Applying for a business loan can be a daunting and stressful process. However, it doesn’t have to be. Preparation is essential and knowing what lenders look for can help streamline the process and improve your chances of securing funding. Here’s a look at useful tips to help you prepare before applying for a business loan.
Do your research
Consider your business needs and what type of business loan and lending process will help you meet your objectives. Perhaps a simple online application process is important. For others, no origination or prepayment fees will seal the deal. While some business owners prefer transparent pricing, fixed payment loans, or a more strategic partner that can lend additional resources above and beyond cash value.
Consider how much money you need
Consider how much you need in contrast to how much you want. Clearly define the purpose of the loan. For instance, are you purchasing inventory, investing in an expansion opportunity, or increasing working capital to meet daily operational goals? Tell the lender precisely why you need the loan and how you plan to repay it. If you don’t know how much you need to borrow, then you might come across as unprepared. Think carefully about how much cash you actually need to borrow and don’t borrow more than you need.
Revisit and refresh your business plan
Now is a good time to revisit your original business plan. If you don’t have a formal business plan, it’s time to create one. Research what lenders look for in the business plan, as it will likely need to be tailored to suit their needs. A lender’s primary concern will be your company’s financial outlook, and how you plan to pay back your loan.
Your business plan should have all of the standard elements, from business objectives to competitive analysis, operational plans and more. Refine your business plan and run it past a local advisor to make sure that it is ready and adequately scrutinized.
Prepare your financial statements
It’s always best to apply for a business loan when your financials are in good shape, as it will increase your chances of approval and help you get more competitive rates. But we know it’s not always that easy.
Prepare your financial statements before you apply for a business loan. Lenders will likely ask for and review the following documents: bank statements, average bank balance, balance sheet, profit & loss statements, business, and personal tax returns, a cash flow forecast, and a business debt schedule. Confirm what your preferred lender will request in advance.
Lenders require these details to ascertain how reliable you are as a borrower and to gauge how well your business is doing financially. According to the SBA, “Be prepared. The biggest problem is that borrowers are not prepared when they sit down with the lender. That’s why a lot of businesses get turned down–They make a bad first impression.”
Review your personal credit history
If you don’t have much of a business credit history yet, a lender will look at your personal credit history when assessing your qualifications for a loan. This is why it is a good idea to review your credit report from all three reporting bureaus. Take time to clean up your credit report, look for inaccuracies or old information, and ask the credit bureaus to correct the information. If your credit history is less than ideal, wait a while before you apply for a business loan.
Depending on the type of business loan you are applying for, and the strength of your application, you may need to provide collateral. Many business loans are secured with collateral, which can be property, cash or even future earnings. These assets are often pledged to the lender for the life of the loan. The collateral can be seized and sold to repay the loan if you default. Lenders use collateral to reduce their risk. Consider how much your collateral is worth and if it may be necessary.
If you have spent time gathering all of your essential business documents and assessing each of the steps above, then you may be ready to apply for a business loan. Make sure you are prepared and know how much you need before applying.
Jayce Redford is a content marketer and a project manager at Ocere, a digital marketing company based in the UK. He graduated with a bachelor’s degree in Business Management from Ateneo de Davao University. He has been with Ocere for 8 years and counting.
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