Gaining capital for your business with a first business loan is similar to pouring the foundation of a new home. Everything that comes after that is because of the choices you made in that first phase. It is difficult to build a house on an uneven foundation, and it will be difficult to run a thriving business built on a shaky financial foundation.
Here are five things small business owners need to know before buying a small business loan.
1. It can be difficult for start-ups to get affordable financing
Start-up entrepreneurs often find it more difficult to get financing than owners of established companies. Often, aspiring entrepreneurs need to apply for a loan to pursue their dreams. Among the reasons why loan applications for startup businesses are rejected are having a mediocre business plan, poor personal credit history, and missing documents and other information required when submitting the application itself. Here are some tips for business loan applicants:
- Get your credit in lineWhen you’re a first-time borrower, much of the lender’s decision depends on your own personal financial history. There are ways to improve your credit score and this can help you not only get approved for the loan you need, but also reduce the interest rate on that loan.
- have a plan: Your first business loan application should have a clear purpose. Writing a business plan is an incredibly important part of the process.
- Know how much money you need: Choose an amount that makes sense. Be able to split up how the money will be used. Borrow more than you think you need as there will inevitably be snafus and delays. You don’t want to go back to your lender a year later because you haven’t borrowed enough money. It will be a reflection of poor planning.
- Find out which one type of loan suits best: There are countless ways to find out which type of loan is best for your situation. Do your research.
- Use a checklist to prepare for the application: Creating a pre-apply checklist is a great way to ensure the loan process goes smoothly.
- Keep in mind that future loans are a result of your first loan.
2. Understand what personal guarantees are
A personal guarantee is a legal contract between the business owner and the lender essentially stating that if the company defaults on the loan, all items of value including property, vehicles and inventory will be seized by the lender and offered as collateral to secure the loan getting back. cost of the loan.
This can also mean that your personal assets are at risk if the company does not repay the loan. Often, small business loans require the lender to provide some form of collateral anyway, and a personal guarantee is almost always part of the process. This ensures that you get a good incentive to grow your business, but also that you don’t walk away from defaulting on a loan without any responsibility.
The need for a personal guarantee for SBA financing comes down to the type of loan you are looking for. The lender also has a say in whether or not a personal guarantee is required. The SBA has its own guidelines for lending, as well as individual banks and financial institutions. You must meet both criteria to even qualify, and even then you may still need collateral to secure your funds.
3. Gather Supporting Documentation Before Applying for a Business Loan
There are many benefits to taking out a small business loan. But the application process isn’t always a breeze. It requires a lot information and documentation, and many entrepreneurs and entrepreneurs get stuck halfway through their application because they do not have the correct documents. Incomplete information and documents are the most common reasons why small business credit applications are rejected.
Once you’ve decided to apply for a small business loan, you’ll want to get through the application and approval process as quickly as possible. Preparation is key when time and money are at stake. Each lender and loan type has different document requirements for eligible loan applicants. Here are some industry standard documents you’ll want to collect ahead of time:
- Credit Reports
- Bank statements
- Income tax return
- Debt schedule
- Collateral Documentation
- Financial Statements
- AR and AP Reports
- Business plan
- Business license
4. A well-written business plan is important for future success
A business plan is an essential part of the process of starting a new business. The plan will serve as a step-by-step guide to both long- and short-term strategies. Business plans are often critical to convincing lenders to finance your venture.
Lenders take risks when they make a loan and they want to be confident that you can repay the money in the future. They really want to understand your business, what you do and how you want to use the money. A business plan is the best and easiest way to communicate this information and allows them to make an informed decision about whether or not to give a large sum of money.
Starter loans are actually quite risky compared to other small business loans. This one makes having a business plan even more important. However, having a business plan does not mean that other factors are unimportant for obtaining financing. Lenders will still look at your credit score, credit history, and financial statements in any loan application process.
5. Applications for SBA loans are different from applications for bank loans
Two of the most common types of business loans are commercial loans and U.S. government-backed loans Small Business Administration (SBA) Loans.
Commercial loans work in almost exactly the same way as: SBA 7(a) Loans, with one seismic difference: commercial loans are not guaranteed by the government. This is a huge difference. Without that safety net, there is a much greater risk to lenders.
A common misconception about SBA loans is that the government provides the loan itself. That is not the case. The fundamental difference is that the US government guarantees up to 75% of the loan amount.
There are a few qualifications to consider before applying for an SBA loan. First, you need a strong credit score. Almost all SBA loans require a personal credit score of more than 660. So if you have a lot of credit and are looking for lower interest rates, you may want to apply for an SBA loan.
While bank loans can work well for many small businesses, online lenders provide convenience and speed. You can apply for financing on your phone; typically less paperwork than a traditional financial institution; and the process is much faster from completing the loan application to seeing the money in your bank account.
Also, online lenders typically offer more types of financing options. In addition to term loans, online lenders offer products such as short-term loans (e.g., bridging loans for real estate purchases), invoice financing, cash advances to merchants, and more. While the process is simpler and financing is faster, borrowers pay a premium in the form of higher interest rates. When the lending process is online, access to your funds is usually done electronically.