Many times, when a new or struggling business owner determines that they need a business loan to start or grow their company, they first think about where to get that loan and then begin to worry about being qualified.
Do I look at alternative lenders? Do I seek out a SBA loan? Do I forgo the business loan and look for a personal loan? Will my bank fund my business or my need?
Will my bank understand why there is a blemish or two on my credit report? Will the lender require more in cash flow then my business is currently earning? Or, will I have enough financial collateral for an alternative loan or physical collateral for a bank loan?
These are common questions, issues and worries that nearly all business owners – seeking capital – go through.
And, while these are all great questions that a business owner should be thinking about – they should not be the first questions that a potential business borrower should be asking (asking themselves or others).
Where To Find Your Business Loan
Where to look for a business loan really depends on two things – not your credit or collateral – but on:
- How much you are seeking, and
- What the funds will be used for.
Let’s say that you are seeking a large business loan – say $10 million to buy commercial property for your business. The amount that you are seeking would severally limit your loan options. For one, the SBA caps their loan guarantee limits – thus, a SBA loan might be out of the question. Further, many banks – either local banks or local divisions of national banks limit their exposure in any one single loan and as such they tend to limit the amounts they will put out to one borrower.
Thus, your only option here might be a financing company (a non-bank financial company) that deals with large commercial loans only or a venture capital firm.
Or, let’s say that your business only needs a small loan – say around $30,000. Now, very few banks like to underwrite business loans this small – they claim they cannot make money on them. Further, many of the alternative business lenders out there (even the new ones) do not like to fund loans under $50,000 – they claim that these loans are not worth their time and effort.
The amount that you are requesting matters in that most lenders have sweet spots and if you don’t fit that sweet spot – they will not fund your request no matter what else your business brings to the table.
Use Of Funds
Once you narrow down lenders that are willing to provide the amount you are seeking (there are lenders out there for every need), then you have to determine if that lender will also fund the reason your business needs that financing.
Some lenders will only fund equipment financing. Some will only fund commercial real estate and some will not fund working capital or goodwill (in the purchase of a business) even though they will fund almost anything else.
Most alternative lenders will finance working capital needs but do not finance equipment, payroll or real estate (even though you might use those funds to purchase those items) you will not get a loan specifically for those needs nor will the underwriting process be geared to those needs.
It is one thing to find a bank or lender that will provide the amount of money you are seeking – it is another to find a lender that will fund both the amount and use (or a lender that will fund all your specific needs – as one may fund equipment but not working capital while another will fund working capital but not equipment).
Then, after you identify a lender that has a product for you – that matches your needs (amount and use) – then you transition into the qualification portion.
Are You Qualified
Once you have identified a potential lender – then it is really up to you to research and understand what qualifications you need to meet for that particular lender.
Example: Most banks look for credit, cash flow and collateral to approve their loans. But, you determine that, while you meet those types of criteria, your bank will not fund your request (in amount or use). Thus, you switch your search to say an alternative lender.
But, even though you might meet a bank’s requirements, you still might not meet an alternative lender’s qualifications.
While banks look at credit and cash flow, an alternative lender might not and be more focused on the collateral your business owns or is willing to pledge.
Or, while a commercial real estate financing company may be overly concerned about your cash flow an equipment leasing company may not care about that at all.
All lenders have their own policies – and they alone determine how much they will fund, what those funds can and cannot be used for and what their criteria for approval is.
Asking (even asking yourself) the right questions in the beginning can go a long way in not only getting you the business loan you need but can both save you time and a lot of headache.