5 Key Steps to Getting a Small Business Loan
It is necessary for every small business to grow and for growing, it needs funds. Business loans are a best option to start or expand your business. But, getting a business loan is not an easy task for small businesses, especially due to tight lending rules by banks. Finding, applying for and getting approved for small-business loans can be difficult but, better preparations ensure your chances of success.
Small business loans are available from many traditional and alternative lenders. Small business loans can help your business grow, expand into new territories, fund new research and development, allow you to hire new people, enhance sales and marketing efforts and much more.
There are certain important factors that one should consider before applying for such loans. Considering these factors carefully can boost the profitability and benefit you derive from your business loan.
1. Ask yourself, why do I Need a Business Loan?
Before applying for a loan, ask yourself why do I need this loan? You cannot apply for a loan without knowing the reason and amount you wish to borrow. Business loans are used for various purposes- for New research and development of technology, equipment or capital expenditures, New product development, Expansion or hiring, Expansion into new facilities or territories. Increase in inventory, Enhanced sales and marketing efforts. Be Prepared to Specify How Much You Want to Borrow and the Expected Use of Proceeds from the Loan.
2. Know the types of small business loans
There are various types of small business loans available. Evaluate all the available loans based on your business needs, the length of the loan, the rate of interest, and the terms and conditions.
Some popular small business loan types are a line of credit loan, a credit card loan, term loan, Accounts receivable financing, Equipment loans and working capital loan. These loans can be used for different needs in different situations. If you are not sure of the amount of loan you want, you can take a line of credit loan and pay interest only on the amount you use.
3. Find the best lender for you
The loan market is full of lenders. Do research, before selecting any lender. Choose the lender who offer the loan you need at a competitive rate of interest. Some types of lenders are national and local banks, Non-banking Finance Companies (NBFCs), credit unions, peer-to-peer lending, non-profit micro-lenders, online lenders and venture capitalists. These lenders offer business lines of credit, crowd-funding, small business loans, accounts receivable financing and even personal loans.
4. Check your credit profile
Before approving your business loan application, lenders may check things like your personal and business credit report, Assets in the business, Time in business, investors in the company, financial statements, outstanding loans and cash flow. These details help lenders evaluate your repayment capacity. Therefore keep your credit profile clean.
5. Keep financial statements in order
Lenders like to know financial health of your business. Business loans often require extensive paperwork. Therefore, keep your income and loss statements, balance sheet and cash flow statements correct, complete, thorough and updated. The lenders will determine your gross margin,
cash flow, debt-to-equity ratio, accounts payable, accounts receivable and more. Lenders analyse these details to understand your business history and repayment ability. So, be prepared with the documents. Some Lenders prefer financial statements that have been audited by a certified public accountant (CPA) and some lenders may not require reviewed or audited statements.
The best way to get business loan for your small business is to invest time in your homework before submitting an application. Getting a business loan is not that difficult. You just need to ensure that you follow the points mentioned above and approach the lender well-prepared. By anticipating what these lenders will review and require, you greatly improve your chances of obtaining a beneficial small business loan