Read This Before You Apply for A Business Loan

Wondering if you should apply for a business loan right away?

We hope you’ve been keeping up with our posts, yesterday we touched on the different types of corporate credit available.

Today we wanted to dive into business loans. A lot of new owners make the mistake of trying to secure business loans or startup funding right out the gate.

We know what we’re thinking… 

“isn’t it a smart idea to get a business loan?”

Yes, however…  Timing is everything. While there are a number of benefits of receiving a loan, there are a lot of things to consider.

It’s MUCH easier, faster and far less risky to apply for a business loan once you’ve established some credit history because the responsibility of paying back a loan could potentially cause more harm than good if your company isn’t in a stable financial position to handle the payments. Not to mention that with higher credit scores and history, you’ll be able to secure financing with better terms and lower interest rates.

So here are a few things to consider before you decide if getting a business loan is right option for you right now…

1) Startup Business Loans Can Be Hard to Qualify For
“Nobody does a good job of providing financing to startup businesses because it’s the highest risk out there,” says Charles Green, founder of the Small Business Finance Institute.

Ironically enough, many lending institutions (both online and off) won’t approve new companies for financing. They see startups as a big risk since they have little to no credit history and may not yet have the cash flow to secure payments.

As of 2022, the approval rate for business loans (including SBA loans) at large banks, is around 25%.

Many lenders also have ‘time in business’ requirements to ensure they’re only loaning to companies that are financially stable. 

This is especially true when the applicant lacks strong personal credit, cash-flow or assets for collateral.

Even with startup loans, lenders will heavily weigh factors such as the type of business, your previous experience and personal credit score. What’s worse, is even if you do qualify – the process may take weeks or months depending on the type of loan and the lender.

2) Business Loans May Restrict Your Cash Flow
Business loans require monthly payments for some combination of interest and principal even if you aren’t making money yet. Having additional monthly payment obligations could restrict your company’s flow (considering these types of loans often come with high interest rates).

Plus, missing loan payments can mean major damage to your credit score(s). Before considering a loan, take all business expenses into account, get a quote for the type of loan you’re looking for to give an estimate for interest rates and then use a loan calculator and factor in the cost of loan payments. You may find that extra cost is more than your company can realistically support right now.

3) You May Not Secure the Amount You Need in a Business Loan
The process of getting a loan can sometimes take weeks, in rare cases even months to complete.

4) A Business Loan May Put Your Personal Credit at Risk
Depending on how you’ve established your business finances, getting a business loan won’t necessarily guarantee that your personal finances are protected. Given the extra risk of lending to businesses, many financial institutions require a personal guarantee and collateral, that means if the business defaults on its debt, banks will come after you for repayment.

You may be asking yourself: “but I need money NOW – isn’t a business loan the best way to do that?”

There IS a right time and place to apply for a business loan but there are certain steps that should be taken FIRST…

Inside Corporate Credit Secrets you’ll learn a proven process to building a strong credit foundation so you can get approved for business loans faster.

Join Corporate Credit Secrets & Get Started Today

Wondering what the most important business loan requirements that lenders look for? Check these out before you start your research or loan shopping. So be on the lookout for that blog post tomorrow.

Your friends in finance,
Private Wealth Academy