When a small business enters its growth stage, a time will come when it needs some additional money as help. Sometimes, it is all about refinancing debt or expanding the operation and finance for buying equipment.
Whatever the needs of your business, a small business loan is an effective means of funding. Now, it’s time to see how to get a business loan.
Check out What is Equity in Business?
Get a Business Loan
Figuring out the Necessary Amount
Lenders always ask about the amount you want to borrow. In such a case, it is not proper to say, “as much as you are willing to give”. The lender wants to know that you have been careful about setting your business goal. As such, it’s important to have an estimate of the amount needed in order to accomplish those goals.
Then, you will need to have a plan in place to utilize the money accurately. In addition, you must compute the way a loan repayment is going to have an impact on the budget moving forward.
Which Category of Loan Suits Your Needs
Once you’ve figure out the amount of capital you require, you can determine what kind of loan is suitable. The most common kinds of business loans are outlined below.
It is an instalment loan that you will repay in a fixed monthly payment system. There are brief loans (usually lasting 6-24 months) and long-term loans (usually lasting three years or more). If a loan is secured then it offers a lowered interest rate than the unsecured one.
Sometimes businesses require loans with an amount smaller than what banks provide. A plausible option, in that case, is to appeal to micro-lenders, who focus on providing small loans. In fact, you can find quite a few non-profit organizations that offer microloans to small business owners who are at a disadvantage.
When you are going to buy machinery or equipment, you may look for an equipment loan. The loans utilize the equipment as collateral and you need to pay the amount in allotted monthly instalments.
Business Line of Credit:
There are very few differences between this line of credit and the home equity line. It allows you to borrow up to a fixed credit limitation. When the loan is repaid, you will have the chance to borrow some funds again.
There are times when a customer takes quite a bit of time to pay you. In such cases, you can rely on a business line of credit so that the working capital does not become empty. It allows the business to keep functioning normally as you wait for the payments to arrive.
As you try to consider every viable option, you have to think from a lender’s perspective as well. The lenders evaluate the loan application with certain criteria. For instance, banks will look at three years of business tax returns before considering your loan application. Therefore, if you have been in the business for less than 12 months, you will have to search for other options.
Checking the Credit Score
Every lender is highly likely to observe your business and credit score above all else. The reason is that those numbers are going to represent the components of risk a bank needs to know about. They are going to check these statistics when they look to approve the loan. So you need to collect yours beforehand and not get jolted by a low score.
In order to improve your chances of getting the business loan, you need a personal credit score of at least 700.
Properly Gather the Necessary Documents
When you decide where you want to apply for the loan, you will have to communicate with the lender. The lender is going to inform you about the documents and information you have to show to apply for loans. Usually, every bank has some strict requirements. It is quite common for banks to ask for the financial statements of your business.
They are likely to ask for a financial projection worth 3-5 years. In addition, banks look through bank statements and business tax returns. It is imperative to note that, eventually every bank will want to see a written format of your business plan. Other lenders are likely to skip some of these documents, but it is customary to prepare any information lenders look for.
Evaluate the Worth of the Collateral
If you are looking for a decent term and a business loan, put up a collateral. Business collateral comprises equipment, vehicle, types of machinery, real estates and accounts receivable. When an individual is unable to show any collateral, he will have to utilize some of the personal resources as collateral.
Also, read about How to Get a Loan for a Restaurant!
Shopping around for the Business Loan Term
When you run a business for a long time, you become used to the banking procedures of asking for loans. However, banks are not the only place where you can look for a loan. You have the chance to observe multiple lenders and make comparisons between loan terms. There are quite a few components to keep an eye out for.
The amount and terms of loans, fees, penalties and annual percentage rates (APR) are key components for this matter. Now, you have to examine the entire cost of a loan and make certain that monthly payments fit the budget.
Applying for the Business Loan
At the end of the day, the lenders get to decide whether they approve the loan or not. There are times when the decision-making process spans across weeks or months. Now, it is your responsibility to assess the situation and prepare the documents the lender is likely to request. If there is any information left unfulfilled, then it delays the approval process.
There are certain situations that do not favour people when they look for a business loan. However, the cases above actually favour the policy of taking a loan.
To conclude, there are multiple detailed steps to follow while taking a loan. This article is here to remind that those steps are not that hard to follow.
Learn more about Best Ways to Get Loans for Small Business