A major problem affecting small businesses is getting a business loan. This is likely because most banks have high lending standards. However, preparing and knowing ahead of time if you meet the loan requirements before applying for a loan makes it easier to qualify for a loan. Here are some tips to help you get the capital you need to take your business to the next level.
What Is the Loan For?
Every entrepreneur must have an answer for this question before applying or a loan. Their answers generally fall into one of four categories:
- Starting a business
- Managing everyday expenses
- Growing a business
- Having a safety net to keep the business afloat during a crisis
Choose the Right Loan Type
After deciding on the purpose of the loan, you need to then choose the best loan type for you. For example, if you’re running a startup, then you will find it almost impossible to get a loan in the first year of business as lenders need proof of cash flow to prove loans can be repaid. This means that startup companies are immediately disqualified from getting finance.
After deciding which kind of loan and lender is best for your needs, you should compare two or three different alternatives to see which one offers the best terms and interest rates. Choose the loan with the smallest APR, provided you are able to keep up with the regular payments for the loan.
Know Your Credit Score
Everyone has a personal credit score of between 300 and 850 points. The higher your credit score the better. Your credit score shows your ability to pay debt including car loans, credit cards, and mortgage. Your FICO score is used when banks consider lending to you, and it is determined by five factors including amount owed on credit (30%), repayment history (35%), how long you’ve had credit (15%), recent credit inquiries (10%), and credit types being used (10%). Small business lenders need to have a personal credit score before issuing a loan to determine how well a borrower manages his debt.
Get Legal and Financial Documents
Banks and other lenders will typically ask for legal and financial documents during the loan application process. This includes:
- Business and personal tax returns
- Business financial statements
- Business and personal bank statements
- Business legal documents such as a commercial lease, incorporation articles, franchise agreements, and more
Another thing to keep in mind is that you will have to provide collateral to qualify for a small business loan. The collateral will serve as an asset and it can be equipment, real estate, or inventory that can be seized and, if necessary, sold should you fail to make repayments on time and default on the loan.