If you own a small business or are trying to open one, a small business loan could make a huge difference. Underfunded businesses often struggle or experience halted growth. Having a cushion to pay for unexpected expenses or make improvements to your business could help it flourish. There are many different types of small business loans. This article will explain how to qualify for one and give you several options.
Qualifying for a small business loan:
Contrary to popular belief, there are many factors aside from credit that a loan qualification takes into consideration. Assets, profits and losses, a business plan, and even income can all play into the equation. The first step is to make sure that you have a solid business plan. If you don’t have a business plan or don’t know where to start, there are many resources available. Online courses, local organizations, and even YouTube videos can show you how to construct a well-composed plan. If you don’t feel comfortable with preparing one, there are authors and consultants that will do the writing for you. This option still requires you to communicate all of the information clearly. The author can only articulate what’s provided. It’s imperative that you proofread the plan to make sure it’s complete. Also, consider preparing some visual materials or models to provide a visual representation of the business. The lender will appreciate you conveying what they’re actually being asked to invest in. You’ll also have to answer questions, so ensuring that you’re well-prepared is essential.
Personal and business credit can be strong factors when approving a loan. If you don’t have any business credit, it’s almost a certainty that your personal credit will be examined. Getting copies of your credit report and checking it over is advised. The major credit bureaus will often provide you with a free or very low-cost report that’s made available online. Credit monitoring services can be beneficial for some borrowers. There are services online that will alert you to any changes to your report. Again, these services are typically free or low cost, depending on the services you select. If you need to clean up your credit, there are several options for doing so. You can dispute the items directly with the credit bureaus yourself. This is free; however, it’s important to note that you’ll have to provide them with some evidence in many cases. You can have a credit repair agency file the disputes on your behalf. This can be beneficial for many people; however, most of them will charge a monthly fee for the service. Also, the disputes they file are standardized and may not work in some cases. It’s important that you communicate with the agency as to what needs to be done. The last option is simply paying off the outstanding negative items on the report. If you have collections accounts, you can sometimes negotiate a settlement for less than the actual balance due. However, this is reported to the credit bureaus which will note it on your credit report.
After you’re comfortable with your credit position, you’ll want to examine your assets. Many times banks will ask for collateral to secure a loan. Homes, cars, valuable jewelry, and other items can be used. They’ll also take your savings and any retirement funds into consideration. You may be asked to put money down to establish equity in the business. The more funds you’re able to put down, the higher chances you have of approval. This is especially true for borrowers who may have had credit difficulties.
Now it’s time to find the best loan for your small business:
After you’ve done the legwork, you’ll have to find the right small business loan. Conventional loans are typically provided by the Small Business Administration. This governmental branch also provides grants, which makes it appealing to many borrowers. However, the small business owner is typically required to be a borrower that fits conventional loan requirement standards. This means a stable credit and employment history. Also, the business plan is highly scrutinized and must be presented in person. Low-interest rates and guaranteed amortization are also appealing to many borrowers. This is a good option for those who fit the mold.
Private equity firms and investors are another option:
For small business owners that don’t fit the standard loan qualification criteria, private equity firms and investors provide an alternative. After presenting an excellent business plan or business records, the investment firm will make you an offer to provide funding. They will request to hold an equity position in your company. While this is a great option for those who are lacking in credit, there are downsides. The firm will now have partial ownership and control over your company. For those who need complete control over their business, this option wouldn’t be advisable. However, the business owner and their attorney may be able to negotiate specific terms that would suffice. This is a good option for many new business owners that don’t mind some guidance and may have credit issues.
Business lines of credit provide financing that can be drawn upon when necessary. This is a great option for businesses that are established and have a strong track record. Cash flow problems occasionally occur in many small businesses, which make the immediate withdrawals appealing. Also, all the underwriting is done up front so the owner doesn’t have to apply every time they need funding. These loans do require that all interest and fees are paid, regardless of how much is actually used. This is a solid option for businesses that don’t require a standard loan but would like a cushion available.
After being approved for your small business loan:
After being approved, you’ll want to stay in touch with the loan servicer. It’s very important to pay as agreed. If you’re unable to make a payment, they may be able to help modify the terms or extend the deadline. A small business loan will give you the opportunity to succeed in your new venture of living the American dream.