All businesses need capital to get started and/or grow, and most businesses will need to seek funding or a loan to do it. Your first options are to fund the business yourself, if you have the savings to do it, and to seek venture capital or angel investments from outside investors. If those two options don’t work for you, your next best option is to seek a business loan.
How Business Loans Work
Business loans work much like personal loans. You’ll receive a sum of money upfront, and you’ll eventually be required to pay that money back, with interest. There are two main differences with business loans: first, the business is responsible for paying back the loan (rather than an individual within the business), and second, there are many types of business loans. For example, an installment loan works much like conventional personal loans, with borrowers paying back principal and interest in monthly installments, but with balloon loans, you’ll only pay interest—eventually paying back the full principal at the end of the loan period.
How to Improve Your Chances
Obviously, banks want to give out loans to the businesses most likely to pay them back (and in a way that earns them the highest potential profit). Not all entrepreneurs who apply for business loans get approved, but you can improve your chances of being improved with these easy steps:
- Choose a bank where you already have an account. One of the best—and simplest—ways to improve your chances of success is to try to get a business loan from a bank or lender where you already have an account. For example, if your business checking account is through “OmniBank,” reach out to a loan specialist at OmniBank to explore your options. Banks tend to give long-term customers preferential treatment, so you’ll be more likely to get approved, and you might score a better deal in the process.
- Improve your financial standing and credit. Banks look at your business’s financial history when deciding whether to give you a loan. If you have a strong history of positive cash flow, good business credit, and good future prospects, you’ll increase your chances of success. Unfortunately, most businesses that need a loan (especially new ones) don’t have these features. You can make up for this, in some cases, by improving your personal credit.
- Choose the right loan type. There are many different loan types, and you may be able to increase your chances of getting a loan if you choose the most appropriate type for your business. For example, if you don’t have much of a financial history, you could choose a loan with stricter terms and borrow a lower principal. If you’re trying to build credit, a floating line of credit could be better than an outright injection of cash. Get a feel for the options available before you make a final decision.
- Consider offering collateral. Most loans are, by default, unsecured, but you can also get a secured loan. A secured loan is a loan tied to a specific piece of collateral, such as a piece of equipment or other business asset, that the bank will claim should you be unable to pay back the loan. It’s a way to lower risk for the bank giving you the loan, and usually comes with lower interest rates and a higher rate of acceptance. The flip side is, of course, if you fail to pay back the loan, you will immediately lose that asset.
- Negotiate for a better deal. Even if your chances for getting accepted aren’t great, it’s still in your best interest to negotiate for a better deal. Most lenders will have a bit of wiggle room when it comes to terms and conditions, and even a tiny decrease in your loan’s interest rate could substantially reduce how much money you pay over time. This is especially important for long-term loans and large sums of money.
With these five tips, you’ll greatly increase your chances of securing a business loan—even if you don’t have much business history to fall back on. If your first lending institution choice falls through, apply to a backup. If that doesn’t work, consider opting for a personal loan instead of a business loan. There are always financing options available to you, so don’t give up.