There are risks involved in starting a small business, but there are rewards too. Among the greatest risks is borrowing capital to get the business going. You can get a loan from commercial and community banks, loan agencies, multi-purpose cooperatives, etc.
In return, the lender earns interest once you pay it back. The total amount of interest paid usually depends on who you borrowed from. Some charge highly, while others cut interest rates to boost lending activity in the market and stimulate the economy.
If this piques your business sense, the following tips can help you secure a suitable business loan.
1. Be Clear with Your Business Plan
Your business plan doesn’t have to be perfect, but it should perfectly reflect your goals. First, it should reflect your biggest “WHY”—Why are you starting your business at this time? Why does it matter? Why should they invest in your business and grant you a loan?
The plan should reflect who you are as a person, what your business is about, and how you intend to use the loan. It should also contain goals, objectives, and missions. What can your business achieve? Will it help answer a need, or will a new opportunity arise from your business?
2. Ready Your Financial Statements
Your plan should come with a financial statement. Depending on how much you intend to borrow, lenders will ask how your business is doing financially.
If you have no existing financial statement yet, you can present a business forecast. What’s important here is to prove to the lender that you are able to pay back the loan.
3. Determine How You will Use the Loan
Before asking for a loan, it should be clear how you will use it. Many loans are available, and the options vary depending on your business needs. Here are some of them:
Small Business Line of Credit
Funds to help manage the business cash flow and pay off unexpected expenses onset, payable depending on the bank’s policy
Accounts Receivable Financing
Allows you to get cash immediately, paid accordingly by your customers, as reflected in your AR financial report.
Working Capital Loans
Used to finance daily operations to help manage fluctuations in revenues due to seasonal operations; needs a collateral or personal guarantee.
Small Business Term Loans
Good for small businesses needing capital for one-time expenditures, payable via monthly interest, depending on the bank’s policy.
Recommended for businesses looking to invest in equipment. They usually require a down payment of the equipment purchase price. Interest is paid monthly and amortized depending on the bank’s policy.
Related: 5 Tips to Know Before Applying for a Commercial Property Loan
4. Keep Your Credit Score in Good Standing
Your credit score determines your capability to pay your dues on time. One way to increase your credit score is to pay your credit card dues on time. A good credit score reflects one’s character and shows that their financial affairs are in order.
Your loans and cash flow will also be reviewed, so clean up your financial status score before applying for a loan.
5. State Your Budget
Have a reasonable budget before applying for a loan. This will show the lender that you know what you are doing. Overestimating or underestimating your need can lead to financial problems.
A reasonable amount, coupled with financial projections, no matter how high, will lead lenders to think that you are confident in managing your finances. In turn, they will gain confidence such that they may increase your loan limit the next time you come knocking.
6. Look for Lenders with Low-interest Rates and Flexible Payment Options
Research thoroughly before you narrow down your options. Look for lenders with low-interest rates, flexible payment options, and late policy payments. Find out their requirements and the pros and cons of each. Find out how fast your loan will be approved.
Manage your expectations by preparing the requirements you may need, to save time during the application process.
7. Prepare Your Collateral
Before approving your loan, lenders would like to know how to secure the money they lend if you fail to pay your dues. This is where collateral comes into the picture.
To increase your chances of getting your business loan approved, make sure your collateral is valuable to lenders. It can be in the form of bank deposits, residential properties, commercial real estate, or mixed-use properties.
Related: How Small Business Insurance Can Save You From Disaster
With so many options available for business loans, you are guaranteed to find the financial help you need to kickstart your business.
More than the stringent requirements and thorough research, at the end of the day, it is your confidence, your character, and your belief that your business will succeed that will help you secure funding.