August 29, 2020 Last updated September 22nd, 2021 1,858 Reads share

7 Crucial Steps To Take When Looking for a Business Loan

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If you are searching for the best business financing option, below are some essential steps worth following to ensure you make the right decisions.

How Much Do You Need?

Firstly, you should figure out the amount you need to borrow. Never answer the lender’s question of “How much money do you want to borrow” by saying “Any amount you can offer!” Lenders should see you thought through your financial needs and objects to determine the much you need. Have a plan that states how you will utilize the money wisely. Run the numbers to know the exact costs for your business, whether your goal is to purchase new machinery or open a second location. Moreover, calculate the repayments for the loan and figure out how it will affect your budget going forward.

What Type Of Loan Best Fits Your Business Needs?

After determining the amount to borrow, you then will look for a type of loan that suits the financial purpose. The most common business loans to consider are:

  • Bank loans: They are installment loans with fixed monthly repayments. You can get them as long-term or short-term. Short-term bank loans have a tenure of about 6 – 24 months while the long-term have 3 years or more. Either can be borrowed as secured or unsecured loans, although the former offers lower interests than the latter.
  • SBA guaranteed loans:   While you can get loans from the SBA, a government agency that offers financial help to small businesses, it does not make the loans. Instead, it has partnered with various lenders, nonprofit organizations, banks, and credit unions to guarantee a portion of the loan. As such, lenders are more willing to take the risk when financing borrowers.
  • Microloans: If you are looking for a smaller amount that what banks can provide, consider approaching a microlender who deals mostly with a small business loan, preferably an SBA-guaranteed microlender. You might get loans of up to $50,000. Conversely, you can reach out to nonprofit organizations that work with disadvantaged businesses and business owners with goals that align with the organization’s mission.
  • Equipment loans: If you need money to grow your machinery and equipment inventory, then go for an equipment loan that lets you use your machines and equipment as collateral. It works the same way as a car loan, having fixed monthly repayments. You can get this type of loan from specialized lenders, banks, or directly from some equipment/machinery manufacturers.
  • Business line of credit: It is not that different from a home equity line of credit in which you can borrow up to a set credit limit. You will have the opportunity to borrow again once you start repaying the loan up to a certain amount. The business line of credit will be helpful if your customers are taking longer to pay you, ensuring that you do not run out of the capital as you wait for the payments.
  • Accounts receivable financing: It is a type of loan that will accept your company’s receivables as collateral. It is a loan type also known as invoice financing. The creditor will advance you the amount you need based on your outstanding invoices. With the accounts receivable financing, you will have the money you need without waiting for payments from your customers. And once you get the pay, you will pass the remaining percentage of the loan less the set fees and interest.

Singapore financial experts 1AP Capital advise that you remember to weight your choices to determine the criteria the creditor uses when assessing your loan application and qualification. For instance, a bank loan might require three-year business tax returns yet your company might have been operating for less than a year. As a result, you are forced to look elsewhere.

Check Your Credit Scores

When checking your credit score, you will to types to deal with: business and personal. If your business is still starting, you will not have a substantial credit history. For a sole proprietor, the lender will focus on your personal credit score. But if you have been in business for a while, your credit score will not be a significant factor governing the loan decision.

Before you start the loan process, obtain a business credit report along with a personal credit report as you identify the financial troubles. Ensure your credit score is near-perfect when applying for a business loan. It will help boost your chances of qualifying to receive the money. Therefore, do not let your bad credit cause you to despair.

Put Together the Required Documents

After identifying where to apply for the loan, check with the creditor to know the paperwork and information you need when preparing the loan application. Banks tend to have very stringent requirements, asking borrowers for their business financial statements (balance sheet, cash flow statement, and income statement) along with other things such as the company’s bank statement, tax returns, financial projections, licenses, and leases. The banks might also ask for a written business plan. Other lenders may not request borrowers to submit as much documentation when applying for the loan. Nevertheless, you should prepare adequately and make sure you can provide whatever information lender requests.

Assess Your Collateral’s Value

If you have collateral that you can put up, it will make things easier for you when borrowing money to finance your business. It also helps you get better terms. The collateral can include machinery, vehicles, accounts receivable, real estate, and inventory.

If your company has no collateral, you can rely on personal assets which can include your home, valuables like art pieces and jewelry, savings or retirement accounts, and vehicles. However, exercise caution when pledging personal collateral. Avoid risking items that you are not ready to lose.

Shop for the Best Business Loan Terms

The business bank is an ideal place to start if you are already in business, but do not stop there. Shop around; check other viable lenders to compare their credit terms. Some of the crucial elements worth considering include how fast the loan will go through, the APR (Annual Percentage Rate), penalties, and the loan’s terms and conditions. Also, consider the loan’s total cost, ensuring the monthly payments are within your budget.

Submit Your Loan Application

The loan’s approval might take weeks or months depending on the lender. Avoid waiting until the last minute to prepare and send your application. As the creditor about the required documents, you should prepare to avoid sending incomplete information. any missing paperwork can delay your loan’s approval. Therefore, review the application before submitting it.

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Aneurin Wilson

Aneurin Wilson

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