The first-time shoppers guide to getting a business loan
Financing your business in Colorado requires a lot of questions to be answered
If you’ve been in business a while, you understand that next to no aspect of running a business is simple and straightforward. For instance, it may seem like you must jump from one hoop through the next trying to obtain business financing.
For one thing, you have to know whether you are eligible for a business loan in the first place. Also, it’s important to research different loan options, as well as red flags from potential lenders.
All of this takes time and effort, but without securing a loan or other business funding, it can be difficult or more time-consuming to reach your business growth goals. If you know you want to scale up your business or expand into a new market, a business loan may be your best option.
While securing a small business loan is no walk in the park, there are plenty of resources available to make the process easier.
As a Colorado business owner, you have access to organizations like the Colorado Small Business Development Center Network (SBDC). Beyond that, let’s take a deeper dive into the most important considerations when getting a small business loan.
Determining Your Eligibility
The first thing you need is to determine whether you would qualify for a loan. While there are different types of business financing that each come with their own eligibility requirements, run through a basic list of loan qualification criteria.
In other words, give yourself an audit. If you were in the lender’s shoes, would you grant yourself a loan?
Here are a few follow-up questions banks and other lending institutions will ask about your business:
- How long have you been in business?
- What is your personal and business credit score?
- What does your monthly cash flow look like? In other words, will you have enough money coming in each month to cover this new potential debt payment?
- Do you have a declaration of bankruptcy in your background? If so, from how long ago?
- Do you have any other outstanding debts? What about a tax lien?
All of these questions will help the lender make one major determination:
IS YOUR BUSINESS A GOOD INVESTMENT OR ARE YOU TOO MUCH OF A RISK?
Lenders want to know that your financials are in good shape and that you will be maintaining (and growing) profitability in the future, so it’s important you have a very clear picture of where you stand.
Understanding Your Options
There are a number of business funding opportunities, some of which are more challenging to obtain than others. An SBA loan, for example, tends to be the gold standard among business lending, as it offers a long-term loan with one of the lowest interest rates — 5-25 years at 7-8 percent APR. Therefore, those loans are typically reserved for business owners with a proven history of financial stability and creditworthiness.
An SBA loan is not your only option, however; business owners with lower credit scores and less business experience may consider applying for short- or medium-term loans. There are also many other debt financing possibilities, depending on what you need the working capital for. For example, if you need financing to pay for a piece of expensive equipment, you may apply for equipment financing, which requires you to put the equipment itself up as collateral against the amount you borrow.
The SBDC here in Colorado is also an excellent organization if you need advice about various loan options. They offer consulting services with certified current and past business owners throughout their 14 community-based centers. Their free, one-on-one consulting offerings are a great resource if you’re looking to learn more about access to capital, writing a business plan for your loan application, and more.
What to Watch Out For
An important thing to keep in mind when applying for business financing for the first time is that it may not all be about you. If your business is a partnership, the lender will need to access information about each primary stakeholder — typically all of those with a 20 percent or higher stake in your business.
This means that one negative credit score among your business partners could mean the difference between being approved or rejected for a loan. Be upfront with your business partners so that you know exactly what you’re getting into, including whether now is the right time to apply for a loan. You don’t want an unwelcome surprise after you’ve already started the long loan application process.
Additionally, be aware of certain red flags when deciding where to apply for a business loan. No reputable lender will ask you for money up front, and know that even online lenders should have a physical mailing address (and not just a P.O. box).
And remember, if it sounds too good to be true, that probably means it is. Keep that in mind the next time you see a lender making a claim of “guaranteed approval.”
Final Thoughts: Be Prepared
Overall, it’s important to enter any type of money borrowing situation only after you’ve sufficient researched your options. Consult an accountant to help you work out potential interest rates and debt repayment plans before accepting a loan offer. Be honest with yourself about where your business is standing, financially, and where it is going. And don’t be afraid to reach out to other business owners who’ve been there in the past.