Business loan applications may often seem complicated, especially for first-time borrowers. Thorough preparation is key to a successful business loan application. So, before you submit your application along with the required documentation, here are eight things you need to know before applying for quick business funding.
1. Prepare a Business Plan
Lenders would naturally want to know more about your business and where it's headed before putting money at stake. A comprehensive business plan gives them an idea of what your business is about, your goals, and your financial standing and projections.
A business plan tells them whether you’re running a credible business or not, or you have what it takes to take your business to the next level. It should also include your goals, competitors, financial standing and projections, market analysis, marketing, and advertising.
Once you have all the necessary information in place, you’ll need to write an executive summary to wrap everything up and draw lenders into your vision. The executive summary is usually the first thing lenders read, but it could also be the last if nothing catches their attention.
Not all lenders ask for a business plan; however, you might still want to create one for your business. It can help you focus on the specific steps necessary to make your business a success.
2. Check Your Personal Credit History
Many small businesses and startup companies don’t have enough history to establish a business credit score. If this is the case, lenders would want to check your personal credit score to gauge how financially responsible you are.
Less-than-stellar credit history can impede your chances of qualifying for a loan. Fortunately, there are several ways to improve your personal credit score before you apply for a loan, such as paying your bills on time, pay off debt and keep your credit card balances low, and dispute errors on your credit reports.
3. Research on Different Lending Companies
From banks and credit unions to online lenders, there are several types of lending institutions you can choose from. It’s crucial to ensure that you’re talking to the right lending company that’s capable of addressing your business’ unique financial needs and preferences.
Banks and credit unions are one of the first places businesses look to when applying for a loan. They offer reasonable interest rates and repayment terms. However, it’s hard for small business owners to qualify for bank loans because of the lack of operating history, poor credit score, and more.
On the other hand, alternative financing or online lending institutions are more lenient in application requirements. You don’t need a high credit score to qualify for financing, and most of the time, they’ll only ask for a few months’ worth of bank statements. Alternative financing also offers fast business loans with a turnaround time of 24 to 48 hours. Banks are notoriously known for long underwriting processes, making alternative financing an ideal option for businesses in need of fast cash. You can check out SMB Compass for more information.
Make sure to carefully weigh your options before choosing a lending company. To find the right fit for your business, you can ask the following questions:
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- Have you funded loans in my industry?
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- What are the interest rates and fees involved in a typical small business loan?
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- How long does it take before I can receive the funds?
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- How long does the application process take?
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- What are the documents that I need to submit to qualify for a business loan?
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- What are your repayment terms?
4. Know Exactly Why You Need a Small Business Loan
Before lenders approve your application, they’d want to know exactly how you’re planning to use the money. This helps them assess the feasibility of your loan application. Creating a detailed loan proposal could give lenders an insight into how you’re going to use the funds to scale your business. You can include the following information:
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- How much your business needs
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- How you’re planning to use the money
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- What you would do if you’re unable to repay the money
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- How you’re going to repay the loan
There are several reasons why you want to take out a small business loan, including needing extra working capital, purchasing new equipment, or buying much-needed inventory and materials.
5. Collateral May Be Required
Some loans, such as asset-based loans and business term loans, may require borrowers to pledge business or personal assets as a form of collateral. You’ll need to have an idea of how much your assets are worth. Potential lenders would want to know if you have valuable assets to back up the funds you’re going to borrow. However, keep in mind that lenders have the right to repossess your assets if you default on the loan.
6. Know the Repayment Terms of Your Loan
At the end of the day, a loan will cost you money. You need to know how long it would take to pay off a certain type of loan before applying for one. Compare several loan options from different lenders to figure out which works best for your business. Calculate the interest rates and fees so you can plan and estimate your monthly, weekly, or daily payments. In this way, you’ll manage your finances better and maximize the use of the loan.
7. Be Prepared to Answer Any Questions
Lenders would want to know everything there is to know about your business, so you need to be prepared to provide detailed information and documentation necessary. You may also want to prepare and review your financial statements and accounting books. Here are some of the most documents lenders usually require from borrowers:
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- Business license
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- Financial statements
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- Business and personal income tax returns
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- Business tax ID and income tax returns
Weigh All Your Options Before Applying for a Loan
Deciding to take on a small business loan is a huge decision for any business. Preparing a comprehensive business plan, checking your personal credit history, and researching for more information can make the entire application process simpler and easier for you.
