Finding the right loan for your business!
Searching for a business loan can seem like an overwhelming task. With countless lenders out there, it’s very hard to know what kind of loan your business needs, where you can apply, and which lenders will actually accept your application.
The search for the best business loan will always be a time consuming process, if you don't know what you are looking for. However, if you’re educated about what to look for, you can drastically speed up the whole entire process.
Here’s a quick Click N Loans guide to everything you need to know.
What Are Lenders Looking For?
Most lenders look for four different characteristics when deciding if they can approve funds to your business. These four, characteristics can quickly tell a lender wether the business may be eligible for funding or not.
Here is what lenders are looking for:
Personal Credit/FICO Score
Your personal credit score is a measure of how well you’ve paid your debts previously. Lenders want to be sure that you have a history of repaying debts on time. All things considered, if you have a good history of repaying debts, you’ll likely continue to do so in the future.
Time in Business
The longer your business is operating, the more likely it is to do so in the future. Before approving your business for capital, lenders want to be sure that your business has withstood the test of time.
Rule of thumb is, the longer term length often requires a longer time in business.
Very easy concept here, your business has to be making enough money to repay the debt. The amount of revenue you’re currently making determines the amount of funding your business will receive. Most lenders fund 10-15% of your yearly revenue, sometimes more. So if you do $100,000 a year, chances are you will be offered $10,000-$15,000 in funding.
Debt Service Coverage Ratio
This one is a little trickier. Your debt service coverage ratio, DSCR, basically tells the lender how much money you have available to repay additional debt or loan payments. According to Investopedia, your DSCR is calculated by the equation below. Net Operating Income divided by Total Debt Service
Net Operating Income / Total Debt Service = DSCR
A DSCR is used to show you can cover your current debts, and you could manage more debt without problem. Usually, lenders like to see that you have a DSCR of 1.15 or above.
Which Loans Are You Eligible For?
All lenders have different requirements regarding your personal credit score, time in business, and annual revenue, but mostly the recent strength of the revenue. Use these general guidelines to decide which loan products you should apply for:
|Credit Score||Time in Business||Annual Revenue|
|Bank/SBA Loan||640||2 years||$50K|
|Medium Term Loan||600||1 year||$100K|
|Short Term Loan||500||3 months||$60K|
|Merchant Cash Advance||500||3 months||$60K|
|Line of Credit||600||6 months||$60K|
It’s important to note that each lender is has their own requirements, which could be more or less strict than the guidelines written above. However, the above table can help give you an idea of the funding that would be available to your business.
Loan Products Overview
Confused by what all the terms above? Here’s a rundown of each loan.
Bank, Credit Union, and SBA Loans
Many credit unions and banks offer business loans to eligible merchants. But most banks have very long and tedious applications and approval times.
The Small Business Administration loan is a good option for merchants who can’t qualify for a bank loan or credit union loan on their own. Rather than issuing out loans, the SBA backs a portion of your loan, directly with on of their private lenders. So the risk is mitigated for the SBA.
Medium Term Loan
Medium term loans are disbursement loans that range from about 2 to 5 years. These loans are normally offered by online financial companies, like Click N Loans.
Because the term lengths are shorter (and therefore less of a risk), medium-term loans are are normally easier to obtain for than bank loans. But you still have to have an established business (at least a year or two old) to qualify.
Short term loans are loans that range from 3 months to two years. Often, these loan carries a one time flat fee instead of a compounding interest rate. Which means you know the total amount the loan will cost before signing. Repayments are often made in daily or weekly and sometimes monthly installments.
Merchant cash advances are the quickest and easiest ways to get funding for your business. They usually have the easiest requirements of all options listed in this article, although they have no set term lengths, most MCAs are designed to be repaid over the course of 3 months to 12 months.
Lines of credit are very similar to credit cards—you are given access to a certain amount of capital, you can draw up to your limit whenever you want, and you only have to pay interest on the amount you’ve borrowed. This option of financing is the best for businesses that frequently need to borrow small amounts of capital, such as restaurants, construction companies and manufacturers.
Finding the right business loan is a lot like dating: the merchant and the lender both need to decide if funding your business is a relationship they want to start. Also like dating, the search for the right business loan can be an intimidating, long, and occasionally frustrating task.
Fortunately, Click N Loans has you covered! Fill out our form here and our dedicated funding specialist will assist you step by step to help you and your business get the funding you need!