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If you run a small business, it reaches a point when you need to get a loan to finance your daily business expenses or to grow your business. Considering that you will find numerous lending institutions in the market, you need to identify those that give you the best deals. Moreover, you must fill out a loan application before you receive any amount from either of them. The loan application process is long and tedious, but with the right information and requirements in place, the task can be easier. We will explain some of the critical things that you have to consider to ensure that you receive a business loan in a timely manner.
What to know before applying for a loan
Before you apply for a small business loan, you need to understand some things. For instance, you have to assess if you really need to obtain funding. When you establish that your small business needs financing, you have to figure out the best financing option for your business.
Numerous financing options are available for small businesses. They range from angel investment, accounts receivable funding, SBA loans, and lines of credit among other options. As such, you have to conduct an assessment to determine the financing option that works best for your business needs.
Check your credit
If you want to get a small business loan, it is imperative that you check your credit status. Most lending institutions will review your personal and business credit before they approve your loan application. However, some financing options, such as invoice factoring, do not regard your credit status. Most of the other lending institutions have to check your credit to determine your probability of paying back the full loan amount.
Besides influencing your chances of receiving a business loan from a lender, your personal and business credit scores will also affect the terms of your loan. The higher your credit score, the higher the loan amount you qualify for.
Personal and business finances should be treated separately. Unfortunately, the majority of small business owners, especially those who have recently started a new venture, mix both their personal and business finances. Mixing the two accounts could bring about significant problems when you want to apply for a small business loan or file tax returns. To avoid such issues, it is advisable to have a business account at the beginning of your business venture. The account could help grow your credit history, eliminate confusion, and prevent personal matters from affecting your firm’s credit score.
You can also seek the help of companies such as Equifax or The Dun & Bradstreet to calculate your credit score. Once you ensure that you have separated your personal account from the business account, you must ensure that your personal credit score is also good. Financial institutions that offer small business loans also consider it as a factor for giving you a loan. Technically, your personal credit score is determined by your history of payments. A good history means a better score.
Which mistakes could lower your personal and business credit scores?
Now that you know how important business and personal credit statuses are in getting a small business loan, you need to implement the recommended practices to your accounts to ensure that your score gets better and stays there. However, most people make mistakes that end up lowering their credit scores. The most critical mistakes include:
- Staying with a high outstanding debt – It is vital to keep your debts low even if it means making minimal payments. A huge outstanding balance leads to a penalty.
- Failing to understand utilization – It is advisable to keep your utilization below 10 percent. You can calculate your utilization as: [Balance/Credit limit] × 100
How can you improve your credit score before applying for a small business loan?
Your credit score carries a huge weight in determining whether you will get a small business loan. Therefore, before you apply for the loan, you have to assess your credit report. Fortunately, you can check your credit report from NAV free of charge. After receiving your credit report, you can make a couple of adjustments to improve your credit score.
For instance, you must:
- Analyze the report for errors
- Pay off the tax liens that you have
- Check whether you have past-due debts and pay them or request for a goodwill adjustment
- Keep your utilization low
- Hire a credit monitoring company
- Keep your outstanding balances low
- If you are in a position, diversify your credit mixture
Make your request specific
To make your loan application process less stressful, you need to ensure that your loan application is specific. It should clearly outline what you are asking for and explain the reasons for the request. Additionally, indicate the budget for your business project to make the purpose of the loan amount you have requested clear to your lenders.
Review your financial statements and prepare your documentation
Financial statements required for a loan application include the balance sheet, the income statement, and the cash flow statement. These statements display the financial performance of your business and they help you to make informed decisions on how best to grow your business and increase your chances of getting a loan.
Now that you know your credit status, you need to have your documentation in order. A majority of small business lenders ask for tax returns, financial statements, and accounts payable and receivable documents.
Get to know the cost of your loan
Besides the loan amount received, you will need to be ready to cover the other costs involved – the interest rate and the annual percentage rate (APR). The former is the percentage of the principal amount of the loan that the financial institution will charge you while the latter is the annual average of the total interest the lender has stipulated plus the service charge and other fees.