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There will most likely come a time where you want to take advantage of a new growth opportunity for your business or you just need some extra capital at some point. However, there are some challenges that many business owners face when trying to apply for funding. Fortunately, there are a few tips that will help you get funded when you are seeking your first business loan.
Know Why You Need a Loan
Before you even think about applying, knowing why you need a loan is an important step you cannot skip. Being clear on how much you need to borrow will guide you in the right direction of finding a loan that is best suited for your business and helps you decide whether a loan is an option you should consider.
Your answer might be because you want to start a business, manage your daily business expenses, grow your business, or simply to just have a safety cushion for your business in case of any unexpected occurrences.
Decide Which Loan is Right for You
There are many types of business loans out there you can choose from with different terms and rates. Taking out a loan requires you paying it back over a period of time and typically comes an interest rate so you need to be able to figure out what you can reasonably afford to borrow. If you choose the wrong loan, you may be putting some strain on your business cash flow.
There are business loan calculators you can find online that allow you to play with numbers and estimate your payments. This will help you figure out how much you truly need to borrow.
Compare Business Loan Options
It is important to understand and compare your business loan options because they are all not the same. Some of the types of financing include short-term loans, long-term loans, equipment loans, purchase order financing, startup loans, SBA loans, merchant cash advances, inventory financing and invoice financing. Each one has different purposes and it is reflected in the cost of the loan and the terms.
You also need to consider where you will get your business loan. Banks and credit unions are popular options but there are also online lenders you can choose from as well. When you are comparing places to get a loan consider the following:
- The interest rate offered
- Any additional fees such as an origination fee or prepayment penalty
- Repayment terms and the length of the term
- Minimum and maximum borrowing amounts
- How quickly you get funded
Check Your Credit Report and Score
A criteria that all lenders consider when determining whether to approve or deny you for a business loan is your credit profile. The better your credit score, the more likely you will be approved for a loan. A good credit score will ensure you get a low interest rate. If you find that your credit score is low, there are ways to improve your score that you can work on doing before applying. By comparing your personal and business credit score with the requirements of the lenders, it will help you narrow down your list and you will have better chances of approval.
Alternative Factors to Consider
Other factors you should look into besides your credit score is how long you have been in business. In order to qualify for a loan, you need to be in business for at least one year to qualify for most online business loans and two years to qualify for bank loans.
Your business also needs to make enough money. Each lender will have their own set of requirements which will ranch from $50,000 to $150,000. You also need to be able to make the monthly payments. Take a look at your cash flow and see how much you can afford and make loan repayments each month.
Also, consider if the lender will require collateral or a personal guarantee. Sometimes lenders will require these when they feel like your business is risky and you could possibly default on payments, so they need a sense of security by asking for a collateral or personal guarantee.
Compile All Your Documents
Once all the above has been done, compile all your documents and get ready to apply. Every lender has different requirements but some of the common ones are:
- Personal and business tax returns
- Personal and business bank statements
- Business financial statements
- Business legal documents
- Documentation for your collateral if needed
By having these documents ready you will save a lot of time when applying for a business loan. The sooner you get approved, the sooner you can get the funding your business needs.
As you can see there are a lot of steps to take beforehand when considering applying for a business loan for the first time. Be sure to follow every single step to ensure you get the funding you need.
