7 Things to Consider Before Applying for a Business Loan.

As a business owner, growing your small business should be your key focus. This may include upgrading or acquiring new machinery, increasing the workforce, expanding your business premises, or running a new marketing campaign. The journey to building a successful small business takes time, hard work, commitment, and ultimately, the capital. 

Sufficient financial resources are the lifeblood of any small business. However, for many small business owners, financial constraints can be a significant setback. That’s why you need to consider taking small business loans once in a while to keep your business going. However, securing a loan requires adequate planning and preparation for the application to go through. That said, here are a few factors you should consider before applying for a small business loan.

Look Into Your Personal Credit Score 

One common mistake small entrepreneurs often make when searching for a business loan is ignoring their personal credit score. Since your business may still be in its earliest stages of growth, you may not have a well-established business credit score. As such, lenders will look into your credit history to determine your track record and if you have been consistent in meeting financial obligations.  For most applicants, the Small Business Administration’s minimum credit score is 650. Most lenders, however, prefer a bare minimum score of 720 and above before giving out a small business loan. Monitor your credit score regularly to keep it healthy, even if securing financial capital isn’t in your plans.

Understand What The Loan Is For

Never apply for financial aid if you are not sure what you want to do with the money. Lenders will want to know how you plan to utilize the funds as it helps them evaluate your business feasibility and credibility. When drafting out a detailed loan proposal, be sure to include the following: 

• The amount of money you need to achieve your business goals
• How you will use the money
• What you plan to achieve after a specific period of time
• Your loan repayment plan
• What you plan to do in case your plans don’t work out, and the business fails to give you ROI, or you are unable to pay back the loan

One sure way to invest a small business loan is purchasing new machinery or adding new stock if the market has enough potential. Hiring qualified workers or expanding the premises can also give you ROI.

Prepare Your Financial Records

If you want your loan application to go through, you must do your homework well. Lenders will look into your business documents and ask questions about the business. They’ll need to review your accounting records, financial statements, tax compliance records , and other crucial details. Before going ahead with the application, understand business loan requirements. Ensure all the relevant documents are up to date and in order. Here are some of the documents you should review and update:

• Financial statements: Profits and loss, annual revenue postings, and business checking account statements.
• Taxes: Business and personal tax compliance records
• Business license
• Social security number
• Business tax ID

Research Multiple Lenders 

No lender or bank is the same as the other. Before applying for a business loan, research your borrowing options to help you identify the ideal lender. You want to work with a financial partner who understands your business, economic, and industry needs. Here’s what you look for in an ideal lender:

• The number of loans they have funded in your specific business industry
• The average loan amount they can facilitate
• Their loan fees
• Their average loan interest rates
• Required payment schedule
• How long it takes for the loan to mature
• Whether or not they require a personal guarantee
• Ask the lender which credit bureaus they work with and when they report to them

Weigh Out The Total Cost Of The Loan

Understand the terms and conditions of every loan offer before settling on one. You can compare the interest rates, repayment plan and schedule, penalty fees, and other requirements of each lender before you make a decision. Several factors determine the rates and interest fees among lenders. For instance, loans with repayment plans that depend on the business cash flow can be expensive.  

Depending on the size of your business and your financial needs, go for a business loan that is within your means. Settling on a loan that will be expensive to service will only frustrate your business growth. Remember, you need the money to move forward, not stagnate.

Understand Your Capacity For Collateral

Some small business loans require some form of collateral. In other words they want you to put some
“skin in the game”. If you choose a loan that requires collateral, such as an SBA loan, you should understand how much your collateral is worth. Lenders will want to know the value of your collateral, and you will want to see if you have something valuable enough to list as security for the loan. Just be sure not to default on the loan or lose whatever property you use as collateral.

Are you a startup? Better Have A Basic Business Plan

The first thing you should think about before applying for capital is your business plan. This is what will help you convince the lender to give you their money. A reputable lender will want to know how credible your business is and if you have what it takes to grow your business and take it to the next level. Basically, they’ll want to know if your business idea and plan will work out because no one wants to throw good money after bad.  

In your business plan, explain everything about your business, including your objectives, immediate competitors, past, present, and future revenue postings, expenses, market analysis, and the unique strategies you’ll employ to drive the business forward. Applying for a business loan is like applying for a job and understanding business loan requirements is very crucial. Demonstrate to the lenders why they should consider your application. At the end of your business plan, include an executive summary that points to your vision. This is what will make or break your business application so do it wisely and expertly.

Bottom Line

Gone are the days when securing a small business loan used to be a daunting and frustrating process. Thanks to technology and innovation. Mobile apps and online lending platforms have made the process MUCH smoother for small business owners seeking access to financial capital. The correct personal credit score, a defined loan purpose, and organized financial statements are an excellent start to getting your loan application approved. Finally, asking the right questions when scouting for the perfect lender will ensure you work with the best financial partner.