Small businesses carry great importance in building the economy of a country. This is because small businesses introduce growth and innovation as well as create jobs in the country. A small business includes any business that has employees that are equal to or less than five hundred in number. This definition has been set by the U.S Small Business Administration (SBA). Some of the small businesses turn into large corporations in the future and hence are seen as carrying considerable potential. Like every other business, small businesses might also find themselves in a situation where they require financial assistance. This could be due to problems faced at the beginning of setting up the business or while running the business. So, you consider taking help from the outside in the form of a small business loan. In this article, we discuss the different steps that you should take before applying for a small business loan.
Before Applying For A Small Business Loan You Must…
1. Answer the Most Important Question
The first step of getting a small business loan is first to make it clear to yourself why you are applying for it. The answer to this cannot be as simple as ‘because I need money.’ As a lender, it is essential to understand exactly why they are giving out credit to someone. If you cannot convince the lender why you need the loan, you will not be able to get it.
Hence, before explaining it to the lender, it is a good idea to ask yourself why you need the money. Is it because you want to start your business? Is it because you would like to expand your already existing business? Whatever the reason is, make sure you are fully aware of it and believe in its success.
2. Know the Right Amount
Along with knowing the reason why you are opting to take out a small business loan it is also important to know what amount you will require fulfilling your purpose. Along with knowing the amount it is also important to figure out the urgency of the loan. If you need the money quick, it is probably not recommended to use the help of banks.
Know the right amount - the more you seek, the more likely you will be rejected.
3. Figure Out When and How You Can Repay the Loan
Be realistic about the way you will be repaying the loan. This needs to be done beforehand so that you can choose the repayment plan that is in line with your financial expectations. Do not overestimate your ability to pay back the loan as it could hurt you in the future. Make sure whatever repayment plan you have in mind, is practical and affordable to you.
4. Know What to Use as Collateral
Regardless of the kind of lender you end up with, it is natural for the lender to ask for some collateral when giving you a loan. This makes the lender feel secure and increases their confidence in you. Collateral doesn’t necessarily have to be in the form of an asset. It could be in the form of guarantees as well. Before starting the application process, it is wise to decide on the kind of collateral you will be provided to the lender to get the loan successfully. This is imperative because you might end up getting rejected if you do not have sufficient collateral.
Some of the lenders waive off the requirement of having to present collateral however this exposes you to a number of risks such as loss of your valuables or other items in case you fail to pay the lender. Do a thorough analysis of the assets that you have and then decide what collateral you can present to the lender. Good collateral increases the probability of you getting accepted for the loan.
5. Decide on the Type of Loan & the Lender
If you are opening up your business and need funds to initiate the business, it might be a good idea to consider a start-up loan. You can do more research online to find out which loan would be best suitable for your needs. Also, at every step, make sure you are eligible for whatever you are considering.For already existing businesses it is a good idea to consider a small business loan. For a small business loan, it is a good idea to make SBA Loans the first option that you consider.
This is because SBA Loans also have the option to opt for low-interest rates and repayment plans that are flexible. The other options that you have are micro lenders or online lenders. If you have a good credit history, can offer sufficient collateral and do not need the money immediately, you should consider going to the bank for your loan. On the other hand, if you do not have a lot of time on your hands and do not have sufficient collateral either, it is better to go with online lenders since they are known to be flexible.
6. Stay Informed
Once you have finalized the main elements of your decision such as the type of loan and lender, the next step is to consider many options in the same category. Check out the terms and conditions of the options that you are considering and the annual percentage rate. Again, make sure that the repayment plan sounds affordable and doable to you.
Discuss with the lender how flexible the terms are and what would be the repercussions if you fail to make a payment. Communicate all your concerns and worries and do not hesitate to ask questions. Every lender has their own set of rules and terms. Make sure you both are on the same page and discuss even the smallest of details regarding your case.
Lear the annual percentage rate (APR) of the loan. Know what the fees will be, as well as any prepayment penalties.
7. Prepare the Paperwork
The application process for getting a small business loan could become lengthy if you do not know what to expect and which documents to prepare. So it is a good idea to make a list of all the documents that will be required by the lender and gather them beforehand. The lenders will require you to show several documents that could pertain to any nature such as financial or legal. Hence, to make the whole process as short as possible keep the necessary items ready.
8. Expect Rejection
Getting a loan can be tricky. By getting your hopes too high, you might invite yourself to disappointment. Understand that rejection is a part of the process, and one or two rejections do not necessarily reflect your inability to acquire a loan. Whenever you are rejected by a particular lender make sure you find out what your case was lacking and make a stronger case in front of the next lender. By doing this, rejection will serve to be a learning process that you can use to acquire the loan you need.
If you are looking to acquire a small business loan, make sure you incorporate all these tips to prepare yourself better for the process of getting a loan.