If you have a business, a time will come when you need to consider taking out a loan. Some of the usual reasons for getting a loan include expanding your services, upgrading the equipment, and increasing your working capital.
A business loan can help with your needs, but going through the loan process can be intimidating, especially if it’s your first application. Discover here some of the considerations before taking out a business loan:
1. Create A Business Plan
Before starting the application process, it’s best to create a business plan to help convince a lender to grant you the loan. Remember that lenders want to know that you’re operating a credible business and have the skills and knowledge to ensure growth.
Try to cover everything about your business, including your objectives, past and projected revenue and expenses, competitors, market analysis, and how you plan to grow your company. Present your business in the best way possible and write a summary that’ll captivate the lender about your vision. Your business plan is the first thing lenders will read.
2. Find The Right Business Loan
Today, there are various types of business loans available. Due to the available choices, you need to research thoroughly before starting an application process. Deciding to apply for a business loan might sound simple until you later find out you have several types to choose from, leaving you overwhelmed by the choices.
The best move is determining the specific use for the loan. In your business plan, you need to figure out the amount of money you need and how long you’ll pay it back.
If you find the selection process challenging, you can start looking up the following types of business loans:
- Small Business Administration (SBA) loan
- Business line of credit
- Short term loan
- Business term loan
- Equipment financing
- Startup loan
You might want to check out what each of these loans has to offer to help you decide.
3. Understand The Overall Cost Of The Loan
You also need to know how long it’ll take you to pay off the loan. Determine the kinds of offers various lenders can provide you, along with the interest rates and fees to estimate your payments.
All the information should be included in your financial statements, but make sure to add up all your payments to know how much the loan will cost you. Know all the terms and conditions in every loan offer before deciding which one will best suit your business needs. If you’re taking a loan from the bank, you need to check the interest rate closely.
4. Prepare Your Financial Statements
Make sure to include any financial statements, both past and future. Try to show the projected numbers so your lenders can see your goals clearly and know that you earn enough to pay them back. It’s best to include your cash flow, income, and balance statements for the past three to five years, as well as the estimates for these statements.
A financial lender will check the cash flow of your business and if it’s enough for the loan you need. Previous tax returns and current debts will be under scrutiny to figure out if you can pay the monthly instalments without defaulting.
Additionally, your eligibility for a loan is also directly related to any associated risks. The fewer risks, the better your chances will be. When you have personal or business insurance, it’ll be an advantage since it’ll settle the loan in case of your untimely passing. If you’re insured, your chances of getting a loan will increase.
5. Indicate The Purpose And Amount Of The Loan
Once you have your financial statements and business plan in good order, you must have a clear objective for the loan and how much you need to achieve your goal. If you can indicate your goals, it’ll be easier to explain what you need precisely. Identify the equipment you need, the marketing strategy to implement, or anything else you want to do with the loan.
6. Check Your Personal Credit History
Checking out your credit history before applying for a business loan is essential, especially if your business lacks time to establish a credit history of its own. The lenders would also want to know they’re lending to a financially responsible person. If your credit report isn’t in good shape, it might be best to wait a while and build up your personal credit before applying for a loan.
Most lenders would also check on your personal bank statements and tax returns for the last year, so you need to keep that in mind for the year before applying for a loan.
A good credit score shows you’re financially disciplined and not likely to back out on the repayment. It’s also a reflection of your capacity to make sound fiscal decisions. Although the minimum credit score necessary to be eligible for a loan can vary depending on the lender, a credit score above 700 will boost your credibility and loan-worthiness.
7. Determine The Capacity For Collateral
In some forms of loans, you need to put down some form of collateral. If you’re applying for this type of loan, you should have a good idea of how much your collateral is worth. Lenders want to know this figure and determine if you have something of tangible value to secure the loan.
Some lenders might require collateral. Generally, it refers to any asset you’ll offer as security to your loan. Inventory, equipment, building, land, and vehicles are some examples of collateral you can offer. Make sure you’ll not default on the loan and lose whatever asset you use.
8. Research Your Borrowing Options
One way to find the right bank or lender that’ll offer the best deal is to research. Avoid considering large banks offering great deals before checking out smaller banks and credit unions first. You might gain a better opportunity for approval of your loan.
In case you get turned down, keep trying. If you make the necessary modifications to your plans and research all your available options, you’ll eventually find an institution that’ll approve the loan you need.
Applying for a business loan can secure the funding necessary to grow your business. Before moving forward, you should carefully look at your finances first. Once you decide to apply for one, make sure you weigh all the pros and cons, assess the available options, improve your credit score, and choose a lender with the best terms. Taking a suitable business loan from the right institution can save you the hassle and grow your business successfully.