How to Use Small Business Loans to Finance Your Exit

Getting small business loans when selling your business might seem counterproductive. However, in many cases, they can help facilitate your exit strategy and ensure you get the best possible result. If using short-term business finance, you’ll need to be extra careful when choosing lenders. Unlike traditional banking, the online financing industry is not well-regulated. Therefore, one must double-check every offer as well as the lender’s credibility. Knowing what to look for and understanding the pros and cons of online business loans will help you make the decision.

Why You Might Need Small Business Loans During Your Exit

Many small business owners are now facing difficult choices as the COVID-19 crisis and global economic recession deepen. The number of failing businesses is staggering and no one can predict the exact outcome of this crisis, says Bloomberg. Over 50% of business owners are worried about the continued survival of their companies. And many of those who do exit the scene do so silently, which means that any data regarding business closure statistics is unreliable.

The International Monetary Fund openly calls this economic downturn "the worst since the Great Depression". Therefore, the situation will only get worse for SMEs in the near future. In these circumstances, it’s not surprising that many owners choose to exit and sell their businesses while they can. In fact, it might be the best time to close one business and start over because as much as this situation is harming multiple existing SMEs, it also offers some great opportunities for startups.

According to a working paper created by top researchers from Harvard, Stanford, The University of British Columbia, and the University of Chicago, over half the startups managed to benefit someway during this crisis. Moreover, new business applications are up as more opportunities come up.

All this means that whatever your reasons for doing this are, a business exit is best done as fast as possible. This is exactly why using small business loans can help you. First of all, a bank isn’t likely to offer this type of financing at all because loan origination is down due to the recession.

However, short-term business finance from alternative lenders is still reasonably easy to get. You can use it in situations like these:

  • Buying out your partner before closing the deal.
  • Making your business more sellable with some last-minute changes.

Pros and Cons of Using Short-Term Business Finance

The main reason to apply for small business loans is that the entire loan application process in a traditional bank is long and cumbersome. It is even more so now because historically, banks become much more reluctant to offer financing during a recession. They are even more demanding toward small businesses at this time. In order to qualify for a loan, one must meet very stringent eligibility requirements. Even then you might not be able to get short-term finance for an exit.

If your matter is time-sensitive, even applying for a regular bank loan might be a mistake. This will definitely waste some days, even if you do get the approval you need at the end.

However, getting small business loans from online lenders is both faster and easier. Usually, you will need to meet only some basic eligibility requirements. There are even options for businesses with a poor credit score.

Moreover, these loans can be unsecured. This also allows you more freedom for maneuvering with your limited business resources before closing the deal.

The application process for online short-term business finance options is straightforward and quick. Usually, you only need to fill out a simple online form and you’ll get your answer within hours. In the majority of cases, the money will be in your bank account in less than 24 hours from the start of the process.

That said, you also need to remember that this convenience comes at a cost. Bank loans almost always have much lower interest rates. However, online lenders take greater risks. Therefore, companies that offer this type of financing set higher interest rates and sometimes additional fees. The offers can differ very much depending on the lender and your own situation. That’s why it’s so important to research and compare multiple options.

How to Choose Small Business Loans When Making an Exit

The benefits of alternative small business loans cannot be denied. Considering the current situation, it’s also not a surprise that the interest in these services has grown. This is something you, as a prospective borrower, need to be concerned about because conmen see it as an opportunity. Already CNBC reports a drastic rise in online lender scams. There are similar reports coming from every country as no one was left unaffected by the crisis.

The majority of complaints concern scam lender apps that steal personal data or outright steal people’s limited funds. Therefore, you need to be extra careful and only consider short-term finance from reputed and well-established lenders.

When looking for small business loans online, consider the following:

  • Lender’s credentials.
    The biggest problem is that the small business fintech lending sector is poorly regulated as a whole. Many experts are arguing for establishing stricter regulation but this process is slow and complicated. Therefore, the first thing you should always do is to check the lender’s credentials. Do the research for your state to find out what kind of certifications and licenses a legitimate financing provider must have. Then, make sure that the company you consider has those credentials.
  • Contact details.
    Even if the company is completely online-based, the lender must provide valid contact details. It must have a legitimate address for business registration. You should always choose a lender with an office (or several) that you can easily visit if necessary. You should also look for a phone number you can contact. Online support only can be too limited in many situations.
  • Client reviews.
    Again, check the lender instead of the loan itself. Look for them on consumer review platforms, like Trustpilot, and see what rating the short-term finance provider has. Also, check what issues are mentioned most often in negative reviews.
  • Experience and history.
    Finally, outright google the lender to learn about company history and whether it was involved in any scandals. Industry veterans are often (but not always) the safest providers of online small business loans.
  • Loan terms.
    If the lender checks out, look at the loan itself. As you are interested in short-term finance, make sure it allows early payments with no penalties and extra fees. If the terms are convoluted or if the lender refuses to provide you the details, look for another option. But keep in mind that loans that allow early payouts might be more expensive.
  • Interest rates and fees.
    Last, but not least, consider the interest rates. Use a loan calculator to understand exactly how much this will cost you. Usually, the lender will offer one on its website. You need to be prepared that interest rates for online small business loans can be very high. However, this might be worth it if you are able to pay it back within one or two weeks. Also, you need to study the terms and conditions to see what fees are included.

In Conclusion: Should You Use Online Small Business Loans?

You cannot know for sure how long it will take to sell your company. Therefore, you might not get much choice about using small business loans. If you do choose to use short-term business finance, you should stick with online lenders as they are more easily accessible than banks. They can also approve the application and provide you with money fast. This is vitally important for time-sensitive matters, such as closing on the deal. However, remember to screen the lenders carefully and compare multiple loan options. Despite the fact that it’s short-term, you need to be sure that you are choosing the best small business loan for your personal situation.

Related: What is Seller Financing and How Does It Work

Published by ExitAdviser


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