When you start a small business, you have a million things to think and worry about. However, many entrepreneurs have one matter at the top of their minds: how they can finance their business. An excellent source of capital is a small business loan, but it can be a challenge to get and apply for. With the myriad of options available, along with the requirements and other details, it can be confusing for the owners to make a decision.
If you are planning to apply for a small business loan and you want to increase your chances of getting approved, we have the answer. Here are the seven steps to perform to help pave the way for you to receive the funds you need from a lender:
Step 1: Ask yourself why you need the small business loan.
Be prepared to respond in full detail. Aside from explaining to yourself, the lenders will also have the same question. Often, the answers fall into one of the following categories:
You need financing to start your business.
You need extra funds for your day-to-day expenses.
You have plans to grow your business.
You want to have a safety cushion.
Your answers can also help you determine the best type of lender to go to in which some of your options include banks and online lenders. Banks are normally the first choice because they are generally safer than other options. However, it is a requirement that you can provide collateral, along with other essentials, including a good credit rating.
Step 2: Find out your business credit score.
One of the critical details that creditors look into is your credit score, which also determines the loans you can qualify for. Every year, you can get your credit report for free from any of the three credit bureaus, including Equifax.
Banks typically have the least expensive loans, but they require the borrowers to have a credit score of at least 600. Some banks may require at least 680 to 700 to get the best deals.
Step 3: Know your personal credit score.
It is not just your business credit score that’s important but also your personal credit rating, which shows the lenders whether or not you are creditworthy. It tells the banks and other lending companies that you can pay for the loan at the agreed time and the right amount.
You can get your credit rating from credit card issuers and personal finance websites. However, you should know that not all scores are equal. One lender may pull a specific rating while the others may look at a completely different one. Most creditors though use the scores from FICO and VantageScore.
Step 4: Determine how you can improve your score.
Unless your score is around 700, you should not be complacent. Lenders and banks have varying requirements for the ratings, and most of them will demand a high score.
Once you have both your personal and business credit report, take time to recognize all the pieces of information you find in that document. Many entrepreneurs look at the scores but forget to examine whether or not specific details such as the following are correct:
Credit card accounts
Social security numbers
If there are any errors, be sure to quickly contact the credit reporting agencies, such as Experian. They will provide you with instructions on how to dispute the mistake.
Step 5: Know significant details about your business and the loan specifics.
Lenders may have different requirements, but they often consider the same things, including the length of time you have been in the business world. They will typically ask you how long you have been operating, which can provide them an idea about whether or not they should approve your loan application.
Many small business loans require the company to be at least a year in the industry, but banks traditionally qualify those who have been in the business for at least two years.
Aside from the age of your company, the lenders will also ask whether or not you make enough money. They will look at your finances, including your annual revenues. Before you apply, it makes sense to figure out the numbers these institutions require, so you don’t waste your time if you do not qualify for their loan.
Your capacity to make payments will also be considered. Your cash flow will be evaluated to learn how much you can afford toward the monthly loan repayments. Some lenders may require you to pay twice a monthly or even daily, so make sure you factor these details into the equation.
Step 6: Gather all the needed documents.
Before you apply, have all the required papers ready. The documents will depend on the lender, but you will mostly need to submit a combination of these things with your application:
Your personal and business tax returns
Personal and business bank statements
The financial statements of your company, including balance sheet and income statement
You can apply for a few small business loans in about two weeks without negatively affecting your personal credit score. If a bank or lender turns you down, you can always move on to your next option. Therefore, it makes sense to have several copies of the needed documents.
Step 7: Understand what the loan will cost you.
You should know how long it will take you to repay the loan. Figure out the interest rates, along with the other fees, to help you estimate how you will make the monthly payments. You should also learn about the terms and conditions associated with the loan. Lenders typically use annual percentage rates to provide the borrowers with information about how much they need to pay for the whole year.
The last step is to wait since you will not get an answer as to whether or not the lender approved your small business loan application. Usually, you will know within two to four weeks. If the lender asks for additional documentation, it doesn’t mean you have a low chance of getting your loan approved.