12 Things to Prepare Before Taking Out a Business Loan
June 16, 2022 | Last Updated on: July 27, 2022
June 16, 2022 | Last Updated on: July 27, 2022
Are you thinking about taking out a small business loan?
Here are some steps you can take to prepare for it to make the process smooth and easy.
Lenders only loan money to borrowers they trust. And even if they trust you, if they trust you less than other borrowers, they will charge you more in interest.
Thatâ€™s why itâ€™s critical to do your research and learn the basics about small business loans. Knowing what youâ€™re getting into will help you feel more confident that youâ€™re qualified to get a loan, know what type of loan to get, determine whether youâ€™re being offered a fair interest rate and loan term, and avoid excessive fees.
Your personal credit score reflects your creditworthiness. It tells lending companies whether you pay your bills on time, have too many or too few credit lines, leverage debt effectively, and have a history of repaying loans.
You can get your personal credit report for free from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can also get your credit score free from several credit card issuers and personal finance websites.
If you’re an entrepreneur that doesnâ€™t have a credit history or an established small business owner with bad credit, you will probably need to start slow. This is the case for many startups, new companies, and small businesses, but donâ€™t give up. Begin by getting a business credit card and paying off the balance each month. It will help you prove to credit agencies and lenders that you are worthy of getting more credit. Over time, it will help you score bigger loans with better terms.
Many lenders consider more than your credit score when making loan decisions. They may also check your time in business, cash flow, revenue, reputation with customers, and more. Demonstrating that your company is solid and that youâ€™re a responsible business owner could be just what it takes to get your loan application approved.
When it comes time to apply for a business loan, you must prove everything you claim on your application, including your revenue, expenses, debts, and assets. You must be able to back these things up with paperwork. Donâ€™t wait until application time to get your documents organized. Doing it now will make the application process faster and easier.
Use a cloud-based accounting and bookkeeping tool to organize your business finances. It makes it easy to manage your income and expenses, send and track invoices, generate financial reports, calculate taxes, and store bank statements, tax returns, financial statements, bank account information, and other documents.
Before applying for a business loan, itâ€™s crucial to determine precisely how much cash you need. Getting too much funding could force you to pay too much interest and costly prepayment penalties if you pay your loan back before its term is up. Requesting too little money than you need may require you to go back for a second loan. Or worse, it could leave you unable to resolve a financial issue, complete a project, or take advantage of an opportunity.
Work with an accountant, financial professional, or loan expert at a reputable business financing company to figure out what size loan to apply for.
Itâ€™s one thing to know how much financing you need. Itâ€™s another to be able to pay it back.
Once you know how much cash you need, figure out how much you can realistically afford to pay. Analyze your monthly revenue and expenses to see if you can afford an additional monthly payment. Calculators are available online that can help you determine how large a loan you can handle.
If you cannot pay back the loan you want, you might need to adjust the loan amount or type. For example, if you canâ€™t afford a short-term loan, you might still make payments on a merchant cash advance or business line of credit.
Keep crunching the numbers and reconsidering financing options until you come up with a combination you can afford to pay back.
Loan decisions are typically not based exclusively on past financial history. Lenders also consider future cash flow, especially for loans that will be used to expand the business, for instance, to purchase equipment or a new location. Realistic cash flow projections will demonstrate your business’s future income and expenses based on how the loan money will be used.
Use your previous cash flow statements, balance sheets, and profit and loss statements to prepare accurate projections. When a lender sees a plan for the use of their loan funds backed by data, they will be more likely to approve your application.
The amount of money you require, why the business needs the money, the term, and your creditworthiness all impact the type of loan you should get. Here are some popular loan types to consider:
Loan companies base their lending decisions on the risk that you wonâ€™t pay the money back. Collateral helps lower that risk by providing banks with a guarantee based on the value of the collateral in the case that you default on your loan.
Look for valuable things you could offer up as collateral on your loan. It could be business assets like a truck or piece of equipment or personal items such as jewelry, real estate, or artwork. Providing collateral or a personal guarantee makes most people nervous, but you can avoid losing it if you get sensible financing that you feel confident you can pay back.
Most lenders will want you to explain how you will use your loan money, including:
The best way to explain all these things is with a complete and current business plan. If you havenâ€™t written one â€” or updated an existing one â€” lately itâ€™s time to get busy.
Not every lender will require a business plan, but it’s best always to be prepared by having one ready. The additional research and planning will help you strategically use your funds, establish realistic repayment plans, and prepare for worst-case scenarios.
Every lender is different and serves a unique purpose.
Take time to research your lending options. Look out for ones that are financially sound, reputable, and have positive ratings and reviews from clients.
Donâ€™t wait until the last minute to get a loan. If you think you may need one in the future, plan ahead. The preparation and application processes may take longer than you expect.
Small business owners need to be knowledgeable about loans and lending, but they donâ€™t have to become experts. Don’t be afraid to seek professional advice.
A bookkeeper, accountant, financial advisor, or loan officer can all be great sounding boards to help you figure out how much funding you need, the amount you can afford to pay back, and the right loan type and provider. Getting support will help you feel confident youâ€™re securing the right financing for your business.