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The Importance of “Dating Around” Before Committing to a Loan Renewal

Loan renewal decisions are important for small business owners–maybe even as important as other major life decisions like choosing a spouse, buying a home, or choosing where to send your child to school. While all of these decisions might seem overwhelming at first because of the level of commitment involved, each decision gets easier the more you know.

The more you know about a person, the more you know about a neighborhood, the more you know about a school district, and the more you know about a loan renewal offer, the more confidence you’ll have in deciding what’s best for you, your family, or your small business.

What is a Loan Renewal?

Often times a small business owner only receives a portion of the loan amount they apply for. It could be because of collateral, a low credit score or even a lack of credit.

But as the lender and the business owner work together, the lenders gets to know the business owner, building up payment history and trust.

At this point, the lender may offer to renew the small business loan and provide the rest of the capital the business owner originally applied for.

Let’s look at an example:

Small business owner Colleen applied for a loan of $150,000 to operate her salon for a year. Because she had limited credit and very little collateral, her lender only approved her for a $75,000 loan for a term of 6 months. But as Colleen paid the loan back on time, she built up her credit score and her relationship with her lender. After 6 months, she had fully paid off the loan. Following, she asked for a loan renewal and received the other $75,000 – everything she needed to operate her successful business for a year.

The Renewal Letter

If your loan is renewable, chances are your current lender will send you a renewal offer letter a few weeks before it’s time to renew. Signing right away might be the simplest option, but it’s not always in your best interest to do so. Your lender might be banking on you not researching your options, getting you to commit to terms that are less favorable than if you had dated around before making a commitment.

Don’t Commit Without Considering Your Options

If you want to save money over the course of your loan, do yourself a favor and get the information you need before the renewal offer ever shows up. A few months before your renewal date, you should approach other lenders with the details of your current loan. Invite them to compete for your business.

There are also a few things you can do to make your small business more attractive to both your current lender and to potential lenders to secure better terms:

  • Avoid things that lenders consider to be red flags, including net losses, lowered personal credit scores, account overdrafts, late payments, and slowed turnover for accounts receivable.
  • Don’t violate the terms of your current loan. Terms vary but can include things like using a credit line for unqualified purchases or taking on new debts.
  • Deliver any financial statements when they’re due.
  • Keep an eye on your personal credit report.
  • Arm yourself with industry and market news that will make your company’s business more attractive to lenders.

Look Out for You

While your current lender probably isn’t looking to fleece you, you need to keep in mind that their priority is to make money by extending credit to clients who are most likely to pay consistently and pay on time. If that’s you, use it to your advantage to negotiate for better terms. And if someone else offers you a better deal, be prepared to do what’s in the best financial interest of your small business.

Emily Suess

Contributor at Fundera
Emily Suess is a contributor for Fundera and a freelance blogger and copywriter specializing in technology and small business.