Securing a business loan can be very difficult, even harder for small businesses this is due to the strict lending conditions meted out by banks. But most times, obtaining financial support from external sources is often inevitable to cover the daily expenses or expand a business. Bob aims to show us how small businesses can secure these loans to get their business off the ground. Bob Jenson is a Chief Innovation officer of smallbusinessloans.co and a frequent speaker at business events. For the past four years, Bob has written a monthly blog column called “Business Success.” He has also taught at the university level for several years.
Although finding and securing that business loan for a small business can be daunting, however, if you do your homework and carefully find out more about loan applications for small businesses, you may just stand a greater chance to better your odds. With these five steps, you can get that business loan approved for your small business.
1. Be Certain Of Why You Need a Loan
Lenders will not just throw money at your feet at your request; they will be willing to find out why you need this loan. And it is almost certain that they will ask you, why you need the loan, to begin with. However, your reply should sound like any of these statements below;
• To launch your business • To cater for your operational expenses • To have a safety cushion in case of a cash crunch.
2. Decide Which Loan is Ideal for You
The reason behind your need for a loan will go a long way to determine what kind of loan you get. If it’s a new business, loans may be hard to come by in the first twelve months of your launch as lenders will demand cash flow support to pay off the loan. Thus, startups almost do not stand a chance in this regards. Startups may turn to other financial options like crowd funding, souring from friends and families or nonprofit lenders. For businesses that have lasted for over two years and have a stream of income, their financing options include SBA loans, invoice factoring, term loans and business line of credit.
3. Find out the Best Type OF Small-Business Lender
There are several sources of small business loans, some of which may include nonprofit microlenders, banks and online lenders. These lenders will offer products such as lines of credit, term loans and account receivable financing.
You should aim to compare different options the moment you settle for a particular lender, compare them against annual percentage rate and terms of the loan that you are eligible for and settle for the loan with the least APR in the event that you can continue to cover the loan’s regular payments. Small businesses find it difficult to get bank loans due to factors like low sales volume and cash reserves, lack of collateral and bad personal credit. Although banks are your lowest APR (Annual Percentage Rate) option, a bank loan can take anywhere from two to six months to get approved. Settle for a Bank if:
• You have collateral • The loan is not urgent • Your credit score is good
Microlenders are nonprofits that have a higher APR than that of banks but usually offer short-term loans of less than $35,000. They may require a financial and business plan and a description of what the loan is intended for. They are an alternative to banks and you should settle for a microlender if you cannot access a bank loan because your business is not large enough.
Online lenders will provide small business loans and lines of credit ranging from $500 to $500,000. The APR varies with lenders, but it is typically between 7% to 108%. They feature higher APR rates but they are ideal if;
• You don’t have a collateral • Need a quick loan
4. Find Out if You Are Eligible
How long have you been in Operation? For most business loans, you need to have been in business for at least a year to qualify for most small business loans.
Do You Make Enough Profit?
Most times, most lenders will require an annual revenue that ranges anywhere from $50,000 to $150,000. Know what part of the divide you lay before applying.
Can You Meet Up With Payments?
Evaluate your business to ascertain if you can afford to pay back the loan, a good way to find out is to ensure that your total income is at least 1.25 times your total expenses including your loan repayment. Thus, if your business was making around $11000 and your total expenses stands at $8,000 you can only afford a loan repayment of $1000 monthly.
5. Ensure You Have The Relevant Paperwork
Once you have settled for a lending option, it’s time to apply for that loan for your small business. Lenders requirements may vary, but you may be required to submit a copy of either/a combination of the following documents;
• Business financial statement • Business tax returns • Business legal paperwork (franchise terms, lease, etc.) • Personal and Business bank account statements
So, with these five tips in mind, you should have an idea about how to approach a lender for a loan for your small business and most importantly, you know the lending option that is better suited to your emerging business.