For many small businesses, a short term loan can help to meet financial needs by providing funding quickly, with short repayment periods. On the other hand, some circumstances may make a long term business loan a better option. These loans can meet a long term financial need, often with lower monthly payments and lower interest rates.
If your small business is considering a long term loan, use these tips to prepare first.
1. Meet the 4 Cs
When applying for funding, a lender will look at the 4 Cs. Outline where your business stands on each of the Cs before looking for funding.
- Capital includes the liquid assets of your business that could be cashed out and used to make loan payments.
- Collateral includes physical assets that could be seized if your business is unable to make loan payments and defaults on the loan.
- Capacity is the ability of your business to make enough money to pay back your loans. You should be able to show that your business has a history of making payments on time.
- Character is your personal and professional history. Lenders want to see that you have a strong credit history, an ability to repay loans, and that you have the integrity that they can count on when entering into a financial agreement with you.
2. Improve Your Business Credit Score
The four Cs listed above are all directly related to your credit score. Your credit score is a major factor in determining whether you and your business are eligible for long term loans. It serves as a quick picture of your financial history and your ability to responsibly handle money.
Build your business’ credit profile with the major business credit bureaus, Dun & Bradstreet, Equifax and Experian. Opening account separate from your personal finances will get your business on the map. Then, you can begin taking steps to build your credit history and boost your score. Responsibly using a business credit card, making on-time payments, and diversifying your funding sources can help to raise your score, making you a better candidate for loans.
Experian has a sample business credit report that can help you see what factors go into a score and what information a lender will find when they pull your report for a loan application.
3. Start Small with Short Term Options
In order to build up a credit history, grow a credit score, and prove that you can be trusted to be responsible for loan payments, you may want to start out with smaller loans. There are plenty of benefits to taking out small loans and using a variety of funding options for small projects before applying for long term funding.
Short term loans are typically easier to secure, as the small amount has less risk of not being repaid. You can use short term small business loans to pay for expenses like additional inventory or office equipment. Follow the loan terms and make on-time payments to build your credit history and increase your credit score, showing future lenders that you can manage money and be trusted to pay back debts.
4. Research Long Term Business Loan Interest Rates
Before meeting with a lender in person or applying for funding online, prepare yourself by looking at current interest rates and trends in rates for different types of long term funding. Do the calculations to determine how much money you’ll need from the loan, along with how much interest you’ll be paying back, and what your monthly payments will be. Being prepared for obtaining a long term loan should include a realistic picture of how the loan terms will affect your business and whether you can reasonably take on that responsibility.
5. Know Your Options
When it comes to long term loans, there are a few options that may make sense for your business.
- Business term loans are a good option for businesses that have a one-time expense to cover. For example, a warehouse renovation to make room for inventory. Longer terms can make these large expenses more manageable by paying them off over time.
- Business lines of credit provide a revolving line of credit that can be helpful for long term projects like building a new facility for daily operations. Long-term projects come with unexpected costs and revolving credit can meet those needs.
- Commercial mortgages are a long term loan option with a very specific purpose. Fixed-rate mortgages make it easier to budget for your commercial building.
Look over each of your options carefully and choose the one that will work best for your business and your funding needs.
6. Prepare Your Documents
Your lender will want to look at your financial statements to get an overview of how much money your company is bringing in and what debts you’re currently paying. To prepare for your business loan application, you should have a profit and loss statement prepared, as well as a projection of your business’ financial future. Include estimated profit and expected expenses to show your ability to repay a loan and continue to grow as a successful company.
7. Have a Business Plan
In addition to financial documents, be prepared with a business plan that outlines manageable goals. Use the business plan to show lenders the mission of your small business, the products or services your business offers, and your plans for growth. Outline the need for funding and exactly how funds would be used to meet those business goals and reach milestones for that growth.
8. Understand Your Risk Factors
Is your small business a risky investment for lenders? By knowing your risk factors, you can manage expectations before beginning the loan application process. These are some of the factors that could make you a bigger risk for lenders.
- Poor credit history, showing that you have a history of not making timely payments or showing that you've sought more funding than you can reasonably payback.
- Lack of collateral, giving a lender less security in knowing that they will be able to recoup their money if you fail to repay the loan.
- Being a new company can be a risk factor. Without a history of profit and loss, lenders won't be able to get a good idea of whether your business will be successful or whether you, as a business owner, will be able to responsibly manage the growth of the company.
Being prepared for what the long term loan application will involve and where your company stands with lenders will make the loan process smoother for everyone involved. When you’re prepared for looking at the long term funding options available to your small business, contact Capital Collaboration to find your funding solution.
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Checking for pre-approval will not affect your credit score.
[author] [author_image timthumb='on']https://capitalcollab.com/wp-content/uploads/2018/12/Jesss-Profile-Pic.jpg\[/author\_image\] [author_info]Jess Barnes | Jess has a passion for helping small business owners build their brands and connect with their customers. She writes about money, tech, and marketing for blogs and businesses.[/author_info] [/author]