10 Things to Look Out For in a Lender
However, the fact is that lenders come in all sizes, shapes, and colors and are also under some duress to actually prove their mettle. This is because lending has of late become an extremely competitive industry and as a potential client, you have more power than you think when you go searching for a loan.
The rapid advent of online lending moreover, and vastly increased competition in the lending market has led to a situation which has given birth to a breed of canny and fly-by-night operators also who may ruin your business should you take a loan from them. They often make tall or too-good-to-be true promises which they seldom keep and their hidden charges increase loan costs substantially, eroding the borrower’s bottom line in the long run.
How then does one select the right and most appropriate lender? Here’s how:
Ask the fundamental questions
When you come face to face with a prospective lender, begin by asking him who he thinks is an ideal customer. This would give you and him a chance to hit the same page and to clarify his expectations of you. Lenders serve all types of industries but you need to find out first whether he has lent to businesses in your niche, having your kind of history as also with similar funding needs.
The ideal lender knows how to read and interpret your application and match the appropriate loan product to help you out. If the lender’s answers to your questions in this regard doesn’t really satisfy you, he may wither be ill-equipped or inexperienced to finance your specific requirement.
Don’t expect that your lender will give you a detailed breakdown of his underwriting criteria. However, feel free to ask him how he’s going to evaluate you. Take note of assorted criteria such as outstanding liens, credit history, current debts, and time period in business and coverage ratios for debt service. Satisfactory answers to these questions usually play a crucial role in your ultimate decision to select a prospective lender.
Check His Past Experience
You can even ask the lender if he has approved loans for businesses like yours in the past. If you discover that your business type is new territory to him, ask him directly. A straight “no” from him in this respect may not be a deal breaker necessarily. However, you don’t also need to plump for the first alternative lender who shows an interest in your affairs. Remember, the more familiar a lender is with your industry type ultimately works to your advantage in the long run.
Identify the Most Suitable Loan Product
You most likely already have some idea about the type of loan that you need. Ask the lender if he is capable of meeting this demand so that he can either confirm or if need be, revise his offer to suit your need. Keep no stone unturned in verifying with your lender the terms associated with any loan product he recommends and terms for repayment.
Total Loan Cost
This is absolutely vital because it reveals the total amount of fees and interests payable over time, in addition to the principal amount borrowed. If you qualify for an amortizing loan, ask and understand all interest rates as also annual percentage rates payable in order to determine the total loan cost.
A loan that comes with factor rate or simple interest focuses more on factor rates along with the APR figure, as the interest is charged on the full upfront sum. This helps you to correctly work out the total capital cost. This would also help you ascertain how to make lower monthly payments and pay less extra money on the loan.
Make sure that your prospective lender tells you clearly about prepayment penalties if you repay the loan earlier than the expiry of its term. Some lenders hold the borrower to the loan’s full term while some charge penalties for clearing the debt earlier. Should the prepayment penalty be heavy, it’s better to stick to the loan’s full term.
Ideally, the more scrupulous lenders advise borrowers to shift to more long-term and cost-effective loans. But those lenders whose clients repeatedly take on costly debts is certainly not a smart choice in terms of the business’s long-term health.
Most impressive and accomplished lenders have separate counseling facilities for all prospective borrowers, particularly small business owners who seek advice. If you approach someone who doesn’t have the interest or the inclination to answer your queries patiently or guide you accordingly, seek help elsewhere. In the long run also, you are least likely to get any extra cooperation from him.
Period for Approval
When seeking a lender, check out the speed at which he approves your loan. While most lenders may take a couple of days, some even give same-day approval. Those with more stringent criteria usually take some weeks. Depending on the urgency of your need for the loan, understand first how long you need to wait for the funding before you move forward with the process. It’s another way of checking out how responsive the prospective lender is because for any business owner, both money and time are equally valuable.
When selecting a lender, it also pays to see first how personalized, supportive, and friendly his services are and whether he will adhere to your schedule from start to finish. Most lenders have websites and checking them out for the institution's goodwill in the market and as also capital strength always makes sense.
You also need to check out whether the institution offers specific credit enhancement programs such as lending to small businesses and how tech savvy it is. This would include special apps, online, and mobile banking business services.
These ten factors will give you an overall idea of any prospective lender’s worth in the market. Once these have been checked and are to your full satisfaction, go ahead with the loan. Chances are you won’t regret your choice.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.