Acquiring capital for your business with a business loan for the first time is like laying the foundation for a new home. Everything that comes after is due to the choices you made in this first step. It’s hard to build a house on an uneven foundation, and it will be hard to run a thriving business built on a shaky financial foundation.
Here are five things small business owners need to know before getting a small business loan.
1. It can be difficult for start-ups to get affordable financing
Budding entrepreneurs often have more difficulty obtaining financing than established business owners. Often, future business owners need to apply for a loan in order to start pursuing their dreams. Some of the reasons why start-up business loan applications are rejected include: having a poor business plan, poor personal credit history, and missing documents and other information required on the application submission. asks herself. Here are some tips for new business loan applicants:
- Get your credit online: When you first borrow, a big part of the lender’s decision depends on your personal financial history. There are ways to improve your credit score and it can help you not only get the loan approval you need, but also lower the interest rate on that loan.
- have a plan: Your first business loan application should have a clear purpose. Writing a business plan is an extremely important part of the process.
- Know how much money you need: Choose an amount that makes sense. Be able to detail how the money will be used. Borrow more than you think you need, as there will inevitably be snafus and delays. You don’t want to have to go back to your lender a year later because you haven’t borrowed enough money. This will be a reflection of poor planning.
- Determine which type of loan is best: There are many ways to determine which type of loan is best for your situation. Do your research.
- Use a checklist to prepare the application: Creating a pre-application checklist is a great way to make sure the loan process goes smoothly.
- Remember that future loans will flow from your first loan.
2. Understand personal guarantees
A personal guarantee is a legal contract between the business owner and the lender that basically states that if the business defaults on the loan, all valuables including property, vehicles and inventory will be seized by the lender and offered as collateral. to recover the cost of the loan.
It can also mean that your personal assets are at risk if the company does not repay the loan. Often with small business loans, the lender will require some form of security anyway, and a personal guarantee is almost always part of the process. This ensures that you will have a good incentive to grow your business, but also that you will not give up a loan without any liability.
The need for a personal guarantee for SBA financing depends on the type of loan you are looking for. The lender also has a say in whether or not a personal guarantee is required. The SBA has its own lending guidelines, but banks and financial institutions have theirs as well. You will need to meet both criteria to be considered, and even then you may still need collateral to secure your funds.
3. Gather supporting documentation before submitting a business loan application
There are many benefits to taking out a small business loan. But the application process is not always a breeze. It requires a lot of information and documentation, and many entrepreneurs and business owners get stuck halfway through their application because they don’t have the right documents. Incomplete information and documentation are the most common reasons why small business loan applications are rejected.
Once you’ve decided to apply for a small business loan, you’ll want to go through the application and approval processes as quickly as possible. Preparation is key when time and money are at stake. Each lender and loan type will have different document requirements for eligible loan applicants. Here are some industry standard documents you’ll want to gather ahead of time:
- Credit reports
- Bank statements
- Tax returns
- Debt schedule
- Collateral documentation
- financial state
- AR and AP reports
- Business plan
- Business license
4. A well-written business plan is important for future success
A business plan is an essential part of the process when launching a new business. The plan will serve as a step-by-step guide for long-term and short-term strategies. Business plans are often essential in convincing lenders to finance your business.
Lenders take risks every time they make a loan and they want to be sure that you will be able to repay the money in the future. They really want to understand your business, what you do, and how you plan to use the money. A business plan is the best and easiest way to communicate this information and allows them to make an informed decision on whether or not to give you a large sum of money.
Start-up loans are actually quite risky, compared to other small business loans. This makes it all the more important to have a business plan. However, having a business plan does not mean that other factors are unimportant in obtaining financing. Lenders will always review your credit score, credit history, and financial statements in any loan application process.
5. SBA loan applications are different from bank loan applications
Two of the most common forms of business loans are commercial loans and US government-backed Small Business Administration (SBA) loans.
Commercial loans work almost exactly the same way as SBA 7(a) loans, with one seismic difference: commercial loans are not guaranteed by the government. It’s a huge difference. Without this safety net, the risks for lenders are much greater.
A common misconception about SBA loans is that the government itself issues the loan. This is not the case. The basic difference is that the US government guarantees up to 75% of the loan amount.
There are a few qualifications to keep in mind before submitting an SBA loan application. First, you will need a strong credit score. Almost all SBA loans require a personal credit score above 660. So if you have good credit and are looking for lower interest rates, you can apply for an SBA loan.
While bank loans can work well for many small businesses, online lenders offer convenience and speed. You can apply for funding on your phone; generally, there is less paperwork than with a traditional financial institution; and the process goes much faster, from filling out the loan application to seeing the money in your bank account.
Additionally, online lenders generally offer more types of financing options. In addition to term loans, online lenders offer products such as short-term loans (e.g. bridge loans for home purchases), invoice financing, merchant cash advances, and more. Although the process is simpler and the speed of funding faster, borrowers pay a premium in the form of higher interest rates. When the loan process is online, access to your funds is usually done electronically.