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Do you know 30% of small businesses fail due to running out of money? Many entrepreneurs give up the idea of starting a business due to a lack of funds. Sometimes it becomes difficult for small businesses to arrange funds and run the operations. That’s where the small business loans come to help. But getting small business loans is not easy. There are many factors that are considered while applying for a small business loan. You should do a little homework before applying for a loan if you do not want to end up getting the wrong loan product.
Building a company is certainly not an easy thing. There are many things you need to take care of. Building a company requires a brilliant idea and enough capital. You cannot start any business without financial flow. Would you drop the idea just because you do not have funds to start a business? You should consider getting a small business loan.
A small business loan is a type of financing provided by lenders to new or current businesses for different purposes. You can use these funds to start a new business or expand the existing one. If you do not have enough cash flow to meet day-to-day expenses getting a small business loan can help. You can use the loan proceeds to purchase equipment, inventory, or hire new staff.
How to apply for a small business loan?
There are different types of small business loans available, but you cannot qualify to apply for every loan. It is highly important to choose the right type of business loan according to your needs. The process of applying for a small business loan can be daunting, especially when you do not understand how a small business loan works.
You should decide in the first place whether applying for a business loan is the right move to make or not. You will have to repay the principal amount of the loan along with interest. So, make sure you apply for a loan only when you are sure about the repayment.
Here is how you can apply for a small business loan:
· Check your credit score and financial profile:
You should check your credit score and financial profile even before applying for a small business loan. The lender will check your credit score to determine whether or not it is a good idea to lend you money. It is highly important to have good credit scores if you are applying for a loan from a bank.
For most small business owners, the personal credit score will always be part of the equation when it comes to applying for a small business loan. If you want to obtain an SBA loan, you need to maintain a good credit score.
What if you do not have a good credit score? Well, you can still apply for a small business loan, but you will have to pay a high rate of interest on these loans. Also, traditional lenders do not provide loans to businesses with a bad credit score, so you have to consult online lenders.
· Business plan:
You must have a great business plan to convince the lender to approve the loan. Your business plan specified your goals and mission. It tells the lenders how you are going to use the loan proceed. You provide financial projections in the business plan, which help the lender determine you will be able to pay the loan back or not.
If you are starting a new business and need financial help, then you must have a good business plan to apply for a small business loan. The lenders may be hesitant to provide loans to new businesses as they are riskier. Having a good business plan helps you assure the lender that the business will be able to generate profits, and you will be able to repay the loan within the specified period.
· Find the right type of loan:
There are different types of small business loans available, but you need to choose one according to your needs. Different types of small business loans are designed to meet different financial needs. For example, if you need to acquire a new business, you cannot use the funds received from invoice factoring. Similarly, if you need working capital, then you should not apply for an equipment loan. The following are different types of small business loans:
· Merchant cash advance
· Equipment loan
· Vehicle loan
· A business line of credit
· Term loans
· SBA loans
· Invoice financing
· Business credit cards
· Commercial real estate loans
Your time in business and credit profile makes a big difference. The lenders prefer to provide loans to businesses with a good credit score. Improve your credit scores and choose the right type of small business loan.
· Choose the lender:
Historically commercial banks and credit unions were the lenders. But with the rise of the internet now things have changed. Now small businesses can lend through online lenders too. If you are lending money from a bank, then you must have a good credit score, as already stated above. Bans offer different types of loans, including long-term loans at a low-interest rate. If you get a loan from an online lender, then you have to pay a high rate of interest. But there are less restrictions, and you can obtain a loan even if you have a bad credit score.
· Qualify for a loan:
It is highly important to understand how to qualify for a loan. Each lender has different eligibility criteria, and you have to meet it to qualify for a small business loan. Depending on the lender, you may have to provide the following information:
· Business plan
· A bank account
· Financial statements
· 3 months bank statements
· Business license
· Other legal documents
· Tax returns
· Collateral (if required)
Is it necessary to provide collateral? Well, not every lender asks you to keep an asset as collateral. But if it is so, you will have to pay a low-interest rate. In case of an unsecured loan, you will have to pay a high rate of interest, and if you fail to repay the borrowed money, the lender has the right to sell the asset in order to recover his money.
· Submit your applications:
No matter you are applying online or submitting the application in person, make sure you review it. You should provide clear and thorough information in the application. The information you provide must match the financial statements. If you provide any wring or inaccurate information, it can reduce the chances of loan approval.
So, review your application before submitting it. Depending on the type of loan and lender, your application may take several months to approve.
Mistakes to avoid in the loan application:
The process of applying for a small business loan is not easy. A minor mistake can lead you towards the loan rejection. So here are a few mistakes you should avoid while applying for a small business loan:
1. Not providing up to date record:
The common mistake businesses make is not providing updated financial records. You need the money and are eligible to apply for a small business loan. It does not mean that the lender will just take a look at your application and approve the loan.
He will check your financial record to determine how stable your business is. He has to make sure that your business will be able to generate revenue, and you will make timely payments. So, pay attention to the other financial records and keep them updated.
2. Not clear on the use of funds:
There is a reason you are obtaining a loan. You must be clear about why you need a loan and how you are going to use the loan proceeds. It not only helps you choose the right type of loan but also helps the lender know that the funds will not be misused.
When you have no idea how to relocate these funds, the lender will reject your application. You must use these funds for the growth and development of the business.
3. Applying for the wrong loan product:
There are several types of small business loans, and it is quite easy to get mixed up. Nothing can be worse than applying for a wrong business loan. For example, if you need working capital and apply for an equipment loan, you will have to pay interest for a longer period.
4. Applying with a bad credit score:
You understand how important it is to have a good score to apply for a small business loan. A credit score of 700 or above is considered good. But when you apply with a bad credit score, the chances of getting the application rejected increase. When you apply for a small business loan in a bank with a bad credit score, then forget about obtaining the loan. Similarly, your application for an SBA loan will be rejected if you have a bad credit score.
5. Providing wrong information:
You should give clear and correct information in the loan applications. The lender will match the information provided in the application with the figures in the financial statements. He will reject your loan application if he finds any inaccurate or wrong information in the loan application. The details you provide should exactly the same on every document.
6. No business plan:
A business plan is important for mapping your goals. You should clearly define how you will run the business and how it will be able to generate revenues. The lenders require you to have a great business plan in order to get the loan approved. Having no business plan can be fatal for your business. Financial institutions prefer to give loans to those who are ambitious and want to do something great in business.
7. Not understating things:
It is highly important to understand how a small business loan works before you apply for the loan. You should understand that the interest rate will depend on the type of loan you choose and the duration in which you have to pay it back.
In addition, you have to read all the stated terms before signing the loan contract. You should not wait for the crisis to apply for a loan as it can make things worse. You need to determine when is the right time to apply for a loan as it takes time to get a loan approved. If you need cash fast, then consider the account receivable financing or a business line of credit.
By avoiding the mistakes discussed above, you reduce the chances of loan rejection. Make sure there are no errors in your loan application so that you can obtain a loan as quickly as possible.
Is it a good idea to apply for a small business loan?
You have an excellent business plan, but due to a lack of funds, it is still on the papers. Or you need money to keep the business operations running? What would you do? Would you just sit idle and see your business doors getting closed, or would you try to arrange funds?
It is true that not every reason is a good reason to obtain a loan. But it does not mean that good reasons do not exist at all. With small business loans, you can start a new business or acquire an existing one. With these funds, you can make payrolls, hire new staff, pay rent, or purchase equipment.
Small loans are a great help for businesses facing trouble in coronavirus outbreak. It has become for small businesses to even survive in this situation, let alone earning profits. Instead of closing the doors, getting a small business loan is a great idea. It can help them get off the ground.
There are different types of small business loans, and you can choose one that best fits your needs. But paying them off should be your priority. Guess what the best part is? Now small business loans for women are also offered to enable female entrepreneurs to start a new business or grow their current business.
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