Very few businesses are able to successfully get off the ground without some form of financing. With so many financing options available, it’s often difficult to know which route is best for your business. Small business loans are often enticing as they are generally quick to obtain. However, a small business loan comes with contingencies that may come back to haunt you down the road.
If you’re considering a small business loan to finance your business, take note of these four obstacles associated with this form of financing.
1. Piles of Paperwork
Traditional small business loans from banks and other institutionalized lenders will often require vast amounts of documentation. These lenders will often ask for your tax returns, credit reports, legal documents, bank statements, business plans, and sometimes your personal credit history.
The SBA does a great job in outlining the necessary documents you’ll need to provide your lender. Make sure you’re as thorough as possible when providing this information, since banks tend to be very specific.
2. Credit Score Checks
When you apply for a small business loan, the lenders will almost always check your credit score. They will typically look at both your personal credit history as well as any applicable business credit history. Since most small businesses lack sufficient credit history the banks will rely on personal credit checks to grant the loan.
If you’ve struggled with personal credit in the past, you will likely get an unfavorable interest rate, if you’re even given the loan at all. With plenty of other financing options available, I’d strongly recommend considering another option, if faced with a high-interest rate. In the early stages of any business, a high-interest rate can severely hurt your cash flow, when you need to be putting cash back in your business.
3. Personal Liabilities
Oftentimes, lenders will ask for personal guarantees or collateral when applying for a small business loan. Small businesses typically lack necessary assets to back their loans, which is why many small business owners end up being personally liable for any losses.
For example, the bank may ask you to put your home up as collateral for the loan. This magnifies the risk tenfold, and often makes this financing strategy extremely unappealing. In addition, if you applied for a business credit card and fail to make your payments on time, your personal credit score may take a hit as well.
4. Approval Process
Applying for the loan is only the first step. Next, the bank will take their sweet time in reviewing your request, before deciding to either grant you the loan or not. Oftentimes, lender’s will come back with an offer so far off, there’s no point in negotiating. If that’s the case, you’ve just wasted precious time and money.
If the lender does approve your request, which can take up to seven business days, you’ll have to wait for the funds to be deposited. Funds may take as long as 60 days to show up in your account. All of these delays cost your business precious time.
Proper financing can surely make or break any business. Small business loans are readily available, so they are enticing to many business owners. However, they come with contingencies that can do your business more harm than good. If you’re considering a small business loan, take these four hurdles into account first!
This article was originally posted on Due.com.
Renzo Costarella is an entrepreneur, avid learner, and startup enthusiast currently living in Silicon Valley. He pioneered his first start-up fresh out of high school at 18 years old. He is one of the first few employees and the VP of Sales and Business Development at Due.
Due is a payments, eCash, online invoicing, time tracking, global payments and digital wallet solution for freelancers, small business owners and companies of all sizes.