There are plenty of reasons for small business owners to look for a business loan, but what happens if you've already taken out a loan--and your lender offers you more?
The answer might seem obvious: take the money.
But don't be so hasty. There are pros and cons to borrowing more that you should be aware of.
Let's go through the two ways a lender might offer you extra cash for your business: loan renewals and concurrent funding.
Renewing Your Loan
Don't be surprised if, at the halfway mark of your current business loan, your lender reaches out and offers you more funding for down the road.
Or maybe you asked for a large loan but only got offered half... With the caveat that the lender would let you renew for the full amount if you paid off that capital responsibly.
Loan renewals are common practice with some lenders. They might offer loan renewals so that they can keep their current customers without much risk since each renewal lets you prove your trustworthiness to the lender more and more.
When Should You Accept a Loan Renewal?
Here are a few reasons why you might want to accept that loan renewal.
1. You have credit problems
Whether it's your personal or business credit, your FICO score is lower than you'd like. In fact, it might have prevented you from getting the loan you wanted when you first applied for financing.
A loan renewal might build your business credit by taking on more debt--and paying it back in full, on time.
Even if you don't desperately need that extra capital right away, improving your credit score could go a long way to opening up better financing options down the line.
2. You're looking for a better rate
Loan renewals almost always come with better rates than what you're currently paying.
After all, lenders want to encourage you to keep borrowing from them. You can typically expect a decrease in your APR, and the lender might lengthen your term as well.
If you think you'll need more financing after you've paid part of your current loan off, then that loan renewal might be a good idea.
Get Concurrent Funding
This is a rarer way for lenders to offer you more money.
Concurrent funding is when you're given temporary access to more than you asked for--upfront. Whether you take out any of those extra funds is up to you.
For example, you receive a loan offer for $100,000, but you decide you only actually need $60,000 to finance your business goals.
However, your lender makes the other $40,000 available for a certain amount of time--maybe 30 or 90 days--and you can withdraw an additional lump sum if you decide you need it. That extra money will come with the exact same rates and terms of your first loan, so long as your credit score hasn't changed.
Think of concurrent funding as a "no pressure" way to borrow more from your lender, without having to reapply.
When Should You Accept Concurrent Funding?
If you've been offered concurrent funding, you might want to accept if...
1. You need cash fast
While a loan renewal will require a whole new application--including paperwork and a credit check--concurrent funding can get you money right away. You simply request the extra capital. This added flexibility of taking what you want, when you need, is a huge benefit.
Note that most lenders will check your credit again if you request concurrent funding after 30 days have passed.
2. You're okay with the extra debt
If you're comfortable with your daily or weekly loan payments so far, taking on extra capital to finance more inventory or a new project might be the right move.
The Importance of Shopping Around
While these two strategies are great for ensuring speedy financing or building up your business credit, you'll always want to shop around for a better deal.
With concurrent funding, you're agreeing to take on more money at the same interest rate, and with a loan renewal, you could get better terms--even if only marginally.
But if you shop around for different offers, there's a chance you could find a significantly larger, more affordable, or longer lasting loan.
You might even "graduate" into a better loan category altogether, like from a traditional term loan to a Small Business Administration-backed one. According to the Consumer Financial Protection Bureau, loan shopping could save you hundreds or thousands of dollars.
Finally, don't be afraid of rate shopping hurting your credit score.
While one lender checking on your credit might lower your score a bit, multiple lenders of the same kind looking at your credit in the same time period will simply be registered as rate shopping.
The lesson? Always send out multiple applications and compare several offers so you can find the best financing deal for your business, even if you have a renewal or concurrent funding offer.