Find out all about traditional loans, and whether these are a good fit for your company’s needs.
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Mention business loans, and a traditional term loan is typically what comes to mind. It’s one of the most common forms of traditional lending, and is straightforward and easy to understand - you’ll borrow a pre-approved amount, and pay the loan back over a fixed term, either at a fixed or variable interest rate. The repayment term length may vary, but typically lasts between three to five years.
Traditional term loans tend to have large loan amounts and long repayment terms. In general, these loans are used to fund specific, one-off investments, such as equipment purchases, business acquisitions, major renovations or long term expansion activities.
The following are general requirements that can help you assess if a traditional loan is a good fit for your business:
You have a strong borrowing profile: Traditional lenders have stringent requirements and a rigorous credit assessment in place. The application process typically involves multiple stages, including in-person meetings, a loan presentation and preliminary assessment. Borrowers need to meet lending criteria such as having a minimum operational history of two to three years, a minimum annual revenue of $200,000 - $300,000 and a stellar credit record. As such, small business owners often find it an uphill task qualifying for a traditional loan; while banks do not disclose their SME loan approval rates, a 2015 survey by Visa and Deloitte showed that 40 percent of SMEs have no access to banking support.
You’re looking to borrow a large amount: In general, banks offer higher maximum loan amounts compared to alternative lenders. The maximum loan amount will vary across lenders, but typically falls within the range of $350,000 to $550,000.
You have sufficient collateral: Most traditional lenders will require that small business owners put up assets to secure their loan. Types of assets that can work as collateral include inventory, equipment, invoice, savings, vehicles and real estate.
You’re not in need of immediate financing: Banks and traditional lenders typically have lengthy application and onboarding processes in place. Depending on your lender, as well as other factors like your eligibility and the loan amount you’re applying for, the waiting time can range from a few weeks to two or three months.
Early planning and preparation is key
Depending on your lender, it could take between one to three weeks before you’re informed about the application status of your loan. As such, you’ll need to plan ahead into the future, and start your loan applications well ahead in advance.
Start gathering all the required documents even before you start your application, and scan your documents so you’ll have soft copies ready to submit along with an online application. By being well prepared, you can help ensure that your application goes on smoothly with minimal delays, thereby speeding up the process.
Build up your personal credit score
Your personal credit score reflects how well you manage your personal finances - and as such, is an indirect indicator of how you’ll handle your business finances, and whether you’ll be reliable and on-time with meeting your payments. It’s an important factor of consideration for lenders in their assessment of small business loan applications - particularly for new business owners without well-established business credit.
If your personal credit score isn’t yet where you want it to be, here are some steps you can take to get started on improving your score:
Make your payments on time: Being timely with your bill payments is a simple, but fundamental step towards increasing your credit score. Scheduling monthly reminders or setting up automatic payments are steps you can take to build a good payment habit.
Stay on top of your credit report: Monitor your credit reports on a regular basis, and be sure to correct any mistakes you spot - as even the smallest of errors, such as miscalculations can impact your credit score. If you’re managing both your personal and business credit accounts, it can be helpful signing up for a credit monitoring service. These services will keep watch over your credit report, and notify you of any changes or potential fraud.
Draw up a solid business plan
A business plan isn’t always required, but drawing up a solid plan of action will provide prospective lenders with a clear notion of where your business is headed and boost your credibility. Here are some tips that’ll help your application stand out:
Highlight current projects and past successes: It can be challenging for small business owners to convince lenders about the long term potential of their ventures - as that can differ from where you currently are. Instead, it can be easier convincing lenders of your potential by highlighting your current projects and past successes. What growth activities are you carrying out right now? What are strategies that have worked well for your business, and how will you use the funding obtained to replicate these successes?
Provide contingency plans: Map out possible worst case scenarios - such as if your expenses are higher than estimated, or if you’re experiencing lower-than expected sales - along with strategies of how you’ll meet your payments under these circumstances. This will demonstrate to prospective lenders that you’ve thought through different scenarios, and are prepared to make your payments even under adverse situations.
Be prepared to present your business plan: Most banks require in-person presentations as part of their loan application processes. This is a way for your lender to find out more about your business, what you require and to assess if you’ll make a good investment. It doesn’t hurt to anticipate possible questions you may be asked, and to prepare for these along with doing a mock presentation of your business plan.
Stringent lending requirements aside, the lengthy application and onboarding processes can make traditional loans inaccessible to SMEs. Small business owners require quick access to funding to meet their short term needs - whether that’s making inventory purchases, funding equipment repairs or taking advantage of time-sensitive business opportunities.
Here’s where alternative lenders come in. Offering streamlined application processes, quick access to funding and flexible lending terms, these platforms can be a viable option for small businesses in need of external financing.