There is a lot that goes into applying for a business loan and it can be an overwhelming process. You need to determine how much money you need, where your business is headed in a few years, and what you will use the funds for. The good news is that there are steps you can take to learn how to apply for a business loan.
There are many reasons why business owners find themselves applying for a business loan. The following are a few examples:
Whatever your reason is it is important that your why is practical and realistic when deciding to apply for financing.
After figuring why you need or want a business loan, you need to have a specific number of the amount you want. The size of the loan you are seeking should reflect the cost of your intended use of the loan. You should not borrow more than what your business needs and what it can afford.
Having your paperwork ready is crucial to get funded as quickly as possible. This will also help avoid any extra pressure by not scrambling to gather all the important paperwork last minute. Each lender has different requirements for the documents needed for the loan, some require more and others less.
Here is the following list of documents to gather to get you started:
Once you have completed the previous steps, now is the time to calculate how much you can afford so the loan you take out is within your means. Two main factors to consider is your monthly revenue and your monthly expenses. Then you can use these two values to calculate your DSCR (debt service coverage ratio). Your DSCR is used to measure how much money your business can use to pay off its debt. The calculation is as follows:
Net Operating Income/Total Debt Service
If you have a DSCR greater than 1, you are in good shape and the easier it will be for you to afford a business loan. A score less than 1 means you are in debt and you should not take out a loan if you do it can lower your score even more.
Different lenders have different criteria for qualifying, but it is best to have a good understanding of what it will take to qualify before you apply and see if you meet the criteria. Some lenders have their requirements available online, others you need to call in to ask.
Here is a list of criteria that lenders consider:
There are so many types of business loans out there and one of the biggest mistakes a business owner can make is choosing the wrong one. Doing research beforehand and learning about the types of loans available will ensure you pick the right one for your business.
For example, if your business needs to purchase equipment, you should apply for equipment financing. Make sure to not waste any time attempting to get a loan that does not align with your business’s needs.
After you have gone through all the steps above, it is time to submit your application which is the easiest part of all. Be sure to have all the required paperwork ready for the lender whether applying online, over the phone, or in person.
Depending on the lender, your application may be approved withing 24 hours or they might require additional paperwork. When this happens, it is important to act quickly in order to expedite the process.
Business loans can help a business thrive and grow. Before you apply, know your why and do thorough research. As you can see, applying for a business loan has a lot of parts to it that you need to consider so you can improve your chances of approval. If for some reason you follow these steps and still do not get approval, there are other alternatives out there to consider other than business loans that you could qualify for.