Your business is thriving, and it is a wonderful thing to celebrate. However, you may have already realized that this growth comes with a price. New opportunities are waiting for you to uncover them but perhaps you are limited with your resources, including money. Luckily, you can turn to small business loans to help you provide funds for your business.
The problem though is that small business loans are not as easy to navigate as you would have liked. From finding the right lender to building your credit to discussing with the bank, you certainly need all the guidance you can get. Here are some of the best practices when applying for a loan for your small business, along with the common mistakes you need to avoid:
Dos for Your Small Business Loan Application
Get a business bank account.
Lenders need to get a grip on your current financial situation before they grant you a loan for your small business. Many owners forget that the easiest way for these creditors to know about their finances is through having a separate account for the company.
You need a checking account that you should exclusively use for your business. It will help build your company’s credibility, which can help increase your chances of getting approved for the loan.
Take care of your business credit score.
It is significant that you understand how credit scores work and know about yours and your business’ scores at the same time. Credit bureaus have different tactics when it comes to calculating your rating, and you may have varying scores.
Your business credit score tells the lenders how creditworthy your business is. It is based on the history of payments of your business to its creditors and suppliers. Other factors that impact your score are your revenue, the industry you belong to, and the size of your business.
Several entrepreneurs don’t know their company has a credit score, but the credit companies, such as Equifax, may create a file for your business after you:
Open a business bank account
Obtain your employer identification number
Incorporate the business
Dun & Bradstreet, Equifax, and Experian are the three agencies that track the creditworthiness of companies.
Know your personal credit score.
The small business application is a very personal process since lenders will consider not only your business’ credit history but also your personal financial information. These details allow them to assess whether or not you are capable of paying back the loan. The credit score tells the lender if you should be approved and often influences your interest rate.
Once you apply for the loan, expect the creditor to perform a soft credit pull. It will not harm your credit standing, but it shows the lender your credit score and some items in your credit report. In this part of the application, the lender will use those pieces of information to pre-approve you for a loan.
Clearly, the better your credit score is, the higher the chance of getting approved. A score of at least 600 will help you obtain the loan. If it is lower than 600, you may not get affordable deals. It is a good idea to improve your credit rating before you apply and the best way to achieve this goal is to pay your dues on time and with enough amount.
Prepare all the necessary documentation.
Several important documents should be in your hands before you talk to the lender, including your tax returns and loan history. Legal documents may also be necessary, including your commercial lease, articles of incorporation, and franchise agreement if these things apply. The required documentation will depend from one lender to another.
Don’t be afraid to seek out expert advice on how to get a loan. An accountant can also assist you in organizing your finances. This way, you can pitch your business plan with ease to the lenders.
Don’ts for Getting the Loan for Your Small Business
Don’t be delinquent on payments.
If you have late payments, they can lead to certain other red flags that will instantly drive the lenders away from your application. Payment delinquency doesn’t just hurt your credit rating, but can also result in tax and property liens, which lower your chances of getting approved. If you have these tax liens, it is essential that you settle them as soon as you can.
Don’t be vague about your financial needs and plans.
Applying for a small business loan is similar to having a job interview since you need to convince the lender that you are worthy of acquiring funds from them. During the interview process, the lenders typically ask how much money you want to borrow, along with your plans on using it. If you are open-ended about these two things, it can give the creditors a lack of confidence about your business’ future.
Don’t apply for a loan without understanding the costs involved.
Lenders have their own way of describing the cost of the loan they offer. Some will talk about the interest rate, while others will give you the total amount you need to pay back. If you have applied to several companies, it can be confusing to compare them with another.
To make the comparison much easier, you should learn how to differentiate the APR and the interest rate. Many people already know what the interest rate it but not the APR, which stands for the annual percentage rate. It describes the total cost of the loan in a year including the other fees. Banks typically impose six to nine percent APRs on small business loans, but it can be higher if you go for alternative lenders that can provide you with fast funding and may be helpful if you have a low credit rating.
A low APR doesn’t mean it is better than a loan with a high APR. Often, short-term loans have high APRs, but they don’t have high interest rates, so the total amount you pay back is low.