To expand your business operations, you will require working capital to hire more staff, rent additional office space, execute marketing strategies, procure materials, and buy new equipment among a host of other things. Many potential business owners may not have the savings required to kick start their ventures. As a result, business loans are needed, and this is where they come in.
However, like many other good things, financing for business isn’t accessed readily. When a loan is not personal, there are increased risks for the lender, and consequently, higher eligibility conditions must be met.
7 Key Steps about Obtaining a Business Loan
Begin with a business plan
The first step to successfully obtaining a business loan is to create a business plan. Lenders will want to be sure that you have a viable business as well as the necessary skills to propel it into success. All of your business information—from your business goals, your rivals, your expected revenue, and expenditures, your company growth plan, as well as your study of the market—must be included in your business plan.
Convince the potential lender that you’re the ideal candidate for the position, and once that’s done, finish with an executive summary that will attract the lender into your goals. First impressions are really important, and if people don’t quickly engage with the content, they could easily lose interest.
Have an accounting team complete your financial statements
Importantly, you must include any and all financial statements from previous lenders, as well as those expected in the future. A clear plan is a must. Use numbers to show lenders your projected income and goal, and ensure they are confident that your business will be able to generate sufficient cash inflow to repay them.
Show your balance statements, income statements, and cash flow statements for a subsequent couple of years, considering all seasonal variations in your enterprise, and how you intend to use the cash you are borrowing.
Clearly explain the reason for the loan and the exact amount you need
Financially audited financial statements, company plans, and loan details allow you to precisely know your goal and funding requirements once you’ve finished the work. It will be easier to communicate exactly what you want from lenders if you can describe your aims clearly in writing as well as in person. Think about the equipment you’ll need, as well as any marketing campaigns you want to conduct, and look for the greatest deals on each of these goods. Have your lender see this research to show that you’re taking the business loan seriously and that you’re not just going for the easy solution.
Evaluate your personal credit history
Before applying for a business loan, it is a good idea to have a look at your existing credit history. This will particularly be relevant if your business has had no time to build its own credit history. In order to get approved for a loan, the lenders will want to know that you are financially responsible, and so if your credit is less than ideal, you may want to delay applying until you have built up your personal credit. Make sure you have bank statements and tax records for the previous year on hand because many lenders will also want to view those for verification purposes.
Identify your collateral capacity
Collateral may be required for some sorts of loans. This type of loan requires that you know the approximate value of your collateral. When you need a business loan, you will want to know that you have something of value to secure the loan. Make sure you don’t default on the loan terms, which will result in the loss of any property you may own.
Calculate what the loan will cost you eventually
Knowing how long it will take you to pay off your debt is important. Once you’ve found out what interest rates and fees different lenders will be able to offer, utilize that information to estimate your monthly payments. This information should be listed in your financial documents, but additionally, adding up all of your loan payments should give you an accurate estimate of the total amount of money you will owe.
Have a thorough understanding of the terms and conditions related to each loan offer before deciding which is most useful for you and be ready to demonstrate that you are a good investment to the lenders.
Conduct research about your financing alternatives
You’ll have to conduct a lot of research in order to discover which bank or lender offers you the greatest terms. Be careful when considering huge banks that appear to have good offers before conducting further research into credit unions and smaller banks. You have a greater probability of getting accepted if you choose this option. It is possible to fail, but you should keep trying, nonetheless.
The surest way to locate a lender is to keep adjusting your plans and researching all of your possibilities. In addition, this is another benefit of Lendio. You can use Lendio to connect with a plethora of lenders who can help you in various ways, whether you’re new to the lending world or are already a seasoned borrower.
- Credit: Lenders often always perform a personal credit check on small-business owners who request assistance. It is crucial to have a solid personal credit history. This helps in getting suitable business loans, too.
- Income and cash flow: When lenders assess a business’s risk, they examine the debt-to-income ratio. To secure a loan, a business must have stronger cash flow and income.
- Business age: Most lenders finance enterprises with at least two years of proven success. This is why new businesses usually struggle to secure funding.
- Current debt amount: Additionally, the debt-to-income ratio also includes debt. As consumers and businesses find themselves with increasing amounts of debt, they will find it more difficult to obtain fresh business loans.
- Collateral: Borrowers see debt backed by valuable assets as less hazardous, which allows for easier access to obtain and receive lower interest rates on collateral-based loans.
- Industry: Lenders will examine the risk of the type of business you run before they decide to provide you with business loans. Keep in mind that it is generally easier to secure loans in some business industries than others.
Short-term Loans vs Long-term Loans
A short-term loan allows you to spend the money you get right away, expecting that you’ll repay the full amount within a certain timeframe (which is dependent on the lender; some loans have a time limit that’s longer, while others have a time limit that’s shorter). Most short-term loans are however repaid within the span of 18 months.
It is best to make long-term investments in your enterprise; nevertheless, short-term loans can aid you during a sales slump or enable you to buy an important piece of equipment. Long-term funding options provide a huge volume of cash to expand your enterprise and profits.
There is no one-size-fits-all solution when it comes to applying for a company loan. You might believe that a flawless credit score and large annual income are all that you need for a business loan, but most lenders evaluate a number of variables when deciding whether to approve you. For instance, if you have a poor credit score, you may still stand a chance to obtain a loan via the competency of other aspects, such as a reduced volume of existing debt.
And, by keeping your finances and business documents well organized, you can boost your chances of getting business loans on time.