Are you trying to figure out how to get a first-time business loan? Read this article to learn more about getting a business loan.
Starting a new business is the easiest way to become your own boss. However, making sure your company is successful and can withstand the test of time isn’t as simple as you might think.
Unfortunately, 82 percent of small businesses fail because they have issues with cash flow.
The easiest way to deal with unpredictable cash flow problems that pop up from time to time is to take out a business loan. If you’ve never applied for a first-time business loan, you might not know where to start.
Here’s what you need to do to get the process rolling quickly so you can get the money you need as fast as possible.
Know Why You Need the Loan
Before you can start applying for a first-time business loan, you need to identify why you need the money in the first place. Are you looking to grow your business or do you need the money to help you make ends meet while you grow your company?
Understanding the reason for the loan can help you narrow down your search for lenders and find a company that will be willing to work with you.
Lenders often place restrictions on how you can use the money they lend you. For example, if you’re applying for a loan to finance equipment purchases, you’ll want to look for a lender that specializes in those types of loans. If you’re looking for a general all-purpose loan to invest back into your company, look for lenders that offer loans without use restrictions.
Disclose why you’re looking for a loan with each lender you’re thinking of working with. This can save you a lot of frustration and paperwork by eliminating lenders that won’t fit your needs from the very beginning.
Don’t Hesitate to Look for Alternatives First
Using loans to make ends meet while you’re growing your business isn’t always the best idea. The more you borrow, the more interest you’ll end up owing on the loan and those interest payments can take away from your ability to invest back into your company.
Try to find other ways to get the money you need before approaching a traditional lender. Look to friends, family, and investors to see if you can increase capital without turning to an interest-bearing loan. If you can, go with those options first.
However, if you’ve already exhausted all other avenues or don’t know where to turn to find loan alternatives, go ahead and apply for a loan.
Look at Your Credit Score
Before you can get a business loan, you’ll need to understand where you stand financially. Remember, lenders always look at your credit score before making a decision on your application. If your company is well established, they’ll look at your business’s credit score and finances alone.
However, if you’re new to the industry or your company is still getting established, lenders will look at your personal finances.
Before you apply, get one step ahead of the lenders. Check your credit score and review your outstanding personal and business debts. If you can, try to pay off as much of those debts as possible before you apply for a new loan.
This will raise your credit score and make your application more attractive to lenders.
Remember, lenders of all sizes want to give money to businesses with good financial histories. If you have a large amount of outstanding debt, they’ll view you as a potential risk and be less willing to give you the money you need. Paying down your debt and boosting your credit score shows lenders that you’re responsible and will be able to pay the loan back on-time.
Reexamine Your Business Plan
Some lenders will require you to submit your business plan along with your loan application. This gives them an idea of the types of business services you provide and outlines how you’ll be able to grow your company so they can get their money back.
Before you submit an application for a business loan, review your business plan in detail.
If you’ve changed the types of services you provide, update the plan. If you’ve made improvements in your business’s organizational structure, make sure those changes are clear in the plan. The more you keep the plan updated, the easier it will be to showcase the way your business operates.
Use your business plan to show lenders that you’re competent and can repay their loans in full.
Figure Out How Much Money You’ll Need
As part of your small business loan application, you’ll need to specify how much money you’re looking to borrow. That doesn’t mean the lenders will give you the exact amount you’re requesting, but it helps give them an idea of what you need.
Take a moment to think about the way you’ll use the loan. Look at the projected costs for the improvements you want to make to your company. Then, take a look at how much you can realistically afford to repay.
Check your profit statements, your fixed expenses, and your projected earnings before you determine the amount. These will give you an idea of how much money you’ll have left each month to cover your loan payments.
Gather the Necessary Documents
Once you have an idea of how much money you need, you’re ready to start figuring out loan applications. No matter what type of loan you’re applying for or how much money you’re requesting, you’ll still need to present lenders with certain business-related documents.
Make the application process easier by gathering those documents together before you start applying. At a minimum, you’ll need to gather your tax returns for the last few years and bank statements showing your expenses and deposits. Most lenders will request both business and personal documents to verify your financial information.
Scan those documents on your computer so you can easily email them to each lender or attach them directly to the application.
Figure Out Which Lenders to Work With
There are many different types of lenders out there and the type you choose largely depends on the type of loan you’re looking for.
For example, if you’re a new small business that doesn’t have a proven business history, you may want to work with asset-based lenders. These companies allow you to secure a loan with physical property to better reduce your interest rate. Keep in mind that you’ll forfeit ownership of your collateral if you fail to repay the loan in full.
If you’re already profitable and have a great credit score, traditional banks and business lenders may be a better choice. However, the application process can be time-consuming and you may not get the money you need quickly.
Think about the type of loans you want to explore and look for lenders that offer those loans.
Apply and Get Quotes From Several Lenders
Once you have your documents together, you’re ready to submit applications to different lenders. Though it’s tempting to work with the first lender that approves your loan application, don’t.
You need to take your time and shop around with different lenders to make sure you’re getting the best loan terms possible.
In most cases, you’ll want to submit applications to at least three different lenders. Once they review your application and send you a loan offer, compare each offer you receive.
Look at the terms in detail. Compare the amount each lender is willing to offer you, the interest rate they’re charging, and the repayment terms. Choose the lender that offers you the loan amount you need at the lowest interest rate.
This way, you’ll end up with lower monthly payments and can focus on growing your business rather than worrying about potentially defaulting on your loan.
Make Sure You Understand the Loan’s Terms
Before you make your decision, take the time to get any questions you have about the loan or the repayment terms answered. Contact the lender directly and get the information you need before accepting the money.
Remember, if you take possession of the money, you agree to the loan’s terms even if you don’t understand them completely.
Create a Plan to Repay the Loan in Full
Once you accept the loan and know what the terms will be, take the time to create a repayment plan. This will help you make sure you’re able to repay the loan in full by the end of the loan term.
Start budgeting for your loan payments immediately and set that money aside for the loan each month. If you don’t, you’ll end up paying more interest on the loan and could increase your total expenses over the life of the loan.
Now You’re Ready to Get Your First-Time Business Loan
Getting a first-time business loan is a big step toward helping your company reach new heights. Keep this guide in mind and you’ll be able to navigate the application process quickly and easily.
Just remember to do your research and choose a lender that offers you the fairest terms possible. Otherwise, you could end up paying more for the loan than you deserve to.
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