5 Tips for Successfully Securing a Small Business Loan
Starting a small business is an expensive venture, and for many owners, the cost of getting started exceeds the available amount in their bank accounts. While there are many ways to raise funds for business expenses, many turn to small business loans for financing. If you have never undergone the process of applying for a small business loan, the process may seem intimidating, but following these simple steps can help you to prepare:
1. Know Your Personal Credit Score and Prepare Financial Documents
Before beginning the process of applying for a small business loan, it is crucial to know your personal credit score. As a new business owner, you will have little merit when it comes to handling finances other than your own. If you have excellent credit, this will show potential lenders that you are capable of managing finances and remaining debt free. If your credit score is average or falls on the lower end of the spectrum, spend some time improving your score before you apply. This will improve your odds of securing a small business loan with reasonable interest rates. Likewise, begin to prepare and collect financial documents, such as bank statements, tax returns and financial projections, for your budding business.
2. Determine How Much Money You Need and How You Will Use It
There are certainly endless expenses that come along with starting any business. However, you will need to identify specifically how much money you will need. While it would be helpful to secure a loan for a large figure, be realistic and ensure first and foremost that you can afford the loan and that the funds will go to a worthy investment. During this process, create a list of intended purchases and be prepared to explain to lenders how these purchases will enhance your businesses profitability.
3. Create a Business Plan
Sadly, 50 percent of all small businesses will inevitably fail within the first five years. Lenders are aware of this staggering statistic and as a result, see small business loans as a major risk. To provide these lenders with a sense of security, prepare an in-depth business plan that includes past financial statements of your business or future projections, if the business is a start-up. This plan will also address collateral for the repayment, assets, an evaluation of the market of your business and information regarding your relevant experience.
4. Research Lenders
There are an impressive number of lenders for small business loans. Whether you opt for a traditional bank or would prefer to work with the Small Business Administration, be sure to research all of your options. Many lenders have their own specific set of requirements, such as being in business for six months prior to the loan, which means that you may not qualify for a loan through some lenders but may meet the standards of another.
5. Find the Best Loan
The most crucial step of securing a small business loan is to find the one that is best for your business. Certainly, you will want to find a low-interest rate, but also be sure to compare other terms and conditions of the loan. Calculate the total cost of several loan options to determine which will cost the least amount of money overall.
After you have gotten everything in order, you will be ready to begin the process of applying for a small business loan. By preparing in advance and carefully researching the requirements of lenders, you will significantly increase your odds of being approved.