Are you facing financial issues with your new or existing business? Take a loan and get set to work! Loans may be taken to bring your business idea into action or support an existing business for additions and day-to-day expenses.
5 Key Steps for Getting a Small Business Loan
There are numerous lenders for small businesses that make the process easy. However, getting loans for a small business may require some extra effort and may also induce anxiety.
The process of taking a loan may seem a little complicated if you’re a first-timer. You may have several questions in your mind. If you plan on getting a loan from a bank, you still need some information before applying for it or even going to any lender other than a bank.
Knowing about the process ahead of time will increase the chances of being successful in getting a loan. Mentioned in this article are 5 key steps for getting a small business loan.
1 Determine Whether You Qualify for a Business Loan or not
You want to set up a business or want a loan to develop a pre-existing business? And you’re short of funds. Apply for a loan. But wait! First, make sure whether you qualify for a business loan or not.
Your credit score plays a key role in making you qualify for a business loan. The better your credit score is, the more likely you are to get loans. Reputable commercial banks give loans to people whose credit score is higher than 680. You may face problems if your credit score falls below the threshold.
A credit score is a number between 300 and 850 that indicates how creditworthy a particular consumer is. The higher the score, the better the borrower appears to potential lenders. A credit score is determined by a number of factors including the number of open accounts, total debt, and repayment history. Lenders use credit scores to assess the likelihood that borrowers will repay loans on time.
The amount of time your business has been in the market also determines whether you qualify or not. Online lenders will require your business to be at least one year; however, banks will require you to be in business for at least two years.
Find out your early revenue since most lenders need this information to be sure that your business earns enough to pay back the loan. The range of the loan may vary from the amount you want and from lender to lender.
Evaluate your business revenue and then calculate if you can pay back the loan in time. What would be your preferred installment scheme? Consider these factors before you apply for a loan.
Last but not least, having collateral is important for a secured loan. It is a mandatory condition for some lenders. Even though it is a risky step, it may decrease the interest rates and allow you to borrow a larger sum of money.
2 Figure out What Do You Need a Loan For and Be Specific about the amount
Lenders will ask you what you need a loan for; an important step in getting a small business loan is to add details regarding the purpose of your loan application. For a small business, you may need a loan for:
- To start a small business
- Manage daily expenses
- Grow your pre-existing business
Lenders often hesitate to give out loans to startup businesses since the business needs time to establish. In the early years, there is not much revenue. There isn’t a solid means of returning the loan. Many lenders do not want their money to be stuck at a place for longer periods.
If you want to manage the day-to-day expenses, write that down in your loan application or explain it to the lender you are vouching for. These may include costs for payrolls or unexpected costs for or buying new equipment.
You may also want to expand your existing business by buying equipment. For example, carpet cleaning may want to buy more carpet cleaning machines, or a bakery might want to paint the interior and replace shelves.
Besides the purpose, be specific about the amount you want to borrow. Money ranges don’t work in situations like these. Make lists of what you need money for and how much it would cost.
3 Research about Small Business Loan Lenders
Various small business loan lenders grant individuals loans to establish or maintain their business. Research about all possible options that you have in hand to make sure you land at the correct place to get a loan.
The traditional approach for getting or applying for loans is the banks. Large commercial banks like CitiBank, Wells Fargo, and JP Morgan’s, etc. The process is lengthy and slow.
Local community banks will be waiting for you to come and submit a loan application. They want to give you loans more than you even want loans.
Peer-to-peer lending is also a quick way you can get small business loans. The middlemen connect lenders to individual applicants on sites such as Prosper and LendingClub.
Many direct online leaders grant loans to small businesses. The process for applying is relatively easier than banks. There even multiple sites such as Fundera and LendingTree that connect you to loan lenders.
4 Compile the Required Documents
Before you start the actual process of applying for a loan, gather all the documents you will need to have a less stressful and hassle-free experience. You will be required to submit the following documents, additions, or exclusions depend on the lender.
- Business Plan
- Business Credit Report
- Income tax returns
- Financial statements: Balance sheet, Income statement, Cash Flow, Bank Statements
- Business license and registration
- Articles of Incorporation
- Contact copies
- Franchise Agreements
- Commercial Lease
5 Apply for the Loan
Now that you have determined what type of loan you want and have all your documents gathered in one place, you must be all set to apply to a bank or a private lender for a small business loan.
Make a list of lenders. Start looking at multiple options that fit you. Select the ones that offer the least APR since all additional costs other than the interest money are included as APR. Apply away with the documents that you have gathered.
Applying for a small business loan is a venture in itself. Prepare for the venture before you step in it. Gathering information and learning about the process will make the process smoother. Moreover, it will increase the chances of you successfully getting a small business loan. These 5 key steps should be at your fingertips whenever you feel like you need a small business loan.