Starting your own business is one of the most lucrative endeavors that you can take part in. With today’s technology, it’s even possible to run an entire company from your smartphone.
Getting the capital to start a company is another story, though, and many people have to take out a loan to do so. To make things even more complicated, a large number of entrepreneurs aren’t aware of how to apply.
Not sure where to start? Don’t worry, we’ve got you covered.
Let’s take a look at everything you need to know about how to apply for a small business loan and get approved.
Understand Your Prospective Lender
One of the most important aspects of getting approved for a business loan is having a thorough understanding of your lender’s requirements. Otherwise, you may find out later after being denied that you never had a chance in the first place due to rigorous standards.
For instance, many lenders have a strong stance against providing money to borrowers who have filed for bankruptcy in the past. The same can be said for general loan delinquency.
Other lenders are more flexible and accommodating when it comes to your financial history, but you may find that the terms you receive are notably rigid. You may also have to deal with a higher interest rate.
So, research your potential lender as best as you can so that you know the criteria you need to satisfy.
Check Both Your Business Credit and Personal Credit
Unfortunately, most people aren’t aware of the fact that lenders take a look at both forms of credit when determining if an applicant is suitable to borrow money. Even if your personal credit score is above average (or even great), a lack of business credit or a low business credit score could significantly hurt your chances.
Business credit is influenced when borrowing/repaying business debt, the number of business credit lines you’ve opened in the past, and how many years you’ve had business lines of credit.
Of course, there’s a handful of factors that could help sway the lender’s decision.
For example, a company that already has a solid stream of revenue may need a loan so that it can scale. A lender will see that and likely be more accommodating if the company’s owner doesn’t have a history of business credit.
Be Ready to Show Your Business Plan
If your company isn’t already up and running, you still have to prove to your lender that you have a solid chance of running a successful business.
This means developing a detailed business plan that details your potential revenue streams, projected numbers, potential answers to contingencies, etc. Put simply, your company should thoroughly exist on paper so that your lender is able to assess how much of a risk you are.
If you’re planning on hiring employees immediately after you start your business, you should also detail their roles, their salaries, and how they’ll impact the growth of your company.
You should also be able to convey how you’re going to market your business, as even a company that offers groundbreaking products or services likely can’t cut through the clutter of the industry when it’s first founded. A solid marketing plan could easily mean the difference between getting your loan approved or denied, and may also help you lower your interest rate.
Gather The Necessary Documentation
A business plan is only part of proving your company’s projected performance. None of it will mean much, though, if you don’t have the required documentation to operate legally.
Documentation that you should have ready to present often includes:
- Commercial licenses
- Articles of incorporation
- Income tax returns
- A business resume
At the very least, you should compile all of the documents you have access to the declare the legitimacy of your business and prove to your lender that you’re a worthy applicant.
In general, the more documentation you’re able to provide, the better chance you’ll have of securing a loan with the terms you’re looking for. The requirements will vary from lender to lender, though, so be sure to check before moving forward.
Have Collateral Ready to Go
Unless you satisfy all the criteria that your lender is looking for, you’ll likely need to offer collateral in order to secure your loan.
This will essentially give the lender leverage over the borrow if they default on their loan— you can’t gain ownership of your collateral back until the loan’s terms are satisfied.
In general, proposed collateral includes property and assets, such as equipment, real estate, etc. It could also include personal items, such as jewelry and other possessions that have an inherent monetary value.
As long as you’re certain you’ll be able to repay your loan, though, this shouldn’t be an issue.
To help speed up the lending process, you should already have collateral in mind when you apply for your loan. This will also prevent any conflicts from arising if your lender asks for collateral as part of the agreement terms.
Understanding How to Apply for a Small Business Loan Can Seem Difficult
But it doesn’t have to be.
With the above information about how to apply for a small business loan in mind, you’ll be well on your way to making the decision that’s best for you and your company.
Want to learn more about how we can help? Feel free to get in touch with us today to see what we can do.