Familiar with the phrase that money can’t buy you everything? Let’s face it, when it comes to business, even too much money is never enough. No matter how big or small your business is, you will always need some extra cash to manage and keep everything running in pace.
Why money, you may ask? Without money, your business can not function at all. Money is needed to pay the bills, buy assets, and pay your employees or yourself. For your business to flourish, you need the greens to make it grow.
Pretty sure every small business owner knows the importance of business capital, which is the main reason you are here. It is simple, you need money, and you are considering a business loan. But beware, if you know not about the facts of taking a debt, it can be dangerous. The worst that would happen is you would end up taking a loan with a high-interest rate, which has a high probability that you will not be able to pay it back in time, thus losing everything you own, even your house.
We don’t mean to scare you, but in fact, to make you aware of the importance of educating yourself about the loan process before you end up indulging yourself in the wrong equation. Some of you might not even know where to start. Have you asked yourself these questions?
- Is it hard to get a business loan?
- How much loan can I get?
- What are the things needed for a business loan?
If you did and still could not find the answer, then you are in the right place.
This is the crucial first step you would take, therefore, you must play smart and act responsibly. After reading this article, decide what you have to do next. You can even keep a lookout for alternative business loans if you wish.
Table of Contents
1. PERSONAL AND BUSINESS CREDIT SCORE
The higher your personal credit score is, the better it is. It ranges from 300-850 points. A credit score would help the lender evaluate your ability to pay back the personal debts such as car loans, credit cards, or mortgages.
It would give them the idea of how you manage your debts. A commonly used FICO score for lending purpose revolves upon five decisions:
- 35% of your score is based on your payment history
- 30% of your score is based on the amount owed on credit cards or other debts
- 15% of your score is based on the credit timeframe
- 10% of your score is based on the types of credit you use
- 10% of your score is based on your recent credit inquiries.
Paying your bills on time is immunity to your credit score, or else it would simply end up with errors in the score.
For an established business, apart from your personal, you would also need a business credit score, which ranges from 0-100, again the more, the merrier.
2. GET TO KNOW YOUR LENDER
Getting a reliable lender can get you the best bet. It is important to reach up to the standard of your lender in terms of qualification and requirement, which would make you a strong applicant.
Some lenders tend to be very flexible that even if you lack in one thing but another requirement over-powers it, you are good to go. However, to impress them, you need to exceed their minimum standard.
A minimum criterion has to be met in terms of credit scores, years in business, and annual revenue to qualify. If you have a bankrupt past or any other problem you had encountered, your chances willswoop down.
It is comparatively easier to qualify for an online lender, however, they too base their loans on traditional factors but easier. For example, you might get the loan even with a low credit score, or if they are lenient enough, they tend to exempt the past bankruptcy part. The catch, however, is getting an expensive loan.
3. GATHER YOUR DOCUMENTS
When applying for a loan, you need to keep all your documentation out in front. This is very important to put your application in process. These usually include:
- Business and personal income tax returns
- Income statements and balance sheets
- Business and personal bank statements
- A copy of your driver’s license
- Commercial based leases
- Business license
- Article of incorporation
- A good resume showing your business and management-related experience
- In case you have a limited business history, you would also need financial projections.
If you think that all this is just a formality then you are wrong! All these documents are viewed and assessed during the process, which will make it time-consuming, so keep that in mind.
If you want things to speed up, then opt for an online lender since they require very little documentation and an easy application form.
4. BUSINESS PLAN
The business plan is not only important for you, but it also is for a lender. They would want to know how you would plan on executing the money and if you have a strong ability to pay back. For this, you need to come up with a strong business plan that includes the reason for taking up a loan and how it would help in boosting profits to really impress the lender.
It should also have a clear view of your business’s current and projected financials that demonstrates the ability to pay back as well as over the rest of the business expenses. A strong plan can help boost the confidence of the lender, and they would trust you and your business better.
A business plan should include the following points:
- Description of your company
- Service or product description
- The management team
- Analysis of the industry
- Facilities and plans of operations
- Strategies regarding marketing, sales, and promotions
- SWOT analysis
For a small business to qualify for the loan, you need to place some collateral or valuable asset (equal or higher than the value of the loan amount) in exchange for the loan you are acquiring. In circumstances where you are not able to pay back the lender on time, the lender is most likely going to seize and sell off your asset. This could prove to be a risk for you, especially if your credit potential is doubtful. Collateral might be essential for some lenders as it not only gives them an incentive to provide borrowers with loans but also is a security deposit in case they are not able to do so.
Before applying for a loan, you should know all the necessary steps to avoid misunderstandings and problems. And once you are here, it is time for you to use that money for the intended business purpose. Remember to pay the loans on time because this would open up future lending opportunities. So it is always a sane option to maintain a good credit score before it builds your repute with lenders. Good Luck![simple-author-box]