Submitted by Chinwe Onyeagoro, CEO of FundWell
There is no easy, central online source for comparing loans, or in some cases, understanding eligibility. Reviewing loans based on an apples-to-apples comparison can be challenging based on the amount of information lenders typically provide upfront. Taking out a business loan is a strategic business purchase, and should have the appropriate amount of due diligence as any activity that will impact business and personal finances.
FundWell has outlined the top reasons why business borrowers should do competitive research for a business loan.
1. Interest Rate and Loan Products – there is a lot of variance among interest rates and loan product types. Even a few extra points could make a difference with cash flow. Getting the lowest interest rate is important, but borrowers should also consider the loan product, and there are many types, such as: SBA, traditional bank, factoring, peer-to-peer, merchant cash advance, and many more.
Each are different and it helps to understand the pros and cons of each to determine which type of loan fits best with the borrower’s business model, timing of when funds are needed, and repayment process over the term of the loan. For example, is a secured or unsecured loan better? It depends on whether or not the borrower has collateral. Current credit rating and business financial situation will determine the borrower’s eligibility for loan amount, rate and type. Depending on the loan product you are eligible for, fees and timing of repayment may vary widely. For instance, if you compared a traditional bank line of credit to an SBA 7(a) loan the rules are very different. A bank line of credit can be drawn down and paid back at any time before the term expires, and you are only charged interest on the portion of the loan that you have actually used. Whilst with an SBA 7(a) loan, the borrower pays interest on the full loan amount and could be liable for a prepayment penalty if they pay off the loan within the first three years.
2. Loan Amount – A borrower should ensure he or she is eligible for the total amount of money needed. Some lenders will only be able to lend a partial amount based on their unique underwriting rules. Underwriting is the process lenders use to assess a borrower’s eligibility for their loan products. If there is a gap in funds raised from a lender, a borrower may need to get a second loan from a different lender.
3. Terms, Conditions and Options – Although these factors are typically less critical than interest rate, loan amount and loan type, they are still important to consider, because they can help a borrower from a cash flow and repayment standpoint, offer protection, impact your personal credit score, influence who you have to disclose to, and much more.
4. Negotiating – The loan market is competitive, yet most borrowers don’t consider negotiating with a lender. If at least one loan offer has been received, a borrower can use this as leverage to negotiate with another lender to either get a higher amount, lower interest rate, or better terms. This tactic typically only applies to business owners with a good personal credit rating and healthy cashflow.
5. Lender Service Offering and Proximity – Another consideration is whether or not it is important to seek a lender that offers several financial services the business needs or is already using, such as a checking account, or credit cards. Additionally, consider if it is important to have the lender close to the business office or headquarters, or provide a network of ATMs that mirror business locations. This is more important if a borrower is selecting a lender based on overall service offering for convenience purposes.
6. Customer Experience – It is important to review small business customer comments–positive or negative–on a lender after a borrower has narrowed down the lender options. There are several online sources to determine if other borrowers have had positive or negative experiences with a lender. You can always start with an Internet search, or visit www.consumeraffairs.com, www.bbb.org, or www.creditkarma.com. Also you can visit the lenders’ social media sites and view posts, or ask other small business owners you know.
7. Decision Making – After a borrower completes the business funding research and comparison process the final decision may be to not get funding. Based on eligibility for the loan amount, interest rate, and terms, it might make sense to postpone funding acquisition. A borrower would do this in order to take actions to improve his or her credit rating, business finances or cash flow in order to take advantage of better funding options at a later time.
By reviewing and comparing multiple lenders and loan products before accepting a loan offer, a small business borrower saves time and gains useful decision-making information. The loan application and approval process, especially for multiple loans, can require significant work on financial documents, multiple calls and visits to a lender, and can have a negative impact on a borrower’s credit rating every time a credit score is requested by a lender. Also, by taking ongoing steps to improve personal and business financials a business owner will always be in good shape to access more and lower cost capital.
FundWell is a small business loan matching and financial wellness site that helps borrowers get the best loan they are eligible for today, and improves their eligibility for more capital at lower interest rates in the future. FundWell provides borrowers with up to three lender matches for free through our referral network of national lenders who directly provide 11 different types of loan products for amounts as low as $500 with 0% interest up to $2 million dollars with varied interest rates. FundWell provides education, transparency and assistance with the loan application process, and our Financial Wellness Program provides a plan and tips to help small business owners improve their financial health, credit score and fundability over time. Visit www.thefundwell.com to learn more.