26 Mar 8 Steps to Take Before Considering a Business Loan
Like any other applications—job, school, loan, housing, etc—it pays if you are prepared. Being prepared doesn’t necessarily mean guaranteed approval of the application, but it certainly shortens the process. Whether the application will be approved or not, at least the waiting game will not be arduous if you come prepared. It is the waiting that will get on your nerves. But here’s another way to look at it: a person who is truly prepared should have an approved application because being prepared means anticipating problems and having a ready solution to that problem.
Here are some steps you should take before applying for a business loan to ensure a smooth process.
Prepare a killer business plan
Since you are planning on opening a business, chances are you know how important a business plan is. It will determine whether you should be given a loan or not. If you want to attract investors, a business plan needs to be attractive. And if you are asking for a loan, it should be able to show that this business will make money because it is only when you are making money where you will be able to pay off the loan from a bank or a lender. Anticipate possible questions from a bank or lender and make sure these are already answered in the business plan because chances are, before you get an interview with the company that will give you a loan, they will already have a decision in their mind on whether they should approve the application or not.
Ask yourself: Why do you need the money?
The generic answer is: to start a business. But that’s not what lenders want to know. They want to know the specifics of where the money will go. How much is going to be spent on infrastructure? How much will go to office supplies or manpower? Why are you spending that much on a particular aspect of the business? These are questions that will help lenders determine the importance of the loan.
Know the various business loans
There are different types of business loans and if you want to impress upon your lenders that you are business savvy, then you should really know what types of loans are out there. Here are some of the alternatives.
- Small business line of credit – this is when a business is given a line of credit of around $100,000 so that your company will have access to the funds whenever you need them.
- Accounts receivable financing – this is just like the above-mentioned line of credit which your company can pay when you receive payment from clients.
- Working capital loan – it’s a loan you take out to finance the daily operations of your business before it starts making money. This is usually a short-term loan of between a month to a year.
- Small business term loan – it’s similar to a capital loan but with a better deal because for the first few months, you will only be paying interest. You start paying for the base loan between six months and three years.
- Small Business Administration (SBA) small business loan – this is a loan guaranteed by the SBA. The interest rates are more favorable because of the government backing. But because it is government, the requirements are more stringent.
- Equipment loan – as the name implies, this is a loan so that you will be able to purchase equipment for your business.
- Small business credit card – this is like a capital loan but in a credit card.
If there are different kinds of loans, there are even more lenders out there. You have to find out the best one that fits your need. There are big lending companies but they are not always the answer to your loan needs. Sometimes, the smaller companies can give you the attention you need. And if there are different kinds of loans, there are as many—or even more—types of lenders out there. If you have figured out the loan you want to take, it would be easier to identify the type of lender you want.
Clean up your credit report
Try to review your credit report and try to clean it up if it isn’t. An attractive portfolio and a killer business proposal will not do much for you if your credit report is a mess. If you are doing financially great, check the records anyway. There might be a misreporting in there like a late payment notice indicated in a report when you actually settled it on time. This could mar your record. You also don’t want any misspelled details in there because that could spell the difference between getting your loan approved or not.
Get to know your lender
Now that you are ready to take out a loan and you’ve identified the lender, you should at least create a relationship with the people in the lending company. Get to know the secretary and other staff members because these are the people that could give you tips on how to have a loan approved. If you can start talking with the officer who could be in-charge of your loan, then that would be great.
Know what you have to offer
It’s hard for lenders to part with their money for something that it is not appealing. So here’s a tip: banks or lenders really love it when they know that you are also investing your own money. This would make them think that if you are willing to spend your own money on this business then you might be worth investing in. If not, then you should at least have a property that you can use as collateral for the business.
Get your documents in order
Most banks or lenders have a checklist of the documents you need to submit in order to take out a loan. So have these documents prepared and in order and submit them to the lending company.