- A business loan can help you establish or expand your business, but navigating the loan procedure and meeting the new, more stringent lending rules can be difficult. For instance, a small business can qualify for up to $10,000,000 from lending institutions. Yet, the approval depends on your credibility and the type of loan you are applying for.
- There are steps that you can consider to guide you in applying for a small business loan. These help you seek financial help and take advantage of new opportunities with less hassle and more efficiency.
- Getting more involved makes navigating and applying for the loan process a lot simpler. Having a defined plan and following through is crucial for someone interested in getting a loan.
Why do small businesses borrow?
Whether starting a business or expanding an existing one, you certainly want funding and obtain loans to look for external funding to help achieve a business goal. A business loan can help you take advantage of new opportunities, and develop your business by effectively financing your day-to-day operations. Though, navigating the loan procedure and meeting the new, more stringent lending rules can be difficult. For instance, a small business can qualify for up to $10,000,000 from lending institutions. Yet, the approval depends on your credibility and the type of loan you are applying for. Moreover, new businesses in the start-up stages of development will require money, and having good cash flow is essential to a small business. Fortunately, debt consolidation can help you lower your costs and make it easier to manage your business’s finances.
7 STEPS TO GET A BUSINESS LOAN
1. Decide How You Will Spend Your Money
There are numerous legitimate reasons for business owners to obtain a small business loan, including, but not limited to, the following: to modernize facilities through the acquisition of new equipment, to acquire land, to finance a start-up business, to expand one’s business, to pay for employees, and many more. And before you consider applying for a loan, you should be able to determine how you plan to use the business loan proceeds in the long run. The fund you will get from the loan can only give you capital; it depends on how well you use it to generate income.
2. Identify the Total Amount You Will Require
Knowing what you are going to do with the money once you get it will help you estimate how much you will need as you already have a list of all of the possible expenses you will incur. Take note that, when performing these calculations, you should keep all possibilities in mind. For instance, if you want to buy commercial real estate to expand your business, look at similar properties online to know how much money you would require. So then, you can easily do this by making a sound budget plan.
Your budget plan will determine how much you require to justify your need for a small business loan since unnecessary fees and interest payments can result from taking out a loan for a large sum of money. Hence, it will not only save you money on interest by preventing you from borrowing too much, but it is also part of the application. Do take note that lenders will ask you why you need the loan. Preparation is critical when applying for a business loan, as is knowing how much you need and why you need it.
3. Determine Your Loan Capability
While it is critical to figure out how much you owe, keep in mind that your borrowing power is limited as small businesses are only qualified to borrow up to $10,000,000, depending on your credibility. Learn about the various calculations used to determine how much you can afford to borrow when applying for a small business loan from a bank or another lender.
The Debt Service Coverage Ratio, or DSCR, will be taken into account first. To arrive at this number, divide your business’s annual net operating income by your company’s annual debt payments. Using the resulting score helps lenders decide how much and how long to lend. On the other hand, The Debt-To-Income Ratio (DTI) is another formula traditional lenders employ. This equation depicts the relationship between a company’s debt and its monthly revenue. If you want to know your debt-to-income ratio, you need to divide your total monthly debt by your gross monthly income.
Last but not least, it is critical to comprehend ROI. For the most part, this means borrowing money costs less than selling something to pay back the money you borrowed. Let’s say, for example; you require a loan to increase your workforce. You will complete more work for your customers and earn more money if you hire additional employees. The increased productivity will pay back the loan in full over time.
Before accepting a loan offer, make sure you understand the lending process and whether you can afford it.
4. Do a Credit Score Check
It is critical to check your credit score regularly for you to know where you stand financially. Your credit score can help you determine whether or not you will get approval for a loan and whether or not you should even bother applying. Lenders typically offer a personal loan prequalification process, allowing potential borrowers to see what kind of interest rate they might qualify for based on the income and creditworthiness. An excellent credit score will help you save tons of money as lending institutions give the best repayment terms to trusted ones.
5. Look for Possible Business Lenders
Once you have determined your objectives of acquiring funds and your loan capability, your next step is to look for a lending institution that offers possibly the lowest interest rates and the best repayment terms to match your preferred monthly budget with the indicated value in the monthly statements. You have various options to choose from, and the following are an example of which:
a. Banking Institutions
b. Small Business Administration
c. Nonprofit Lenders
6. Prepare Loan Application Documents
Now that you have chosen the right lender, you must note all the essential documents you will need to process your loan. The requirements you will need vary depending on what type of loan you are applying for. At the very least, you must demonstrate to the lender that you have the financial means to repay the loan as stated in the third step; it may assess your capability and credit risk through 5C’s of credit (character, capacity, capital, collateral, and conditions). The evaluation will be based on the following, but not limited to, documents you provided, so you have to be mindful of the values included:
- Business Financial Statements
- Personal and Business credit reports
- Personal and Business income tax returns
- Bank Statements
- Business Licenses
For instance, a start-up business may be asked to submit a business plan, resumes for all owners demonstrating industry expertise, and financial predictions for a thorough evaluation.
7. Apply for Business Loans and Compare Options
Before applying, you must make sure that you have compiled all the essential documents in a folder to hand them quickly to the lender; this would help avoid inconvenience for both parties, but this is not necessary. Next, together with the documentation needed, you must provide the lender with your reasons for applying and the amount you wish to borrow. Remember not to take loans above your means unless you want to pay for charges. After this, credit reports will now be evaluated by the lender. This is to determine your creditworthiness as a borrower. Next will be the approval process. This may take weeks, depending on the type of loan you have applied for. And once approved, the loan will go through underwriting, closing, and funding.
Obtaining loans is not always a terrible thing for a small business; often, it is used to finance operating expenses such as paying suppliers, employees, and other business-related expenses. To make things work for your small business i.e. to develop and prosper without having monetary problems, especially in paying loans, you should take all the responsibility and accountability to effectively manage funds daily by making a sound budget plan. The budget plan must state all the specific expenses you will incur, and the values of that expenses should be thoroughly estimated by comparing similar costs online and with other providers. This will help you acquire the sufficient amount you will need from lending institutions to prevent unnecessary charges from being defaulted or delinquent. Likewise, make sure to have all your documents ready before you apply to avoid inconvenience from both parties.
Moreover, even if you follow these seven steps, you may still be rejected if you do not meet the qualifications that these lending institutions require. The more significant the amount, the more stringent the terms are. To successfully acquire a loan, you should establish a good credit score and look for more options that suit you.