10 Things Small Businesses Want To Know Before Applying For a Loan

The alternative lending industry continues to register rapid growth with a total of 1,734 loans having been disbursed in the year 2020, an increase from 2019 according to Statista.com. Small businesses are both drivers and beneficiaries of this growth and therefore it’s important for lenders to know their concerns when it comes to applying for small business loans.

This growth also means increased competition and specialization among lenders. Small business borrowers on the other hand have become more knowledgeable with some seeking advice from Small Business Development Centers (SBDCs) before applying for debt finance.

As competition increases, small business owners will continue to seek lenders who have better turnaround times, lower costs, fees and rates, as well as suitable advisory services. Successful lenders will be those that take time to understand their target clients and provide tailored services as opposed to offering financial services as a package.

In a competitive market, impression matters. Therefore, lenders should be able to adequately respond to the following concerns, if they are to win the hearts of small business owners.

1.   Do you lend to businesses in my industry?

According to the Federal Reserve Bank of New York, the average small business owner spends 26 hours looking for and applying for a loan. Quite often, this happens because the lenders are not clear in their offering of products and services yet borrowers know what they want.

Lenders ought to be clear on their products and services as well as their niche.

Responding to this question promptly even if negative would leave the client with a good impression and they might consider doing business with the lender in future when conditions are right.

2.   Do you offer a loan that fits my business need?

Since the client has clear business objectives and purpose for the loan, they will be interested in a loan tenor that fits their projected cash flows. Acquisition of an asset such as a property might need a longer repayment period due to slower returns while a loan for stock purchase might require a shorter period since it may take a shorter time to sell the goods purchased.

3.   How long will the loan application process take?

Loan application process, approval and disbursement may take anywhere from a day to several weeks if not months depending on the type of lender, loan amount and purpose and the requirements. However, small businesses prefer lenders who are able to process their applications, approvals and disbursements in record time due to the nature and demands of their businesses.

In fact, most small business borrowers would rather pay a premium for a loan that is processed faster than to wait days on end for a facility that may have a lower pricing.

4.   What’s the pricing and the total cost?

The borrower would like to know the pricing method that lender uses so as to determine the affordability of the facility. The borrower would also be interested in the total dollar cost of the loan especially when they are comparing loans of different repayment periods.

Annual Percentage Rate (APR) is a tool widely used to help clients determine the price of loans even when the tenures are different. The total dollar cost of the loan also helps the borrower determine the affordability and easily compare the cost to the expected ROI.

Clients are therefore happier working with lenders that give full disclosure of the pricing and the total cost.

5.   What will my payment schedule be?

Many small businesses may have irregular cash flows in any given repayment cycle and therefore the borrower would be seeking a loan whose repayment may be aligned with their cash flows. If your loans are structured to have weekly repayments, this may not fit with a business which relies in a month-end influx of cash flows or infrequent inward deposits.

6.   When will my first payment fall due?

When making a monthly loan payment, it’s logical for the client to assume that their first payment will be due at the lapse of one month after the date they accepted the loan proceeds. On the other hand if the loan is on a weekly repayment schedule, the first payment shall fall due on the lapse of one week following disbursement.

It’s important therefore that the client is informed when their first payment falls due so that they can align their cash flows appropriately

7.   How do I make the periodic loan repayments?

While a few borrowers still find making their loan repayments through a paper check, most prefer automatic debits via Automated Clearing House (ACH) transfers for a number of reasons. This includes convenience, timely loan repayment hence good credit records, and the fact that most lenders prefer it.

8.   What is your Better Business Bureau (BBB) rating?

BBB ratings represent the BBB’s opinion of how the business is likely to interact with it’s customers. The rating is based on information BBB is able to obtain about the business, including complaints received from the public. BBB seeks and uses information directly from businesses and from public data sources.

Some of the factors that form the basis of BBB rating include:

·        Business complaint history with BBB

·        Transparent business practices

·        Failure to honor commitments to BBB

·        Licensing and government actions known to BBB

Since there are many options for a small business borrower, having a good BBB rating for a NBFC would be a major advantage.

9.   May I get a few testimonials of your current and past customers?

Customer success stories (case studies) and testimonials are crucial in a borrower’s decision making process. Most borrowers will look for this information from the lenders website and may go further to look for independent reviews online.

Lenders often loose potential clients to competition just because they did not have any case studies or client testimonials to back up their claims. It’s therefore important to provide the potential client with references of your services if you are to remain competitive.

10.         Do you report my loan repayment history to the appropriate business credit bureaus?

Most small business owners are concerned about building a good credit profile so that they continue to negotiate favorable credit terms. A small business borrower is less likely to seek credit from a lender that does not submit credit information of its clients to the credit bureaus even if the terms of the facility were attractive.

Ordinarily, those borrowers with good credit history and that are working towards building their credit profile will prefer to borrow from lenders that are registered with credit bureaus. Borrowers with weak credit scores would find it comfortable working with lenders who are not registered

It’s therefore important to register with credit bureaus so as to attract borrowers interested in building good credit profiles. Such borrowers are less likely to default.

In conclusion

As the financial services sector, especially among Non- Bank Financial Companies (NBFCs), continues to be competitive, players will be positioning themselves so as to attract the most successful small businesses. By promptly responding borrowers concerns, a lender will be able to attract high value clients.

Check out other articles on small businesses here