All new businesses require a helping hand in the beginning and there is no better helping hand than extra capital. For most, if not all, small businesses that extra capital comes from business loans. Even though acquiring a small business loan may seem like one of the most challenging tasks in the preliminary phase, it need not be if you are equipped with the right information and the necessary tools.
In reality, the key to obtaining a business loan is being prepared beforehand for the lenders and the requirements they put forth. This involves taking a long hard look at your own business performance and assessing how well it would hold up against the said requirements. So here are the 5 steps that best prepare you for getting a small business loan:
1. Know your Business Needs
Ask yourself, why do you need the loan? Is it because you need to expand your business or to manage the expenses? Perhaps you would like it as a safety net in case things go south. Whatever the case may be, the type, as well as amount of loan you target, will be dictated by why you need the loan.
2. Determine The Type Of Loan You Need
Startups that have less than one year of operations or revenue history may find it almost impossible to get small business loans since most banks, as well as online lenders, require at least one to two years of operations for businesses to be eligible to apply for the loans. In such cases, startup business loans are the most appropriate. As for small businesses, types of loans range from microloans (if you don’t manage to get a traditional loan because the company is too small) to 7(a) SBA loan programs.
3. Choose the Best Lender
The first lender that comes to mind when you think of a loan is a bank, but there are numerous options for loan lenders, including alternative lenders that can be accessed from lending platforms like Orumfy that offer small business loans at the lowest rates. Online lenders also provide loans much faster than banks and also have a higher approval rating. However, if you possess the necessary collateral and do not require the loan on an urgent basis then using a bank as a lender would be more advisable.
4. Assess whether You are Eligible
In general, there are three main criteria your business must meet to be eligible to apply for the loan:
- Duration of business operations: Usually all lenders, whether online or banks, require 2 years of revenue history or business operations for businesses to be eligible to apply.
- Credit score: Unsurprisingly, banks require higher credit scores than online lenders. However, having a credit score of 680+ would be sufficient to apply for a loan with any lender.
- Revenue generation: Generally, annual revenue of $50,000-$150,000 is set as the requirement for any small business loan issuance.
- Repayment Capacity: Lastly, lenders assess whether a business can make the repayments within the stipulated time period. For this purpose, most banks set the income to expenses ratio at 1.25, meaning income earned should be 1.25 times more than the expenses incurred by the business.
5. Gathering Documents
After selecting an appropriate lender for whom your business meets all the requirements, gather the necessary documents that include, tax returns, bank statements and financial statements for the business and apply for the loan.
Another factor that must be kept in mind while applying for a loan is the annual percentage rate (APR) which is the cost of the funds borrowed. The higher the APR, the greater will be the cost of the loan over time.