Both new and seasoned entrepreneurs need capital to run their businesses. Small business loans help entrepreneurs both cover the business operational costs and/or set up a new business. Unfortunately, however, over 80% of the small business loan applications are rejected every year. Apart from small business loans, there are other financing options to consider. But even they have eligibility criteria. It can be difficult to identify the correct type of loan and lender for your business. So before you apply, there are a few things you need to know.
Know how much you need to borrow and why
Before you submit your loan application, it’s essential to determine how much you need to borrow. Do you need financing for a long-term or a short-term loan? Knowing this will help you decide if you need a short-term or long-term agreement. It will also help you effectively explain the purpose of your loan to the bank.
The cardinal rule is to borrow only the amount necessary, no more. Otherwise, you may find yourself in debt down the road. Businesses often secure loans, but fail to pay them off because they have borrowed beyond their affordability. Many of them end up having to consolidate debt later to get back on the right financial track. But the ultimate question is, why should you take that risk?
The bank will ask you to supply a business plan. If they see that you are applying for a loan amount that is more than what is required, they may reject your application. You must also be able to clearly explain how you plan to use the money and pay the loan in a timely manner.
Your personal and business credit score
Like any other loan, lenders will check your personal credit score. But in the case of a business loan, they will also check your business credit score, which ranges from 1 to 100. A poor business and personal credit score will make it extremely difficult to secure a loan. If your business credit score is between 80 and 100 and your personal credit score is above 650, you are likely to be eligible for a loan at a low interest rate. You can get your business credit score from either Experian or Equifax.
Why do lenders give so much importance to credit scores? A business credit score indicates if your company is stable enough to qualify for a loan. Likewise, a personal credit score helps lenders determine if you are a responsible consumer. If you can’t effectively manage your personal finances, the chances are high that you won’t be able to tackle a business loan successfully. Another factor you need to consider is that lenders prefer to work with growing companies who have enough cash flow and assets to pledge as collateral.
Lenders who work in your industry
When you are looking for a lender, try to find one who works in your industry. Lenders from your industry will better understand your specific needs and ask only relevant questions. This will save time for both you and them.
Pre-qualification requirement
Find out if there are any pre-qualification requirements and what documents you will be required to submit. It helps to ask the lender beforehand.
Also gather all of the necessary financial documents before applying for the loan, i.e. bank statements and pay stubs. Some loans require additional documentation, which can be very time-consuming. It helps to be prepared for this ahead of time.
How much you can get and from where
When you plan to take out a business loan, it’s important to shop around to determine the best deal. Compare loan rates and terms. Finding the lender who is charging the lowest interest rate on your loan is key. Check the loan tenure; is it too long or too short? Remember, borrowers often default on payday loans, as they have to be paid off within 14 days and at a high-interest rate. Many business owners consolidate payday loans to get out of that situation. Likewise, if the interest rate on the business loan is too high or the loan term is too short, you may get into financial trouble.
Remember that it will take some time to get your loan approved. Different banks have varying loan approval processes, and it can be time-consuming. You will also be asked to attend face-to-face meetings and provide a lot of paperwork.
Aside from banks and credit unions, there is another option from where you can get a business loan. That is from a lending marketplace, where you apply for a loan online. Once you submit the details, you will likely receive offers from several lenders. Since it’s an online process, you won’t have to go anywhere, which will save you a lot of time. As far as interest rates are concerned, you will need to compare all of the offers in order to find the best deal.
Finally, always read the loan agreement’s fine print before choosing a loan. If you don’t understand something, ask questions.
