A Step by Step Guide On How to Get a Business Loan
Nearly 29% of startup businesses fail due to poor or lack of funding. Entrepreneurs need business loans to start, grow, and manage the day to day expenses or to have a safety net and cushion against unforeseen eventualities. It is, however, difficult to apply and get approved for a loan especially if you are a small business with no cash flow or revenue.
Here is a simple guide on how to get a business loan:
Know why you need funding
As an entrepreneur, you have to ascertain why you need the money. Knowing why you need funding will make it easier for you to tailor your application to meet that particular need. You may need a loan to start up your business, to help you cover your day to day expenses or even purchase equipment for the firm.
After identifying your business needs, start fostering relationships with your potential lender. If it is a traditional bank, you can start by growing your savings or if it is an online lender, consider taking small loans and repaying promptly to build a good credit history. This strategy will work for you when you need a huge loan because people like working with those they like and trust.
Identify the right loan that suits you
It is important to note that getting approved for a business loan if you are a startup is almost impossible because banks consider it risky. You should, therefore, choose a loan depending on your needs. A startup can get funding from family and friends, crowd funding, microloan lenders and personal loans. Companies which have been operational for more than two years have several financing options. Some of the options available for these businesses are term loans, SBA loans, business lines of credit and invoice factoring.
Identify lenders with the best rate
You should approach shopping for a lender with a lot of caution. With the several financing options and lenders available in the market, you need to be selective and choose an option that is affordable. You can use banks or online lenders and the many options available but before settling on any creditor, compare at least two or three alternatives. Check on their APR or interest rates. These two tools will help you know how affordable your loan is.
Use traditional banks if you have collaterals, your credit history is good, and if your business does not need the cash urgently because the process takes time. Microlenders are your best bet if you lack collateral, you need the funding quickly and if you are a startup. You should, however, exercise caution because microlenders usually have very high APR.
Find out if you qualify for the loan you need
You can never get approved for a loan if you don’t qualify for it. Before applying for any loan, you need to find out if you are eligible for it first. These insights will help you know if you qualify for a given loan or not.
- Do you have an acceptable credit score?
A higher credit score will make you eligible for a loan with any lender. A credit score of 650-700 is good, but it does not a guarantee that you will get a loan. Lenders prefer a credit history of above 700 to be considered creditworthy. You can find information about your credit score in credit bureaus and personal finance websites.
- Determine the number of years you have been operating
The number of years you have been in business will help you decide where to get funding. To get a loan from a bank, you have to have a two-year proven history of cash flow and revenue. For online lenders, you have a one-year track record of successful operation.
- How much money do you make?
Monthly or yearly revenue will help you know the amount of money to borrow. Different lenders have a specific amount that they expect you to make before giving you a loan. You need to know what your potential lender requires before you apply.
- Can you afford monthly repayments?
Is your business in a position to comfortably pay off your loan? Lenders may ask for weekly or monthly payments. Carefully examine your cash flow and ascertain if it can repay the loan because defaulting will attract penalties.
Attach the necessary documentation to your application
Having the right documentation will give you leverage and help you negotiate better. Your bank statements, financial statements, personal and business tax returns and business legal documents will make you more eligible for a loan. Attach these documents to your application for that loan you qualify for.
Follow the above steps and save yourself the constant rejections.
Why not let us help you find out which business loans you qualify for? Get in touch with us today and speak to one of our specialists.