build an application package that’s accurate, complete, and lets your business shine so you don’t have to repeat the process every time you apply.
Your chances of being approved for the loan you want with the rates and terms that fit your business always increase when you work with a broker. Again, you need a lender with an appetite for your category and risk profile. The fastest, most accurate way to find that lender is through a qualified broker.
So the next time you’re hunting for a business loan, don’t use the “shotgun” approach and submit to every lender you find. With every stray bullet, your credit score and your chances for approval go down. Be precise, accurate, and better equipped to succeed. Reach out to our team for a free assessment. We are happy to point the way.