A great business idea is not the only thing required to create a successful business. Sooner or later you may need to turn to a funding resource such as invoice factoring and small business loans. Between these two however, loans are the advised for small businesses especially in their earlier stages.
Applying for a business loan is a good way to fund your business, however, it’s not a walk in a park especially if you are a small business. You need to submit requirements for lenders to review and this may take weeks or months before it gets approved.
If you place yourself in the lender’s shoes, you’ll see that simply relying on the borrower’s circumstances or loan application form is not enough to lend a large amount. Seeing it from their perspective can enlighten you on why the application process is challenging. As you see it from this angle, you will also discover there is a chance to have it processed smoothly.
To help you process your loan application smoothly, here are five steps you can take.
Secrets to a Smooth Business Loan Application
1. Review and update your financial report
One of the requirements lenders are going to ask from you is your financial report. These can include your assets, expenses, other sources of income, and tax returns. Showing an accurate and updated record of your finances is vital for lenders to ascertain you can do on-time repayments of the amount including the interests of the money they will lend you.
To prepare, you need to provide at least three years of both personal and business tax returns, cash flow record, balance sheet, and your sales projections. If they see you have a good record of your finances, you have better chances of getting approved.
2. Maintain a good credit history
A good credit score can either make or break your chances of getting your loan application approved. Lenders will always carefully look at your credit history to assess your creditworthiness. However, this is not only limited to your small business’ credit history but may include your personal credit history as well, especially if you are just starting your business.
Your credit score shows whether lenders can take the risk of lending you a small business loan or not. Each lender has a standard of what they consider as “good”
A good credit score shows that you have provided loan repayments timely including its interest. This gives lenders an idea that they can take the risk of lending you a large sum. They may even offer better payment terms.
While a good score is favorable for your loan application, a bad credit score can lead lenders to reject it. If they decide to approve your application, they may give you a higher interest rate on your loan.
3. Prepare a detailed plan for using money
When you fail to plan, you plan to fail — and this goes true even on how you will use the amount you are borrowing. You need to be straightforward in stating why you are applying for a loan. Lenders would also want to know the reason why you need the money.
You need to communicate clearly how much money you will need to use. It’s also important to also set a realistic amount to loan and not a guessed amount. Start determining how much you need to borrow by doing research.
If you are applying for a small business loan to replace pieces of equipment you use in your office, you can ask dealers for quotations and compare their prices including shipping fees. If your loan is to open a new branch or office, you need to search for office spaces ideal for your business, compare their rent, and consider the electric consumption, tax payment, and permits you need to pay.
Once you’ve researched the amount, prepare a detailed budget plan. This will provide lenders an idea that you are a responsible borrower. You can also provide a business plan and marketing plan to increase your chances of getting approved.
4. Find the right lender
Every financing company offers different rates, payments, periods, and loan terms, especially for small business loans and requirements.
Review each of them and see which will work well with your business. Find out more about their requirements, compare, and see if you qualify to apply for their loan offers. You can visit these financing companies and ask the terms they offer based on your financial statements and credit ratings.
You can also ask for their advice on what loans fit your business goals and business profile. Gather as much detail you may need to help you decide which financing company and their loan offer to apply for.
5. Get all your documents ready
Once you’ve selected the loan offer you want to apply for, prepare all the documents you may need to provide them for your application. As mentioned earlier, requirements may vary from one lender to the other.
Organize all the papers needed. Some of them have been mentioned earlier in this article. To guide you, here’s a list of documents the lender may ask from you:
- Cash flow statements
- Personal and business bank statements
- Personal and business tax returns for the past three years
- Profit and loss statements
- Balance sheets
- Business permits and registrations (and franchise agreements)
- Business owner’s resume
- Documents for collateral
- Articles of incorporation
Some lenders may ask only a few of the documents listed here. Nevertheless, it’s best to be ready before you apply for a loan. Seeing that you organize not only makes your loan application quicker but also gives them an impression you are someone they can take a risk with.
Applying for a loan can be challenging and it may take weeks or months before you get approved. You need to apply for a small business loan earlier to make your business idea happen immediately. Prepare for all the requirements, update your financial records, and research earlier which loan offer fits you. This way, even if getting a small business loan is challenging, you can have a smooth processing of your application.
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