As an entrepreneur, getting a small business loan can be challenging. However, it doesn’t need to be a nightmare.
Preparing for the loan application process improves your chances of securing a loan. It demonstrates your reliability and capability to pay loans on time.
Here’s what small businesses need to do to speed up the application process. It’ll improve your chances of getting the loan painlessly and effortlessly.
1. Determine Why You Need the Loan
Before you fill out the loan application forms, understand the motivating factors. It’s among the many questions that lenders like Thinking Capital will ask.
In most cases, you’ll seek for financing to:
- Grow your enterprise
- Start your business
- Manage daily expenses
- Get a safety cushion
2. Choose your Ideal Type of Loan
Knowing the reasons why you need a loan determines the type of loan you get.
For instance, most financial institutions shy away from businesses that are less than a year old. The lender needs a cash flow statement to determine your ability to repay the loan.
As a startup, you’ve to rely on other forms of credit financing. Such include crowdfunding, personal loans, and borrowing from friends and relatives.
An old business has lots of financial data. Because of this, they have more financing options, which include term loans. Invoice factoring and business lines.
3. Have Your Documents in Order
When applying for a loan, transparency is a must. The exercise will be more seamless if financial, tax, and accounting records are accurate and up to date.
You can do this by employing a system where everything is organized. Alternatively, you can hire an accountant to handle your bookkeeping.
However, several entrepreneurs attempt to save money by handling their bookkeeping. Don’t make this mistake. When you get too busy, you’re likely to ignore the books.
A good accountant handles your books without emotions. As such, they’ll guide you when making tough decisions.
4. Have a Good Credit History
Yes, your financial documents are in order. Congratulations! But that’s not enough. Pay your bills as they fall due. Avoid bankruptcies, foreclosures, late payments, and charge-offs.
The financial institutions have different credit requirements. But maintaining a good credit score is a vital part of this process.
Further, you should not apply for more than one loan at a time. Applying for several loans kills your chances of getting any financing. Here’s the reason.
When you submit your loan application, the lender pulls all your credit history. Well, doing this might knock you few points off your rating. If several lenders do this, it’ll add up, thus affecting your credit score negatively.
Therefore, don’t lower your ratings by trying several lenders. Instead, identify the loan where you have a higher chance of securing and apply.
5. Demonstrate Cash Flow
Does your business have any financial history? If so, demonstrate your financial cash flows. The lenders want to see whether you can honor monthly or annual repayments.
In most cases, the lenders will assess your tax returns Vis a Vis existing debt. Therefore, if you want to get a loan, provide a clear plan that shows your capability to make loan payments.
6. Understand that Lenders are Different
Every lending institution has its terms and conditions. They’re never the same. Each of these has its advantages and disadvantages.
For instance, a large bank focuses on more prominent clients. The reason, a more substantial loan request translates to higher profits. While the facility may be willing to finance your small enterprise, you’ll not get favorable terms and attention like a corporate entity.
What then do you do?
A smaller bank is built on a personal relationship. Therefore, you can meet the banker at your chamber and explain your situation. Building this relationship will make all the difference.
As an entrepreneur, getting a small business loan is a big hurdle. It’s even worse considering the onerous lending regulations by different financial institutions.
But that doesn’t mean you give up. Look for different sources of financing to start, grow, and expand your business. Yes, the process will be challenging. Therefore, prepare in advance to boost your chances of securing a loan. Have your documents ready and strive to maintain positive credit scores.