Raising capital is one of the biggest problems small business entrepreneurs face. Often, they use their savings to launch and support these ventures. But obtaining a small business loan is a great alternative in such cases.
This article will detail what you should know before getting a small business loan.
1. Consult A Financial Advisor
When shopping for a loan, you’ll have several options that you can evaluate independently. But there’s a risk that you may overlook certain aspects of the contract. Deciphering financial jargon is difficult, so it’d be wise to consult a financial advisor to help you understand the terms and conditions of the available offers.
For instance, a financial advisor will advise whether to make a small business loan variable or fixed based on your financial requirements. They could also guide you throughout the loan application process and help you build a winning proposal. Note that seasoned experts may charge a premium for their services, but it’s worth the investment.
2. Maintain A Good Credit Score
Credit scores play a huge role in determining whether your loan gets approved. It gives the lender a good idea of your ability to repay the borrowed money. The higher your credit score, the better. On the one hand, the lender may reject your application if you have a poor credit score, as it makes you a high-risk borrower.
But bear in mind that lending institutions have different requirements. Some of them would even approve your loan application despite your poor credit score, although this could also mean high-interest rates, plus they’ll likely require collateral.
To improve your credit score, regularly monitor it. This way, you can assess your progress and make any changes if necessary. Keeping your credit utilization rate low is important too. Consider requesting higher credit limits if you find yourself struggling to maintain one. Moreover, pay your bills on time. Other credit score-boosting strategies won’t work if you default on your payments.
3. Evaluate Your Options
There are a few options to consider when obtaining a small business loan. These include:
- Microfinance Loan
This is a growing financing option entrepreneurs use nowadays, usually offered by nonprofit organizations. In this type of loan, lenders typically have looser eligibility requirements since loan amounts are usually small. But they may have higher interest rates.
- Traditional Loan
This is the most common source of loan financing and usually has stiffer eligibility requirements. That said, loan processing and approval may take time. However, there’s a good chance you can get substantial funding if you have a great proposal or business idea. This may also present the lowest interest rates out of all the available options.
- Business Credit Card
It’s a smart approach to financing a business in its early phases, despite being risky. It’s easy to apply for one, and it normally takes a day or two to know if you’ve been approved.
You’ll need solid personal credit to apply for a business credit card. And once you’ve obtained one, you must be careful when using it. Missed payments may result in penalties and high-interest rates that could affect your credit score.
The above list isn’t exhaustive as there are other options available, but it provides the common sources of loan funding for small businesses. Each one has its pros and cons, so the best thing to do is go for the option with the most reasonable terms depending on your financial capacity and requirements. So, research is a must.
- Prepare Documentation
It’d be best to have your documentation ready when applying for a loan. Various loan types will need different kinds of paperwork. As a result, you must conduct research in advance.
You should have commonly required documents, including corporate information, proof of business, business and personal banking information, business and personal tax returns records and legal documents. The application procedure will go more smoothly for everyone involved if you have these materials on hand.
- Monitor Your Cash Flow
Note that a decent credit score doesn’t guarantee quick loan approval; it only increases your chances of getting approved. But proving that you’ve been paying your debts on schedule is what banks or lenders are most interested in seeing. Therefore, a company’s cash flow is crucial, as it gives them information to use in determining the viability of your company and its ability to repay the loan.
- Put Yourself In The Lender’s Shoes
Recognize that the interests of lenders and borrowers are often divergent—so why exactly should the lender give you money? That’s the question you should ask yourself before applying for a loan.
Do all the research you can about specific institutions or lenders’ requirements. You may tailor your application to meet those conditions. By doing this, you’ll understand how things should be laid out. Remember that the lender wants to minimize risks as much as possible. Your application should give them a strong reason to believe you’re a worthwhile choice.
- Determine How Much Money Your Business Needs
Some business owners make the error of taking out more debt than they need. However, even if you secure the loan, it could be challenging to pay it back. Thus, you should only borrow the amount of money that your company needs—nothing more.
- Learn From Other People’s Mistakes
It’d be best to educate yourself on the facts surrounding loan application rejections. Just because your loan application was rejected shouldn’t force you to give up. Instead, think of it as a learning experience. Recognize what went wrong so you can avoid it when you apply again.
A common mistake people make is not having a solid business plan. Lenders want to see it to know your business’s profitability, marketability, and growth prospects. If you have a poor plan, the lender may lose confidence in you and reject your proposal. You can ask the help of your financial advisor in this area.
Another mistake entrepreneurs make is not doing enough research on lenders. When shopping around for a loan, it’s best to consider your options carefully. Going with the first loan offer you receive isn’t advisable; more often than not, you’ll find other banks with much more favorable terms than the ones you first approached. So, take the time to compare before finalizing your decision.
Conclusion
Small businesses usually struggle with securing loan financing. Small firms typically have limited expertise and may need more financial history to demonstrate their creditworthiness. Fortunately, entrepreneurs have options to consider. Remember that maintaining good credit is crucial, as is ensuring that their cash flow demonstrates your ability to repay loans. Speaking with a financial advisor for more detailed guidance on obtaining loan financing is also advisable.
