Every entrepreneur puts her/his heart, soul, and loads of savings into starting a business venture. Yet, at some point in time, there is a need for additional capital. Perhaps, because you want to open a new branch, increase production capacity, or introduce a new product in the market. You might think of using business profits but managing such investments with everyday business expenses is impossible. Thus, you are back at square one since you can’t grow the business without investing more.
Any idea how to break this chain?
Surprisingly, business loans can come in handy. Although the entire concept of external financing seems daunting, it provides access to immediate cash. All you have to do is apply for a bank loan, fill out the application form, and raise additional capital for the business.
However, loans come with credit risk, exposing businesses to the risk of bankruptcy. Therefore, as well as checking things like the sba 7a loan requirements to make sure they will be able to get the loan they are looking at in the first place, entrepreneurs will have to discern their financial standing to ensure they can timely repay the loan.
Similarly, you have to keep tabs on the changing interest rates to make more apt decisions regarding loans. These additional measures will protect you from losses and bankruptcy while promising long-term business survival and profitability. In case you don’t know much about the financing world, have a look below. Here’s a to-do list before applying for a business loan.
1. Prepare Financials
Although entrepreneurs are not accountable to anyone, they must maintain records to ensure regulatory compliance. And this record-keeping goes beyond pen-and-paper calculations. You have to prepare financial statements – balance sheet, income statement, cash flows, etc., as per international financial reporting standards (IFRS). These come in handy for lending purposes since banks look into financials before giving money. After all, they have to ensure you can pay back loans within the given maturity date.
Moreover, you will also have to prepare forecasted financials for the next five years. It would unfold the impact of seasonal changes on your business, reflecting its financial strength. So, are you familiar with IFRS and forecasting models? If not, you can always learn the ins and outs through advanced programs. Thus, consider pursuing an online masters in accounting to create a robust financial standing and get loans at the best interest rate possible.
2. Create A Business Plan
How can you convince the lender to give you a loan? Banks and financial institutes are quite particular when it comes to providing finances. They ensure your business is capable of making repayments with the market interest rate. Likewise, they want to know you are running a credible company and have the skills to make it thrive.
Well, a brilliant business plan can provide them with all essential business details. If you don’t have a business plan, let us help you create one from a financing perspective.
Firstly, list down your business goals, mission, and vision statement to give a clear idea about your business. Secondly, include your past and projected revenue, income, and expenses to provide insights into the company’s financial standing. Most importantly, add market analysis and how you intend to grow the business. It will draw the lender into your vision and increase the loan approval prospects.
3. Look Into Credit History
Banks check credit scores and reports to ensure the candidate has a clean record and is eligible for acquiring the loan. Hence, before applying for the loan, take a look at your credit history. Suppose you have delayed credit card payments or extensions for repayments. In that case, it will adversely affect your credit score, decreasing loan approvals’ chances. Thus, wait a while to build up personal credit and then apply for the loan.
Timely repayment of business debt and credit card bills can boost your credit score, showing you as a financially responsible person. Usually, a credit score of 700 or more is optimal to get loan approvals. If the score is below 680, you can still get a loan but with conditions. However, if your score falls below 600, work hard, make timely repayments, and raise it before applying for the loan.
4. Assess All Lending Options
Once your credit score gives a green signal, it is time to research all the borrowing options you have. Firstly, look for banks offering the lowest interest rate since every bank has a different spread. Next up, look for flexible repayment and approval guidelines to acquire money quickly. Nevertheless, don’t fall for large banks despite their captivating offers because approval chances are always higher with smaller banks.
Moreover, explore different funding options. Whenever we think of loans, conventional bank loans hit the mind. But there are numerous lending options available, and to assist you better, here are some of them.
- Line of Credit: At times, entrepreneurs don’t know the exact amount they want to borrow. Surprisingly, opening a line of credit gives the flexibility to acquire funding as per your changing needs. For instance, you can open a credit line of $50,000 and withdraw up to $50,000 at any time. You can get more funds once you repay since credit lines stay open for years.
- Unsecured Business Loans: Unlike conventional loans, unsecured loans don’t ask for collateral. Thus, you can acquire loans without putting your property or asset with the bank.
- Equipment Financing: Are you thinking of installing a new plant? Instead of seeking a loan, opt for equipment financing. Here, the bank will purchase equipment and give it to you on lease. In addition to being a more straightforward procedure, you won’t have to worry about pricing.
5. Buckle-Up for Paperwork
Unsurprisingly, banks scrutinize every aspect of the business at the time of loan approval, resulting in loads of paperwork. You have to submit a business license and permits to prove your company as a separate legal entity. Likewise, you have to submit employee identification numbers and payroll records. It would reveal whether you are a responsible owner who offers fair compensation to her/his employees. You also have to submit old and recent financial statements with cashflows. It will help the banks analyze how much money is coming into the business.
Lastly, you have to provide your company’s debt schedule if you took any debts or loans in the past. Besides this, some lenders might also ask for bank statements and tax returns before giving out loans. Furthermore, if your business is in a unique situation, the bank will ask for more paperwork. It might sound like an arduous process, but you only have to scan and upload the documents with digital applications.
Undoubtedly, acquiring loans and exposing the business to debt is not on anyone’s bucket list, but that is how businesses grow. Instead of fearing loans, entrepreneurs should understand how they work and secure the best deal. Thus, brush up on your financial skill, learn about different lending options, and determine your company’s financial standing. It will ensure you don’t take a loan beyond your repayment capacity, making your business thrive.