How Small Businesses Should Prepare for Loans
Many people have ambitions of operating a small business. This is backed by a report from the Small Business Administration (SBA), where about one million small businesses opened in the United States between 2019 and 2020.
What is common between all these small enterprises is that they need money to start. The truth is starting a business is expensive. Moreover, every business needs money to advance. Also, there are times when the only way to make money is when you have money. The good news is that today there are many ways that you can finance your business as a start-up.
And most people will always lean towards business loans as a dependable option for financing. However, banks only approve a small percentage of business application loans, making it challenging to get a top-notch loan for your business.
As a startup, it is quite challenging for you to navigate the world of business financing. Many loan options are available for small businesses, including debt consolidation loans, merchant cash advance loans, SBA loans, equipment loans, invoice financing, etc.
Therefore, business owners need to be organized when applying for a loan. Ensure you pick the right option to help raise enough money to run your business and set it up for longevity and future success. This article highlights the best way for small business owners to prepare for a loan application.
1. Start By Building and Maintaining Your Business Credit
A business credit score shares many similarities with a personal credit score. It helps to measure your business credibility. Your credit score communicates to lenders if you use debt effectively, if you have too many or minimal credit cards, and if you pay your bills on time. So to secure a business loan, you must ensure your credit repayment history is timely.
You will need to start with a small line of credit to build a solid credit score. If your business is new, you should reconsider asking for a significant bank loan, but if you’ve been in operation for a few months, you may qualify for a business credit card.
This is possible since most credit card firms will measure your eligibility using your personal credit score. So the catch here is to ensure you use your business credit card properly to establish a good credit score for your business. When you can raise your credit usage ratio, you can qualify for bigger, better loans in the future.
However, a poor credit score should not make you lose hope because your business’s worth shouldn’t depend on its credit score. Unfortunately, most lenders decide you’re eligible for a loan if you have a good credit score.
This is because there are loans your business can leverage that don’t need credit score details. Merchant cash advance loans are one of the loans you can consider for your business. It has no credit card requirements, and you can get financing if you’ve been in business for two months or longer.
Most lenders will ask for you to accept credit cards for your business. You and your lender will establish an agreeable percentage that will automatically deduct from each subsequent sale for a certain period. Merchant cash advance funding is one of the most favorable loans for small business owners as there isn’t a bulk payment.
Remember that you’re more than your credit score. Therefore, you must ensure that you engage in a financing option that doesn’t limit business loan approval due to your credit score.
2. Know More About Business Loans and Practice a Perfect Pitch
It is natural for one to engage people they can trust, and this is the same for lenders. Lenders feel more at ease working with borrowers they can trust.
There is a high possibility for lenders only to approve your loan application if they get the impression you are familiar with certain loan terms. Therefore, it is vital to understand more about interest rates, the difference between a term loan, an SBA loan, merchant cash advance loans, and business lines of credit and invoice financing loans.
The best way to grasp this relevant information is by researching and studying the basics. Basic knowledge of business loans gives you a good start with your preferred business financier.
Do you want to apply for merchant cash advance loans? Do you understand your credit requirements for you to get approval? What documents will you need to qualify for such a loan, etc.? You need to know these crucial details when applying for any loan, including merchant cash advance financing.
This is vital as potential lenders will feel confident that you’ve researched, prepared, and worked through your plan. It is best to ensure you’re able to respond firmly to the following questions:
- What’s the purpose of the loan?
- How do you intend to use the loan proceeds?
- Do you have other business debts? Who are your creditors?
- What immediate expenses do you need to cover, and who are your suppliers?
- Do you have a management team?
You can convince lenders to finance your business by showcasing your confidence when handling such questions.
3. Organize All Your Business Documents
Ensure you document every aspect of your business, as it can act as proof. Disclosing your business and personal financial history during loan application is vital. So ensure you document your expenses, debts, revenues, assets, etc., and other necessary documentation for the lender to approve your loan.
You need to ensure you have the following information in place:
- Your business financial statements
- Personal information and financial records
- Your income tax returns
- Your business and personal loan application history
- Profit and loss statements
- Projections of your financial statements
That’s why it’s essential to get organized in advance instead of rushing through it during the application period. Start by ensuring your accounting and bookkeeping are in perfect order to make the application process easy.
The free cloud-based bookkeeping solutions make it easier for businesses to organize their money well. These solutions are straightforward, as you can easily monitor your business invoices, manage your revenue and expenses and create financial reports.
4. Plan Your Finances In Advance
Can you determine your business’s pressing financial needs? This should be part of your preparation process before applying for a loan. You must be careful to avoid getting excess funding, as it risks your business. This is because you will need to pay prepayment penalties and unnecessary accumulated interest.
On the other hand, it’s not wise to request some funding. This will put you in a position where you must apply for a second loan which is very expensive in the long run. Besides, another alternative of applying for a minimal loan may make you postpone a project.
You now realize how both options can be detrimental to the longevity of your business. To avoid all these risks, do a little research to determine what will be valuable for your business. Ensure you have the precise figures before you speak with any prospective lenders.
After determining the amount that would be viable for your business, the next step is to consider what you can afford. Consider your income and expenses to feel confident about the amount you can add to your monthly payment.
Consider changing your loan type if you can’t afford an additional monthly payment with your existing bills. You don’t need to panic if a short-term loan is out of the question for your business. A merchant cash advance for small businesses or a business line of credit is still a viable option for businesses. So ensure you keenly crunch these numbers and revisit your options once more.
Moreover, ensure you have proof of your business financial flow for presentation. As much as lenders will review your prior financial statements, they want to know where their money is going. How’s the future of your business? Is it promising?
Realistic cash flow predictions are vital because it helps to demonstrate how the loan will affect your business’s future earnings and expenses.
Your before and current cash flows will help you prepare precise projections. Lenders only want proof of their investment safety by accessing a data-backed plan. This, in return, will convince them to approve your application.
6. Narrow Down to the Ideal Loan for Your Business
All the tips above will help you determine a suitable loan for your business. This is because you know what to do with the loan, your creditworthiness, and what you can afford. So let’s take a look at a few common loan types that you can consider:
Merchant cash advance loans. The best way to explain this is that you will be exchanging part of tomorrow’s revenue for fast turnaround funding. Merchant cash advance providers give you a significant amount of cash you will pay back with a portion of your daily sales.
Term loan. This is also known as the traditional type of loan. You’ll receive a lump sum of money that you have to pay back with accrued interest over time until you clear the whole amount.
Short-term loan. They share a lot of similarities with term loans. The only difference is that they are quicker to approve and slightly more expensive. As much as the loan is costly with a short repayment period, you will receive the money in your bank quicker.
Purchase Order Financing and Factoring. Under these two programs a lender will finance the production or acquisition of pre-sold products. PO Funding is a great solution for cash strapped businesses that have good sales opportunities in front of them.
You must prepare early before applying for a loan as a small business owner. The best way is to start is by building a solid credit score, gaining basic knowledge on loans, preparing your business documents, and planning your finances before looking for financial providers.
All this information is crucial as it help you to expand beyond a few options. You can apply for a term loan or merchant cash advance financing. All these will help to prepare your business for longevity and success. So look into all the available options before settling on the best for your business.