When it comes to starting a small business, one of the biggest hurdles will be securing funding. Small business loans are one of the best solutions to this particular problem, but they aren’t as simple as they might first appear. Although they may sound similar to personal loans, there are some key differences that you need to understand before proceeding.

How to Apply for a Small Business Loan

In theory, all you need to do is find a lender, apply, and get accepted. In practice, it’s a lot harder than it sounds. There are many factors to consider at each step, both in terms of preparations and potential pitfalls.

For example, when you’re browsing lenders, you shouldn’t settle after you find the first viable option. It’s hard to accurately gauge what is normal for your situation until you’ve spoken to a few different lenders and gathered some rates to compare. A rate that may have looked good enough in a vacuum may look a lot less enticing when held up to the competition. Furthermore, you also need to keep in mind that some lenders may take advantage of your relative unfamiliarity and push suboptimal rates in the hopes that you don’t know any better. The best way to combat such tactics is to do your research before committing.

Preparations to Make Before Contacting Small Business Lenders

Before you communicate with even one lender, you need to make sure that you have a solid idea of what you are looking for. How much money are you looking to get and how long do you expect the repayment period to last? If you press forward with only a vague notion that you need money and want to pay it back eventually, then you run the risk of taking a loan that you aren’t prepared for. If it’s too much money, then you will be needlessly paying extra interest. If it’s too little, then you may need to take out another loan, leading to additional complications and headaches. If the repayment term is too short, then you may struggle to make those faster, larger payments.

You also want to make sure that you have not only a firm understanding of your own financial situation, but also the documentation to back it up. The process will go a lot smoother and you will come across as more professional if you are immediately able to present evidence of your financial trustworthiness and your business’s ability to pay back the loan. A list of all assets and applicable tax information is a good place to start.

However, the future is just as important as the past. Evidence of your likeliness to pay back the loan is good, but you also want to have a firm idea of your business’s prospects in the future, particularly when it comes to how this loan will help you. How much money does your business make now, how will that increase in the near future, and what will you be able to repay in both the best and worst case scenarios? If you don’t have at least a very good idea for how to answer these questions, then you should carefully consider the future of your business before proceeding.

How to Compare Small Business Loan Terms

When it comes to actually determining the best terms for your situation, there are several key areas that you want to focus on: interest, loan length, and late penalties.

Interest is simple enough and exactly what one would expect: a lower interest rate means the loan will cost you less money overall. The better you look as a loan candidate, the lower the interest rate will probably be. This is one of the main reasons for gathering up as much relevant evidence as possible before having a meeting with a lender. If you can convince them that you have a history of repaying things on time and the means to do so now, then it will be a less risky investment for them.

The length of the loan is just as important, but can be a little more complicated to judge. Whether you want a longer or shorter repayment period can depend largely upon your circumstances. For example, a short repayment period will cost you the least overall, but that will often come at the cost of a high monthly payment. If you can bear that burden easily, then a low duration loan can be a good choice, but if you cannot, then it may be better to opt for a lengthier loan. You will pay less each month, reducing the strain on your fledgling business, which can be a benefit worth much more than the slight increase in overall interest payments.

Late penalties are exceptionally important as well. The severity of penalties can vary from lender to lender and even from different types of violations. There may be a rather small penalty for paying a day or two late, but a much steeper one if you take an extra week or even fail to pay until the next payment is due. Thus, it’s critical that you read the fine print and identify exactly how punishing each sort of violation will be. If you experience a stroke of bad luck and have to delay a payment, then you will definitely want to know how to handle that while causing the least damage.

Rejection and Trying Again

Even if your initial application is rejected, that’s no reason to throw in the towel. You may need to widen your search to other lenders or refine your application before further attempts, but there are steps you can take to improve your chances of being accepted in the future.

However, if none of those are viable options, then it might be time to consider why your application is getting rejected. If no lender is willing to give you money after looking at your finances, perhaps you aren’t in an ideal position to be investing this much into your growing business. Further research and some extra time getting your own finances in order may yield some new insight into your situation.

On the other hand, if your problem is that lenders are willing to give you a loan, but it’s just a little less than you need, then it may be a good idea to consider multiple smaller loans from different lenders. This diffuses the risk a bit and may make them more likely to give you the money you need.