The idea of owning and running a business is exciting. However, there are many things you need to consider before starting a small business. Running a small business comes with its fair share of challenges. One of those challenges is managing the finances, especially obtaining a loan for your small business. Your ambition and hard work can only get you so far, and you will need additional help to eventually grow your business or manage the day-to-day expenses. This article explains five steps to secure a small business loan that will help your business grow, increase the value of your business, and resolve cash flow problems.
Understanding Different Loan Types
You will come across many kinds of business loans, so your goal should be to understand the types of loans available and then make an informed decision based on your needs. For example, there are business loans for starting a business, buying real estate, and purchasing equipment. They vary depending on your needs, specific terms, and the loan length. Some options are working capital loans, small business term loans, business factoring loans, Small Business Administration (SBA) loans, and equipment loans.
Determine Loan Purpose
The first question lenders tend to ask before extending a loan is the purpose of the loan. For example, you may need a loan to get your business up and running. In this case, you should write a business plan in advance, determine when you need the money, and the amount you think you will require to fulfill your purpose.
Similarly, you may need a loan to grow your business. This loan makes it possible to hire more employees, create new marketing campaigns, or be used for any other purpose that will help expand your business.
Lastly, you may need a loan to help you manage your day-to-day expenses. This loan will help you cover expenses like payroll of your employees, unexpected or accidental costs, or research purposes.
Having a determined purpose as to why you need the funds and how you plan to use them is a necessary step.
Determine If You Qualify
Once you have understood the different types of business loans available and decided which loan will meet your needs, determine whether you qualify for that specific loan. Some of the factors for small business loan eligibility are
Credit Score
A good credit score is one of the most significant factors for small business loan eligibility, as it helps secure lenders when applying for a loan. Lenders are more likely to offer business loans to companies with a credit score of 680 or above.
How long has your business been operating?
The amount of time you have been in business is also essential when applying for business loans. You will only be eligible for most small business loans if you have been operating for at least two years.
Profit
The amount of money you make per year will determine whether you can afford to get a loan or not. It may seem bizarre, but your annual income decides if you can repay the loan while making every other payment necessary for your business.
Collateral
Lenders require you to put forward some collateral value in exchange for a business loan. It can be your equipment, stocks, property, or anything else of value. If you fail to repay the loan, it serves as security for the lender, in which case, they will seize the collateral.
Prepare Documentation
Before applying, make sure you have all the documentation ready. It includes legal documents, personal and business bank statements, financial statements, business plans, and tax returns.
Apply
Once you have decided what type of loan and lender is best for you, you will need to fill out forms and get ready to apply. It is best to apply for more than one business loan with similar terms and annual rates and wait for approval.
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