If your small business requires capital, a loan is the most reliable source of financing. However, securing a business loan can be pretty challenging, considering financial institutions like banks approve less than 15% of applications.
Navigating the business loan world can be intimidating and tricky, especially if your first time applying for a loan. This is why it’s crucial to have the proper preparation in place and get organized.
Here are tips you need to consider when applying for a small business loan if you’re thinking about financing.
Learn about Business Loans
Trust is essential between lenders and borrowers. If a lender feels that you don’t understand the different types of loans and how interest rates work, there is a high possibility that your loan application will not be considered.
Educate yourself on business loans by doing extensive research and understanding the basics. Understanding how these loans work will help you gain your lender’s confidence, thereby increasing your chances of getting financed.
Develop a Business Plan
A business plan is the fastest way to convince a lender to loan you. There are many reasons why you may need a small business loan, such as starting a business, buying equipment, expanding, improving cash flow, and increasing inventory. A business plan helps determine how much loan you require and outlines how the funds will be used.
Lenders want to provide funds to businesses that have potential. A business plan helps convince them that you have the necessary skills to grow your ideas into a credible business.
Show them that they can trust you with their money by including all necessary details about the business such as goals, projected expenses, revenue, market analysis, competitors, etc.
Review your Credit History and Score
Your credit score measures the credibility of your business. It informs the lender if you clear your debts on time, utilize debt effectively, and have too little or too many credit lines. Generally, you’ll need to convince the lender that you have a history of clearing your loans on time to secure a loan.
Knowing where your credit score stands before applying for a small business loan is essential. If your business is still new, then there is a high possibility that you may not qualify for a substantial loan. However, you could be eligible for a business credit card if your credit score is good.
Review your Loan Options
Different loan options are available nowadays, depending on the type of business or specific financial situation. Before applying for a small business loan, determine the type of loan you need.
Factors that can influence the type of loan include the loan amount, your creditworthiness, timing, and use proceeds.
Here are a few types of loans to consider;
Term Loan
This is a common type of loan that provides you with a lump sum of cash, and it is paid back within a stipulated amount of time with interest.
Short Term Loan
Similar to term loans, but it is more expensive and faster. You’ll receive the money quickly but face a shorter repayment period and high-interest rates.
Merchant Cash Advance
With this loan, you trade future earnings for cash today. A lender provides you with money in exchange for a percentage of your future profits.
Disaster Loans
Loans are given to struggling businesses because of declared disasters such as pandemics like Covid-19.
Government-Sponsored Loans
These are the best loans to finance small business ventures, and this is because they have competitive interest rates, large lending amounts, and a generous repayment period.
Take out a Business Loan Protection Policy.
Having the proper measures to help you repay outstanding debt is very important. Business loan protection allows businesses to pay back exceptional debts during difficult situations.
Business loans can either be secured or unsecured. A secured business loan is when you borrow funds using the business’s assets as security. This means that the lender can sell your business’s assets to repay the loan. Other loans require guarantors, and people are held personally liable for the debt.
By taking out loan protection, you can safeguard the business from unprotected debts should you, as the business owner fall ill or pass away abruptly. The payout from this business life insurance policy can be used to repay the loan and help protect the business’s survival.
Choose the Right Lender.
Lenders are of different types: credit unions, banks, nonprofit lenders, micro-lenders, and online lenders. Each lending institution is the other.
For instance, banks may provide large loans, but they have strict eligibility requirements and are often busy with enterprise clients. On the other hand, alternative lenders have more lenient requirements and faster approvals but slightly higher interest rates.
There is no one-size-fits-all lender. You’ll need to determine which type of lender best suits you by shopping around and researching.
Good Luck with your Next Business Loan Application!
So there you have it; everything you need to know (and do) before applying for a business loan. Do you have any experience you’d like to share with us concerning loan applications? Let us know in the comments below.
