Key Considerations When Applying for a Business Loan
When a business runs short on funds, applying for a business loan would seem like the next logical step.
After all, a cash influx can support expansion plans, keep operations running, and help the business thrive, if not stay afloat.
Before you apply for a business loan however, you have to understand (and keep in mind) that you will be accountable for repaying the loan, whether the business thrives or not.
Approach the lending process fully prepared by taking into account the following key considerations when applying for a business loan:
Be aware of your credit score
If you intend to borrow from a traditional lender, it is safe to assume your credit score will be one of the main elements that will be taken into consideration. With that in mind, make it a priority to know your numbers prior to applying for a business loan.
Request for a personal credit report and once you get it, check if there are any errors. There might be instances when you paid promptly but it will be reflected otherwise in the report. If you find any errors or discrepancies, get in touch with the credit bureau right away so any issues are resolved the soonest possible time.
If your credit score is high, you have a bigger chance of getting a loan with an attractive interest rate to boot. On the other hand, if your score is low, you might find it challenging—albeit not impossible—to get your business loan application approved.
Know and understand your options
Nowadays, businesses have plenty of loan options available at their disposal. Alternatives can range from traditional (credit unions and banks) to nontraditional. If you prefer the latter, you will be glad to know there are financial platforms that offer loans with higher than average rates but faster approvals.
There are also financial platforms that require loan repayments in small increments paid on a daily basis. Many find this arrangement beneficial as it lowers their risk of missing bigger repayments that are required monthly.
Other alternatives like the merchant cash advance will grant loans based on future credit card sales. While this option often comes with fees and higher interest rates, getting approved is easier, even for those with poor credit ratings. In addition, repayment schemes for this type are often based on your revenue.
Figure out how much you need
If you are unsure as to how much cash your company needs to expand or operate, make it a point to meet with an accountant or financial adviser before you approach any lending institutions.
Apart from knowing how much you really need, be prepared to also discuss what you intend to use the loan for. For example, you will need to inform the lenders if you will be using the business loan to pay for additional staff, purchase materials, or pay the rent.
Also, make sure you have all the possible documentations needed handy. If you will be asked to submit a business plan, make sure you have all the important bases covered like the amount you need, what you are going to use it for, how you intend to manage risks, and how you’ll be able to repay your loans if the business will suffer another financial setback. Be ready to also answer questions regarding your future business plans, business model, and your finances as a whole.
In addition, meeting the following crucial factors would also enhance your chances of getting your business loan approved.
- Capacity – understandably, lenders are not willing to risk giving loans to businesses that have no means of repaying. To get the lenders nod, you have to be able to convince them you have a steady income to rely on.
- Collateral – banks as well as other traditional lenders often consider capital equipment or real estate as collateral. Monthly credit receipts and accounts receivable might also be considered as collaterals. If you have any of those mentioned, you can rest assured you’ll have a higher chance of getting approval.
- Credit score – for many lenders, traditional or otherwise, the credit score is a measure of one’s commitment and willingness to meet financial obligations. Fortunately, there are still lenders who would be willing to lend money to businesses with low credit scores. However, you have to give them a good reason to look beyond the numbers.