If you're thinking of starting a business, or if you're in the process of growing your existing one, it's important to know what you can expect from financing. A business loan can help your company grow faster and get to the next level. However, applying for a loan takes time and effort on your part to find the right lender and develop a strong business plan for how you'll use the money.
There is, however, no reason to believe that getting a business loan is impossible. This merely means that you will need to prepare your application carefully, select the appropriate product for your organization, and devote the necessary effort to ensure a successful outcome. If you're new to borrowing money from banks or other lenders, here are some tips to help ensure your loan application gets approved on its first try.
Understand your credit score and credit history
Your credit score and credit history will play a significant role in determining whether or not you qualify for a business loan. Make sure you know your credit score and have a clear understanding of your credit history before you apply for a loan. Review your credit report and credit score to learn more about credit standing. This will give you an idea of what kind of loan terms you may qualify for.
A good credit score is crucial when applying for a business loan, so it's helpful to know what your current number is and what you can do to improve it. Several free online services will allow you to check your credit score. You should check with each of the three major credit bureaus: Experian, Equifax, and TransUnion. A combination of all three reports should you give an accurate picture of where things stand.
Here are some ways to improve your business credit score:
· Make sure to pay all of your bills on time, as prompt payment is a major factor in determining your credit score.
· Keep your credit utilization low. Your credit utilization ratio should be no more than 30% of your total credit limit.
· Diversify your credit mix. Having a variety of credit accounts, such as a mix of business credit cards and business loans, can help improve your score.
· Limit the number of hard credit inquiries on your business credit report. Hard credit inquiries can negatively impact your score, so avoid applying for too many loans or credit lines at once.
· Monitor your business credit report regularly to ensure that all of the information is accurate and up-to-date. Dispute any errors that you find with the credit reporting agency.
· Establish a credit history by obtaining a business credit card, loan, or line of credit, even if you do not need the funds right away, and make sure to use them responsibly.
· Maintain a healthy cash flow in order to avoid defaulting on any loan payments and negatively impacting your credit score.
· Consider working with a business credit reporting agency that can provide you with customized advice and support to help improve your credit score.
It's important to note that it can take some time for your efforts to improve your credit score to take effect, so be patient and consistent.
Figure out what type of business loan you need
The first step to getting a business loan is figuring out what type of lender you need. Loans are based on the type of business you have, so knowing this will help you find the right lender.
There are several types of business loans that companies can apply for, each with its own unique features and terms. Some common types of business loans include:
· SBA loans: These loans are guaranteed by the Small Business Administration and are typically offered by banks and other certified lending institutions. SBA loans can be used for a variety of business purposes, including working capital, equipment purchases, and real estate acquisitions.
· Term loans: A term loan is a lump sum of money that is repaid over a set period of time, usually with fixed monthly payments. Term loans can be used for a variety of business purposes, including equipment purchases and expansions.
· Line of credit: A line of credit is similar to a credit card, in that it provides a pre-approved amount of money that can be borrowed as needed. The borrower only pays interest on the money they actually borrow. It's can be also used for working capital.
· Invoice financing: This type of loan allows businesses to borrow money using their outstanding invoices as collateral. It's used to help businesses that have to wait for payment from their customers
· Equipment financing: This type of loan is used specifically to purchase equipment or machinery. Equipment can be used as collateral for the loan
· Merchant cash advance: This type of financing is based on future credit card sales, Businesses in this type of loan, pay back the loan with a percentage of their daily credit card sales.
Compile your paperwork
The specific paperwork required to apply for a business loan can vary depending on the lender and the type of loan. However, some common documents that may be required include:
· A business plan: This should outline your business's financial projections, including your projected revenue, expenses, and cash flow, as well as your overall business strategy.
· Financial statements: These may include your business's balance sheet, income statement, and cash flow statement, as well as your personal financial statements if you are a guarantor for the loan.
· Tax returns: You may need to provide the lender with copies of your business and personal tax returns for the past two or three years.
· Proof of collateral: Some lenders may require that you pledge assets such as real estate or equipment as collateral for the loan.
· Personal guarantees: Some loans may require personal guarantees from the business owner, this means that you are personally liable for the loan if the business is not able to repay it.
· Business licenses and permits: You may need to provide copies of any licenses and permits required to operate your business.
Depending on the loan type, a lender may require industry-specific documentation or details of the projected use of funds. It's always a good idea to check with the lender directly to find out what specific documentation they require.
Choose the right lender
The next thing you will want to do, once you have determined your business is ready for financing and that you would like to apply for one, is choosing the right lender. Here are a few tips to help you choose the right lender for your business loan:
· Look for lenders that specialize in your industry or type of business. Some lenders have expertise in certain areas and may be more likely to understand your business and approve your loan.
· Compare interest rates and fees. While a lower interest rate may seem more attractive, it's important to also consider the fees associated with the loan, as they can add up and make the loan more expensive in the long run.
· Consider the repayment terms. Make sure you understand the repayment schedule and whether it's realistic for your business to make the payments on time.
· Read reviews and check for customer complaints. Look for online reviews of the lender and check the Better Business Bureau website for any complaints or negative reviews.
· Check their credit requirement, if they require a high credit score and if your credit score is not good then look for lenders who are flexible on credit score requirement
· Look for lenders who are able to provide support following loan disbursements, such as business advisory services, this could be helpful for your business growth.
· Consider the application process, including the required documentation and the time it takes to get approved.
· Examine whether the lender offers a flexible loan structure and repayment plans, so you can find the best fit for your business.
Remember, it's important to shop around and compare multiple lenders before making a decision, to increase your chances of getting the loan approved.
Determine how much you need
Have a clear idea of how much money you need to borrow and what you'll use it for. It's important to only borrow what you need and to have a solid plan for how you'll use the funds. There are some factors that will help you determine this amount:
· Determine your business's projected revenue and expenses for the next few years. Use this information to create a realistic financial forecast.
· Calculate how much working capital you need to cover your expenses until your business becomes profitable. This will give you an idea of the minimum amount of money you need to borrow.
· Consider the cost of any equipment or inventory that you need to purchase in order to grow your business. Add this amount to your working capital needs.
· Take into account any additional expenses, such as marketing and advertising costs, rent or lease payments, and salaries.
· Factor in the cost of repaying the loan, including interest and any fees. Make sure you will be able to make the loan payments without putting undue strain on your business's finances.
· Research different loan options and compare interest rates and terms. Look for loans that have the best terms for your business's specific needs.
· Consider the use of collateral for the loan as this can help you secure better interest rates.
Once you have a clear idea of how much money you need, you can use this information to apply for a loan from your preferred lender.
Takeaway
The process of applying for a business loan can be daunting, but it doesn’t have to be. By following these steps, you'll be well on your way to preparing for your first business loan and positioning yourself for success. Business loans can provide a quick and flexible solution for meeting unexpected expenses or taking advantage of business opportunities. However, it's important to remember that they also have drawbacks, such as interest and fees, the need for collateral and creditworthiness, and the risk of default. Therefore, before taking out a loan, business owners should carefully consider the potential benefits and drawbacks, and think about if it aligns with their long-term goals.
