When looking for a business loan, it’s important to compare rates and terms from multiple lenders. You can use an online lending marketplace to get multiple offers and compare rates. You may not qualify for a traditional bank loan if you have bad credit. But there are other options available, such as a cash advance from your merchant account provider. With this type of loan, you don’t need good credit to qualify – but you will pay higher interest rates and fees than a traditional bank loan.
So what’s the best option for your business? It depends on your individual situation. Compare rates and terms from multiple lenders to find the best deal for your business. In the section below, we’ll discuss the factors to consider before applying for a capital loan and the long-term loan risks.
Let’s get started.
Requirements of Qualifying for Business Loan
Business & Personal Credit Scores
Lenders will look at two types of credit scores: business and personal. Your personal credit score is important, but it’s not the only factor lenders will consider. They’ll also look at your business credit score to get an idea of your business’s financial health.
Annual Business Revenue & Profit
The next step is to annualize your business revenue and profit. This will give you a good indication of how much revenue and profit your business generates annually. Once you have your annualized revenue and profit figures, you can begin to compare different loan options.
Your debt-to-income ratio is the percentage of your monthly income that lenders use to decide whether or not to give you a loan. A higher debt-to-income ratio means more of your monthly income is going towards debts, making it difficult to qualify for a loan. Capital loan finance is also a concern for lenders when processing your loan application.
Debt-Service Coverage Ratio
The debt-service coverage ratio (DSCR) is a financial ratio that measures a company’s ability to repay its debts. A company with a DSCR of less than one may have difficulty repaying its debts, while a company with a DSCR of more than one should have no problem doing so.
Collateral for Secured Loans
If you’re looking to take out a secured loan, you’ll need to put up some form of collateral. This is usually in the form of property or assets, which the lender can claim if you default on your loan repayments. The amount of collateral required will depend on the size and type of loan you’re applying for.
The next step is to develop a business plan. This will help you determine how much money you need to borrow and what kind of terms you can expect. A business plan will also give lenders an idea of your company’s financial stability and growth potential.
Things to Consider Before Applying for a Loan
- Your business’s credit score: Lenders will review your personal and business credit scores when considering you for a business loan. If you have bad credit, you may still be able to get a loan, but it will likely come with a higher business loan interest rate.
- How much money you need: You should have a clear idea of how much money you need before applying for a loan. This will help you determine which type of loan is right for your business.
- The repayment terms: Repayment terms vary by lender, so be sure to compare options before choosing a lender. You’ll want to find a loan with terms that fit your budget and repayment schedule.
- The fees and costs: Be sure to compare the fees and costs of different loans before choosing one. Some loans have origination fees, prepayment penalties, or other hidden costs that can add to the total cost of the loan.
- Your business’s financials: Lenders will want to see your business’s financial statements when considering you for a loan. Be sure to have these documents ready before you apply.
Long-Term Loan Risks
Long-term loans tend to have higher interest rates than shorter-term ones, meaning you’ll pay more in interest over time. They also typically require collateral, which can put your business assets at risk if you can’t repay the loan.
And finally, long-term loans can be difficult to obtain if your business doesn’t have a strong credit history. For these reasons, long-term loans are generally best used for established businesses with a good track record of profitability.
You may want to consider alternative financing options if you’re a startup or small business with limited operating history.
The Bottom Line
Business loan rates are determined by many factors, but most importantly, by the business’s creditworthiness and the collateral’s strength. Loan terms and conditions also play a role in setting rates. When shopping for a business loan, comparing offers from multiple lenders is vital to ensure you get the best deal possible.
For businesses that don’t qualify for traditional loans, alternative financing options are available, such as merchant cash advances and factoring.