First Time Business Loan: A Practical Checklist
Acquiring money for your company with a first time business loan is akin to pouring the foundation of a new house. Everything that comes afterward comes as a result of the choices you make at that first stage.
And like a house’s foundation, a major error early in the process can lead to devastating results down the road. It’s difficult to build a house on an uneven foundation, and it’ll be hard to run a thriving company built on a shaky financial foundation.
You need to get off to the best start. Here are 6 tips to help you think about, plan for, and get results the first time you’re looking for a first time business loan.
1. Get your credit in line
First things first. A lender’s primary concern is whether your business is likely to repay its debt. And when you’re a first-time borrower, much of from the lender’s decision depends on your own personal financial history. Best case scenario, you already have good personal credit. If not, start improving it now. A first time business loan may require you to exceed your lending institution’s underwriting guidelines.
Are any of your accounts in collections? Pay them off. Do you carry too high a balance on your personal credit cards? Pay them down, and pay on time. There are ways to improve your credit score, and doing so can help you not only get approved for the loan you need, but lower the interest rate on that loan.
2. Have a plan, and be able to vocalize that plan
You wouldn’t pour that foundation without having checked and double-checked blueprints written by an experienced architect. Similarly, you shouldn’t seek funding for a company that doesn’t have a business plan. Your first time business loan application should have a clear goal.
Writing a business plan is an incredibly important part of the process. It can help you, the owner, organize your thoughts, goals, and plans. It will also provide answers for many important questions that come with borrowing money. A strong business plan also shows lenders you’re capable and organized, and is frequently a required document for loan applications. In fact, business plans are absolutely required for SBA loans and traditional term loans. But while they’re not necessary for many online lenders or for merchant cash advances, they can still be an invaluable tool.
Your business plan can communicate to lenders (and to you) the exact purpose of your business. What is it that you do, and why do you do it? How will you do it on a larger scale, and what do you need to be able to do so? A lender who can see your passion, your purpose, and your plan is going to be more willing to lend you the cash you need.
3. Know how much money you need
And know why that’s the number you’re seeking. It’s a bad look for your company if you’re approved for too small a sum and are forced to go back for another round of funding too soon. Similarly, you’re not likely to get approved for a disproportionately high number.
Pick an amount that makes sense. Be able to break down how the money will be used. Proving that you used thought and logic to come up with the amount you’re looking for shows lenders you’re a smart bet.
Once you know exactly why you need the money and exactly how much money you need, it’s time to consider actual loans.
4. Figure out which type of loan is the best fit
There are many different types of business loans and many different places to find a business loan. Maybe you’re a company just starting out and you’re looking for a boost of money to get off the ground. Maybe you run a company that has been in business for years and are looking to expand into a new market. Maybe you just need to buy one expensive piece of hardware to take your company to the next level.
There are numerous ways to find out which type of loan is best for your situation. Do your research. But in the meantime, here are a few of the more popular types of business loans along with their biggest benefits and drawbacks.
- Small Business Administration (SBA) loans are typically known as the least expensive business loans out there. That’s because a large percentage of the capital is backed by the US government, leading to lower risk for the lender. The requirements for an SBA loan can be stringent, but if you’re eligible, they’re a fantastic option. The money can be used as best you see fit and the interest rates are lower than you’ll find elsewhere.
- Equipment Loans are given for the purpose of purchasing or upgrading physical equipment. That could mean new purchasing software, a pizza oven, or computers. They’re a safe investment for lenders because they hold the new equipment as collateral. If a borrower fails to repay the loan, they can just repossess the equipment for minimal loss.
- Business Lines of Credit or business credit cards operate in largely the same way: just like your regular credit cards. You have a credit limit and must repay whatever is spent up to that limit (plus interest). Many business owners hold an open line of credit in case of emergency.
- Merchant cash advances aren’t technically loans. You repay them by paying the provider with a set percentage of your daily credit card sales. Cash advances can be very fast (and good in case of emergency) but their APR can be high.
Once you understand the purpose of each type of loan more fully, you can apply for the most appropriate one.
5. Use a checklist to prepare for the application
Creating a pre-application checklist is a great way to make sure the loan process goes smoothly. Itemizing your to-dos allows you to focus on each individually. Is your business plan perfect? Have you double-checked your credit rating? Are your financial records complete and accurate?
Breaking down the large project can make it easier to improve the parts individually. And with an organized list, you know that when you meet with your lender’s account manager, you’ll have everything they’re looking for at the ready.
6. Remember that future loans will come as a consequence of your first loan
It’s very likely that you’ll need more funding in the future.To succeed, your business will need to grow. Right now, you’re laying the groundwork for future funding with your first application.
So make sure you’re applying for a loan that will allow your business to grow into an even more attractive borrowing party. Choose a loan that allows you to afford your monthly payments so that your business credit score grows, making it more likely your second loan will come with less interest.
Think about lending as an investment in your business’s future. You need to consider what that future can look like and make the necessary moves now to create stronger situations later. Making good choices with your first time business loan is a great place to start.