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.
All small business owners face challenges. One of them may be a lack of capital to grow their business. Delancey Street offers a number of business loans for a variety of business types. We can assist business owners with getting loans, lines of credit, merchant cash advances and other financial matters. For New York City-based businesses, we have provided small business loans of up to $2 million. What makes us unique is that we work individually with all business owners to get a better understanding of their situation as well as their needs to ensure that they get the right loan.
Our approval process is fast. We offer funding within only two business days and flexible repayment plans. However, we can work with any type of business and cash flow process.
It’s also OK if you have bad credit and you are free to use the funds any way you want.
Upon applying for a small business loan with us, you can use the funds on anything of your choosing. Use it for expanding your business expenses, paying off loans or for expanding your payroll. Apply for a small business loan today to get started.
Fast Business Loans
For small businesses, securing a loan can be life-saving. When a business has more access to capital, many doors can open for it and the company can expand and perform a number of additional projects that might otherwise be unobtainable. At the same time, the process of securing a loan is often complex with many steps needed before you can sign a contract and accept that loan. It’s important to properly prepare for the process so that much of this confusion can be eliminated from the process.
First and foremost, when you go about getting a business loan, you must determine your needs. Of course, the loan should be your best option at this point in the life of your business. It’s important to acknowledge your business goals and realize how a business loan would help you to achieve them. Once you have assessed your needs, you can work from there and learn more about the process of securing a business loan. Aspects to consider include your creditworthiness and the best types of loans for your situation.
The single most important aspect that determines whether or not you are able to qualify for a small business loan is your credit. Your credit score and reputation also decides what the terms will be for the loan and how much for which you can qualify. This is because banks want to ensure that a borrower is low-risk and won’t have problems paying the loan back. If your credit is good, it makes you a good candidate in the eyes of the bank and gives you more options as lenders will be more willing to extend a loan to you. Of course, the better your credit, the lower the interest and fees on your loan.
However, personal credit is not the only thing you should look at, but you must also study your business credit and know your business credit score. Banks always want to know that a potential borrower’s business is creditworthy before extending a loan.
Improving Your Credit
It’s important to get a copy of your credit report and look it over. Examine it thoroughly and check for any discrepancies as they can adversely affect your credit score. If there is anything in your report that appears suspicious, you should immediately report it to the credit bureau so that it can be investigated and any errors fixed. Before you apply for your small business loan, you should have a good track record of paying all business-related bills on time and in full. You can obtain a copy of your business credit report from the three major credit bureaus. Again, if you spot any errors, report them immediately.
Target Your Request
When requesting a loan from the bank, you must convince the representative why you need the money and how you plan to use it. Explain that the loan will help in enabling the company to flourish and expand. Even better, you should elaborate on how this will ensure that you can pay it back.
Improve Your Financial Statements
Banks want to ensure that a business’ financial statements are in good standing. This can better motivate them to extend loans or credit. Provide the bank with your income and cash flow statements, as well as a balance sheet when applying for the loan. These documents must look professional, so if need be, see an accountant to prepare them.
Your application package should be presented in the most professional manner. It will show the bank that you are serious and professional. Always check for mistakes in your documents multiple times prior to giving them to the bank.
Understand the Terms
Once you are considered for a small business loan, you should always understand its terms. Read everything carefully and ask questions before you sign any contract. Understand the interest rate, APR and any fees tied to the loan so that you can get a good idea of how much it will cost you.