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5 Reasons to Be Picky When Selecting a Business Loan Lender
December 24, 2021
Reasons to Be Picky When Selecting a Business Loan Lender

5 Reasons to Be Picky When Selecting a Business Loan Lender

Unfortunately, many small business owners are fooled by the fact that small business loan lenders make many similar claims in their marketing campaigns. The reality is, although some lenders appear similar based on their marketing tactics, they may provide completely different experiences.

From loan terms and conditions to the loan application process, individual business lenders tend to have many, significant differences.

Because of these differences, it’s critical to be picky when you’re selecting a business loan lender. After all, it’s neither easy nor cost-effective to switch lenders until after your loan term expires.

If you’re still tempted to hurry up and pick a lender and be done with it, consider these five reasons to be a bit more selective.

Why Business Owners Should Be Picky When Choosing a Business Loan Lender:

1. Long-term lending relationships matter

Many entrepreneurs who haven’t dealt with small business finance don’t realize the value of a long-term lending relationship. Don’t make this mistake; finding a lender who can continue to serve you as your needs change and evolve makes financing a far more productive experience.

A business loan lender who has successfully worked with you before tends to be more likely to approve your subsequent loan applications. Plus, the familiarity between you and your lender will help facilitate faster collaboration.

In short, being picky and finding a lender you can work with for a long time makes the entire financing process more efficient and cost-effective.

2. Maximum cost-efficiency

It can be overwhelming to realize just how many factors can influence the cost of your loan. The length of your loan term, fees, interest rates, and penalties all change the amount and timing of your borrowing costs. Yet even between fairly similar lenders, there tends to be quite a bit of variation in loan structures.

Oftentimes, these variations may seem inconsequential, but as your loan term progresses you may be surprised at the real cost.

This is yet another reason it’s so important to take your time when selecting a business loan lender. Understanding the true cost of a loan requires understanding all the little (and big) fees you may or may not have to pay.

For instance, some small business lenders have prepayment penalties while others don’t. So if you think you might pay off a loan early, your prospective lender’s prepayment policies are something you’ll want to carefully consider.

3. Faster approval times

When lenders underwrite a loan, they’re evaluating the default risk of you and your business. To evaluate risk, lenders generally look at five characteristics of a borrower.

These five characteristics are known as The Five C’s of Credit: Character, Capacity, Capital, Collateral, and Conditions.

When you’ve worked with a lender multiple times, these five C’s are easier and less time-consuming to evaluate. Lenders will have already run background and credit score checks. They already have an idea of your capacity, capital, collateral, and character. Plus, they have a better understanding of your current and future financial stability.

However, you likely won’t successfully work with a lender multiple times if you aren’t careful about choosing them to begin with.

As with any other kind of service provider, the level of service you may or may not receive from an individual lender will vary significantly. Taking the time up front to find the lender that’ll provide top-notch service for years to come ensures your approval times stay short.

4. Optimal loan program

Just as you should expect the quality of service to vary from lender to lender, you should expect each lender’s loan offer to differ.

While some lenders may offer only merchant cash advances, others could offer only equipment financing. Or, you could find a lender that offers MCAs, equipment financing, and online term loans. The variations are endless.

In addition, the Small Business Administration offers business funding, and their programs differ from other financing lenders.

If you apply for a small business loan from an SBA lender, you’ll need to prove that you can’t secure traditional funding options. Then, you can compare their funding options, which include the SBA 7(a) loan and short term loan options, among other loan programs.

However, you won’t know what options you have if you’re not picky when selecting your business loan lender. As a result, you’ll likely miss out on finding a lender that has loan options to fit your changing needs.

5. Terms and conditions vary widely

Another highly variable aspect of business loan lenders is their terms and conditions. While these terms and conditions can be a lot to digest, it’s important to understand their impact. Even a seemingly small difference, like a prepayment penalty policy, can end up costing you thousands.

In this way, pickiness in choosing your business loan lender can mean the difference between profit and loss.

Conclusion: Do Your Homework… or Hire it Out

Choosing the right business loan lending and financing option is like choosing a business partner. So despite the extra work it adds, you can’t avoid being picky about your lender and hope to succeed.

Of course, no one said that small business owners have to do it all themselves. Instead, you can employ the help of your most financially savvy employee or a trusted contractor to do much of the legwork for you.

Ultimately, you’ll need to make the choice in order to secure necessary business funding. The good news is, once you’ve done your due diligence, the decision will most likely make itself.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].