Along with purchasing a home or a car, seeking a business loan is likely one of the most significant financial moves you’ll make in your lifetime, both for your personal finances and for your business. Just like you wouldn’t buy a house or a car without comparison shopping for the best deal, the same amount of research can go into choosing a business loan. Yet many small business owners worry that comparison shopping will hurt their credit score and thus their chances of loan approval.
Though lenders eager for your business may tell you otherwise, it is both possible and imperative to get the best rate for your small business loan, and you can do so without hurting your business credit. Let’s look at the pros and cons of comparison shopping to determine what you can do to get the best loan for your business.
Pro: Get the Lowest Rate
The most obvious reason to comparison shop for your business loan is to get the lowest interest rate. By looking for funding from many lenders, you can seek out the best interest rate (and APR), and keep the overall cost of your loan as low as possible.
Going through a loan broker or consultant can put you in a great situation as a borrower: a bidding war. With multiple lenders competing for your business, you can take your pick, ending up with a rate lower than you would receive by approaching an individual lender or by going it alone.
Pro: Get the Best Terms
What are your priorities when considering sources of business credit? Do you need a longer payment period? Are you most concerned about getting the lowest interest rate, or about how quickly you can access funds? Can you provide collateral?
Your answers to these questions can help you decide which kind of lender, type of credit, and loan terms will be most beneficial to your business. Which loan or lender will get you closest to your borrowing goals? SBA loans and bank loans frequently have lower rates than online lenders, but take longer (and more paperwork) to get approved. If you need capital quickly, this may not be the best choice for you.
Look at all your options. Carefully consider factors such as the full length of the loan period, the turnaround time for receiving an approval (and thus funding), and credit limit, in addition to APR to ensure that you’re getting the best all-around deal — the most appealing combination of terms for your own business.
Pro: Increase Your Chances of Application Approval
Bank loans and SBA loans often have the lowest interest rates, but lenders are often choosier about who they approve for loans, so some small business owners may not meet the criteria. The most recent Small Business Credit Survey (conducted in 2014 by four Federal Reserve banks around the country) found that 54 percent of business owners who sought credit were ultimately denied; 20 percent said they were “too discouraged” by the process to apply for business loans at all.
But have hope! The survey notes that small business loans were easiest to obtain through “large and small regional banks and online lenders. Of firms that applied to a small regional or community bank, 60 percent were approved for at least some of the financing sought.” Nearly 20 percent of small business owners seeking loans had applied with an online lender, which can be a friendlier (although sometimes more expensive) source of funding. Shopping many types of loans and lenders — including online options and local banks — can open doors to your business when others close.
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Con: You Have to Move Fast
The only real downside to comparison shopping for business loans? Spreading your inquiries out can result in a hit to your credit score.
There’s a common misconception that rate shopping will adversely affect your credit score by showing many credit inquiries (a red flag for lenders). That is true to a point, but credit bureaus allow a grace period for borrowers to comparison shop.
Typically, inquiries from multiple lenders for big-ticket loans — personal loans such as auto, student loans, or mortgages, and business loans — within the same two-week period are treated as one inquiry by credit bureaus. That first inquiry will drop your score slightly (by a few points), but credit bureaus and lenders will recognize subsequent inquiries for the same type of loan as comparison shopping. All inquiries will show up on your credit report, but will ding your score less than the first, if at all.
As long as you stay within that two-week grace period, rate shopping won’t significantly hurt your score.
It also won’t damage your score if you check your own credit multiple times — in fact, it’s a good idea to keep an eye on it. Pull credit reports on your personal credit and your business credit regularly, about once a quarter, to check that no errors have been reported. The more consistently you check your scores, the more quickly you’ll spot anything out of the ordinary.
The Small Business Credit Survey found that poor credit was the number one reason for loan application denial, so keeping your scores in top shape is critical.
Applying for a small business loan is something you should approach carefully, armed with as much information as you can get. As long as you keep your research within that two-week grace period, don’t be afraid to shop around until you can track down the right credit source with the lowest interest rates and best loan terms for your business.
About Meredith Wood
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Meredith is also the Senior Financial and B2B Correspondent for AlleyWire.