The Six Easy Steps to Apply for a Business Loan
Obtaining a business loan from a bank or a financial institution is easier said than done. First of all, you need to make an assessment if the loan will be beneficial for you in the long run, or will it become a burden on your business cash flows.
Then, there is paperwork. No bank or financial institution will ever disburse a business loan without completing its formalities.
Having said that, it is also imperative to understand that business loans have been fueling economic growth for quite some time.
Last year, a record number of business loans were disbursed. These loans have helped startups with their initial endeavors, and also existing businesses with their growth plans.
In the following article, we will discuss the six most important steps before applying for a business loan.
Do You Need a Business Loan? And How Much?
The first step before applying for a business loan is to determine whether you need a loan at all.
When you take a loan from a bank or a financial institution, you are required to pay mark-up or interest on that loan until its retirement. The amount of interest is an additional cost that you will have to bear.
Whether you want to expand your business, add much-needed inventory, or buy necessary equipment, you will need a loan. Make an assessment regarding how much money you want, and whether you will be able to repay it with your existing cash flow.
A cost to benefit analysis will enable you to make the right decision.
Affordability of the loan
You may need a million-dollars for the purpose of expanding your business, but this does not mean that you can also afford a million dollar loan.
Carry out a thorough analysis of your finance and future business projections in order to arrive at a realistic amount. Otherwise, you may be compelled to take a huge loan and find yourself burdened by it.
It is easy to calculate a realistic loan amount with the help of a debt service ratio or a simple loan calculator.
You can calculate the debt service ratio simply by dividing the yearly net profit by the number of yearly debt payments. If the resultant is more than “1”, you are good to go; otherwise, it’s a no.
You can easily determine your monthly payment towards the loan with the help of a business loan calculator. All you need is the amount of loan, the tenure, and the rate of interest.
The Best SBA Loan Program will calculate all of these things for you.
Determine the Right Kind of Loan
Once you are sure that you need a loan and decided a realistic amount, it is time to determine what kind of loan will be most suitable for your business.
There are many kinds of business loans. They are all technically different and work best in variable situations.
The most famous loan is the ‘term loan’ — involves a pre-determined amount of cash disbursed to the lender. It is repaid, with interest, within an agreed time frame.
The SBA loan involves loans disburse by a lender. The repayment is determined based on the usage of the loan, and the nature of the borrowing entity.
A credit line is a ready cash line whenever you need it to make business-related payments. There is a limit to the credit line. It can be very useful in short term.
There is an invoice financing, merchandise financing, and even personal loan — decide which one you would opt for in order to get the maximum benefits.
Choose the Most Appropriate Lender
The next step in applying for a business loan is to choose a lender. Commercial banks are always the first choice.
Almost everyone will recommend a bank for obtaining a business loan — they offer the best interest rate. From a bank you can get a term loan, a credit line, and an SBA loan.
However, banks have a very strict credit control regime, they will check your credit worthiness and will also ask for collateral. Their paper work, in many cases, will sometimes take months.
Micro-lenders provide loans to entities that are small and cannot obtain loans from their tiny profit margins and balance sheets. They will provide you with short term loans even if your credit score is low or you cannot offer any collateral.
You also have some other options like online lenders and investors who are willingly to bet their money on your business.
Check whether you are Qualified for a Loan
In order to obtain a loan from any lender, you must qualify for it. If you don’t qualify for a business loan, all your preparations in this regard will come to naught.
The very first thing that you should check is your own credit score.
As mentioned earlier in the article, banks would charge you the least interest but only if you have a good credit score. If your Credit Score is bad, a bank will never sanction you a loan. Consequently, you will need to take loan from other lenders who will charge more interest.
Your income statement should be in order. A lender will analyze your income statement and balance sheet in order to gauge the strength of your business, and whether you will be able to repay the loan within the stipulated time.
The next important thing for lenders is the tenure of your business or for how many years you have survived in the market. Traditionally, banks do not offer loans to new and inexperienced entrepreneurs. Your business must be more than two years old in order to qualify for a business loan.
Complete the Paperwork
Banks work with pre-defined SOPs. In order to work with a bank, you must prepare the appropriate documentation. Their paperwork requirement varies from one lender to another. But, there are some requirements which are common.
They will need copies of your Bank Statements, Income Statement, Balance Sheet, Income Tax Returns, Business plan, License, and legal documents of the entity.
Keep copies of these documents handy. They must be submitted with a duly filled and signed loan application form.
The Final Word
Securing a business loan from any lender is not rocket science; yet, many people take it very seriously.
Obviously, if you have the right paperwork in place, you can obtain a business loan without any hassle.