The vast majority of small businesses will require some form of up-front capital in order to begin operations. Whether you need to rent office or warehouse space or you need to invest a lot of money in manufacturing or inventory, there are a lot of unexpected and unforeseen costs when it comes to starting a business. Applying for a small business loan can sometimes be a stressful and overwhelming process. There is a lot of paperwork, proof of income and expenses and documentation needed in order to secure funding for a small business loan. If you can emotionally, mentally and physically prepare yourself for the process and possible hiccups along the way, you can probably expect a relatively stress-free process. Here is what you need to know about the application process and what to expect when attempting to acquire a small business loan for your company with the least amount of hassle and stress.
Before You Begin The Application Process
It is vital to understand your available options before you begin the application process. With each new application for credit, your score will be impacted. You want to make sure you are applying for funding through avenues that are the best match for your business and financial needs. Credit cards, small business loans, crowdfunding and angel investors offer you a wealth of financial options. All of these financing avenues, however, come with a different array of fees, stipulations and terms.
Do not be afraid to reach out to lending institutions, investment advisors and banks to find out what you can expect throughout each application and loan disbursement process. In many cases, you may make the determination that you can get away with putting up less money up front or rule out particular types of lending institutions as a possible match for funding.
Analyzing Your Credit Score And Risk
Your credit score offers lenders an inside peek into your financial reputation. When you own a small business, your personal credit score and your business credit score will both be assessed to determine your creditworthiness. When you first start a business, your credit score may be a mixture of expenses and transactions that occur from your personal tax-related and credit-related transactions. As your business begins to expand, it will need to take on its own identity. You will need to keep all of your business and personal expenses completely separate to avoid potential tax implications. Paying your bills on time and in full, having a variety of accounts open and current and paying your taxes accordingly will all ensure that your personal and business credit scores will keep you in a prime lending position.
If you cannot afford to pay your business or personal credit cards in full each month, it is vital to pay off as much as you can and to keep your utilization of the cards relatively low until you can pay them off in full. Lending institutions consider a ratio of less than 10-percent utilization as acceptable for lending. Your credit score is the single most important tool that lenders evaluate when it comes to deciding whether or not to extend credit to you or your business. Paying your bills on time and not racking up a mountain of personal or business credit card debt can put you in the prime position to get favorable credit limits, high loan amounts and low annual interest rates.
Improving Your Score Before You Apply For A Loan
The three major credit bureaus provide invaluable insight into how well you pay your bills and the types of information that are contained and reported within your credit file. There are many free websites online, in addition to the credit bureaus, that will give you even more in-depth insight into how you pay your bills. These free websites compile your data to give you a score pertinent to how often you pay your bills on time, how many accounts you have in rotation, how old your credit history is and many other key details. All of this information is assessed by financial institutions and lenders, so it makes sense that you should also have an insider view at what your financial situation looks like in detail.
When assessing your credit report, you need to look for invalid or outdated information and report any discrepancies immediately with the credit bureaus and the reporting agencies. Pay off any past-due debts, tax liens or judgments that may be negatively impacting your score. Even if you dispute these charges, it may be more beneficial to just pay them off if you are in a time crunch and need to secure funding before the launch of your new business. Settling old debts will help you temporarily boost your credit score, but you need to maintain a habit of paying debts on time in the future to maintain your good credit score. Going forward, diversifying your credit by having installment-based loans and credit cards can prove to lenders that you can handle a variety of credit-related transactions responsibly.
Formulate A Lending Plan To Present
Financial lenders love to meet with proactive small business owners. When you have a clear and concise plan about how your funds will be allocated and can provide a breakdown of costs, expenses, fees and inventory or maintenance needs, you demonstrate that you are an insightful and proactive business owner.
Once you have a business spending plan, financial statements from your bank, tax documents and your accounts payable and receivable statements, you can proceed with the application process. Many financial lenders like to see at least two years’ worth of business tax returns in order to extend credit, but many credit unions and angel investors are more interested in seeing a clear-cut spending and allocation plan in the initial phases of business operation.
Once you have secured a loan, you may want to have a trusted attorney look over the terms of the contract before you sign on the dotted line. Small business loans can sometimes come with complicated lending terms that you need to understand before accepting the offer.