Forced by the current economic times, it’s almost impossible that you haven’t considered opting for a loan for your business, especially for small-scale businesses. The recent world economic conditions have been a proper nerve-wrecker.
If you are planning to finally gear up to apply for a business loan for the first time, there are certain things you should know to make better and informed decisions.
Let’s go over the basics to equip you with the relevant information required to qualify for a business loan.
Different Types of Loans
Since the business dynamics have revolutionized over the years, lenders have extended their lending options to facilitate a wide range of business types and scales. Here are the most common types of business loans for you to choose from -
- Bad-Credit Loans
If you’ve got the issue of bad credit, lenders tend to provide bad credit loans where your credit score does not hold much value. The only points of focus are your cash flow and recent bank statements.
- Equipment Financing
As the name suggests, lenders provide loans for the specific purpose of purchasing any tools or equipment for your business. Here, your purchased equipment will serve as business collateral.
- Long-Term Business Loans
If you plan to establish your business with the help of a business loan, you should opt for this type of loan that consists of low-interest rates and does not require you to repay it instantly.
- SBA Loans
SBA Loans are processed and guaranteed by the U.S. Small Business Administration which gives the lenders added confidence in the repayment from the business.
How You Can Qualify for a Small Business Loan
Getting a small-business loan is a detailed and thorough process that requires both time and patience to sit through. This is why it is appreciated to understand your lender’s qualification criterion prior to your application to avoid any frustration.
1. Develop Your Personal and Business Credit Scores
When you apply for a business loan, lenders are especially focused on your credit score management. While the business credit score should be more valuable, lenders are also interested in your personal credit score to gauge your seriousness and capacity to repay your personal debts.
To satisfy your lenders, you can improve your personal credit by ensuring that your bills are fully paid within the deadlines.
Business credits are monitored by lenders when the recipient of the business loan is an established company. For them to like your business credit score, you will be required to establish proper trade lines and maintain a clean public record. And here is how to dispute a credit report.
2. Understand Your Lender’s Minimum Requirements and Qualifications
For lenders to grant a business loan, it is important for the recipient to meet the minimum criteria of the business’s yearly revenue, credit scores, and overall years in business.
- Targeting Loans in Small Business Administration
If your business meets SBA’s definition of “small”, operates as a for-profit company, and does not have the risk of being an ineligible business such as an insurance company or a bank, then you can qualify for a small business loan.
- Bank and Online-Based Loans
Here traditional factors are given more importance and the qualification factors are relatively lenient. However, relaxed qualification metrics come with expensive loan conditions.
3. Ensure you are Equipped With Financial and Legal Documents
I mean, you saw this coming right? Loans have the words “excessive documentation” attached to them with an invisibility filter. When a lender or a bank wishes to provide you a business loan, it expects a bucket load of paperwork.
For starters, you might want to have the following documents when contacting a potential lender -
- Articles of Incorporation
- Business licenses
- Commercial leases
- Ensure that you have a copy of your Driver’s License,
- Maintained Personal and Business Income Tax Return reports
- Maintained résumé to showcase your business experience
- Set of Balance Sheets and Income Statements
4. Devise a Strong Business Plan
A business plan is considered to be the backbone of its business. If a lender feels that your plan to use your money is well-managed, and you’re able to repay the loan, then you’re likely to satisfy them.
Generally, lenders look for strong points in the following areas of a business plan -
- What are your current and planned financial plans?
- What is your company’s description?
- Do you have a functioning and interactive management team?
- How do you manage your facilities and operations?
- How do you define your product or service?
- Is your industry analysis up to the mark?
- Do you rely on SWOT analysis (strengths, weaknesses, opportunities, threats)?
5. Maintain Assets or Collateral
Business collateral is a sensitive matter when dealing with business loans. The majority of the lenders require you to provide an asset that can be seized by the lender if you fall short of your repayment agreement.
The collateral serves as a safety net for lenders in the event of a business failure. This way, they can recover their money without much hassle.
The requirements of collateral aren’t necessary with every lender. However, it serves as a token of trust to move forward for both the business and the lender.
Small business loans demand proper analysis of a business with proof of the business’s cash flow, assets management, and balance sheet management. For that reason, you should, if you are doubtful that you might miss something important, devise your Small Business Loans with Nav, to ensure your loan application is not rejected. Getting assistance from business financers can also help you make better comparisons of your business’ financing options.
Do’s and Don'ts When You Receive Your First Small Business Loan
After understanding the metrics required to qualify for a small business loan, you need to understand some do’s and don’ts to ensure it’s a smooth-sailing experience going forward.
- Do Maintain a Real Budget
Avoid hyping up your product/service and provide a real budget analysis to attract investors. Ensure them that their investment will be profitable, and you’re golden!
- Ensure You Have Extra Funds
Having a separate savings management system is the key for small businesses. This allows you to free yourself from the worries of paying your bills.
- Compare Different Lenders to Make an Informed Decision
Understand the importance of comparing different lenders when finalizing your decision of closing the deal. While two lenders can be providing you similar terms, further digging will enlighten you about the minuscule variations that might be of use for you.
Always value the reputation of a lender to ensure your loan processing is hassle-free.
- Avoid Stressing About Your Finances
You should maintain a focus on marketing and business management. When you stress about finances, it limits your ability to take risks and go out-of-the-box. It will also limit your process of building a business where you need the freedom and confidence to turn your dream into reality.
- Ensure You Do Not Underestimate Your Expenses
You should never underestimate your expenses as they can be really harmful to your revenue analysis.
In the modern era, getting a business loan is as common as owning a smartphone. For small business owners who feel ashamed and restrict their growth just to avoid asking for a loan, you need this initial boost to uplift your business.
In fact, due to the modern-day business dynamics, business loans are becoming a necessity for small businesses to help them scale their businesses and expand their divisions.