Running a Small Business can prove to be challenging. Even though small businesses today constitute the majority of business in the U.S, it is natural to face challenges at the beginning of your venture. One of the most common problems that are faced by small business owners is the lack of financial support. To solve this problem, you can apply for a Small Business Loan. Acquiring such a loan, however, can prove to become a cumbersome and lengthy process if you have not prepared yourself beforehand. In this article, we share some insight into the whole process that will facilitate you into qualifying for the loan you need. Before we discuss the tips, it is important to mention over here that if you are maintaining a start-up and are looking to fund your new business, it is a good idea to apply for a start-up loan instead. If your business lacks sufficient background, it is highly unlikely that you will acquire a small business loan.
Here are a few facts that will help you qualify for a small business loan.
1. Credit Score
Having a good credit score is extremely important when looking to apply for a loan because your credit score directly reflects your ability to pay off debt. Some people have the misunderstanding that when applying for a small business loan, the lender will only be looking at their business’ credit score.
However, in most of the cases, whether the lender is the bank or an online lender, your credit score will be given a lot of importance because the lender is interested in knowing how good you are at managing money and how quickly and efficiently can you pay off the loan in the future. So the first step in making yourself eligible for the loan is to make sure your credit score is good enough. A credit score of about 700 and above is considered to be good and if maintained, can make you qualify to acquire a small business loan.
Maintaining strong documentation is vital to acquire a small business loan because your documents will reflect the standing of your business. Also, whoever the lender is, they will require a list of documents that will convince them of your need to get this loan. Other documents are needed to prove your identity to the lenders.
Basic Borrower factsheet, which includes
- Business details such as:
- Tax Id or Employer ID
- Business status (sole proprietor or corporation)
- Nature of business, e.g. (services, manufacture, production, etc.)
- Contact details of the business
- Owners/directors information
- The borrower factsheet helps the lender keep track of the client in case of a missed payment. It also helps in deciding the terms and conditions of the financing facility. The nature of business helps the lender complete their homework about the industry analysis, i.e., whether the industry in which the buyer is in is thriving or saturated.
- Business details such as:
- Balance Sheets
This step will allow the lender to analyze the situation of your business assets and your payables. The stronger your assets are, the more convinced the lender will be because it gives the lender something to come after if you fail to repay the loan.
- Income Statements
The income statement will give the borrower an idea of revenue generated and the expense created by the business during the past financial year. This document gives them a better picture of where they could expect the business to be in the coming years. It will help them understand whether the business is profitable enough to be invested in or not.
- Cash Flow Statements
This document will help in analyzing the amount of cash available to the business owners. Strong cash flow indicates liquid assets and can demonstrate a high capability of repayment. By analyzing your current loans, it becomes easy for the lender to determine whether you will be able to pay off your current debts as well as future expected debts in the future with your current status of cash flows.
Along with your financial statements, you are also required to present a detailed business plan to the lender. The lender requires this to understand the viability of your business and your vision. The lenders will need all the details about your business so that they can ensure that the business they are lending to is one that is responsible and highly-structured. Nobody wants to invest in a sinking ship. Hence, it is essential for you to ensure that you have a business plan that brings clarity to the lender and shows a promising future.
Having sufficient collateral is extremely important when applying for a small business loan. Online lenders tend to be lenient about the terms and conditions that are applicable in this regard. However, it is a requirement that has been set by all the lenders and hence is something that you should think of before applying for a loan. You can provide collateral in many ways for example:
- All loans granted to small business shall require insurance against natural calamities such as earthquake or floods. They will also require fire insurance, which will ensure recovery even if the small business is not able to pay because of natural disasters.
- Personal Guarantee of the owner(s) – where the owners or sponsors shall provide a guarantee on the signed affidavit to pay-off the loan within the stipulated loan tenor. The personal guarantee creates an additional pressure on the borrower to ensure timely payments and discourages them from default.
- Hypothecation of stocks – loan disbursement to a corporation should require the bank to pledge the stocks of the company till the time the loan has been paid-off in full, which will allow the bank to take ownership of the stocks in case of default.
- Collateral can be against assets.The bank shall evaluate the market value of property, plant, and equipment that it needs to pledge as collateral in case the business defaults on its loan. The property may include intellectual assets such as patents, on hand inventory and licenses, etc.
4. Know Your Lender
Above all, it is essential to have proper knowledge about the loan acquiring process and to make yourself familiar with all the terms and conditions. When applying for a loan, you have many options that you can consider. Whether you use banks, microlenders or online lenders, it is important to be one step ahead at all times and gain all the knowledge you can about the rules and regulations of the particular lender in question. Take care of all the possible hinderances beforehand, which will help you have a complete application and will make you a more suitable candidate for the loan.
In the end
If you wish to make yourself qualify for a small business loan, make sure you keep all four of these things in check. Once you have done everything mentioned in this article, you have nothing to worry about and should feel confident about your approval. We wish you good luck.