Financing is one of the major issues that stop the most incredible business ideas from thriving. Owners and entrepreneurs lack funds when it comes to starting up a business or growing an existing one.
But with every problem comes a solution. Now there are many financing options available that perfectly suit your business needs, whether you need cash to purchase equipment or to plan a broader marketing plan, or manage your cash flow. Every business has an option to acquire funds from external sources. It could be a bank loan, venture capital, crowdfunding or any other financing product.
Some of you might be skeptical when it comes to trying crowdfunding and venture capitals. So, you can stick to the traditional bank loans. Remember, acquiring a traditional business loan is not like having a piece of cake. Here are five things to prepare before asking how to apply for a business loan.
Prepare Financial Statements
The lenders won’t hand you over money for a commercial term loan considering you look good and so does the atmosphere of your business. They need stats, data, and evidence to monitor whether you’re eligible for a loan or not. They’ll judge your ability to pay back a loan and based on that, they’ll be giving you money.
How would they judge your ability to pay back? Financial statements, Income Statement, Cashflow, etc. They would serve as evidence about where your business stands currently and would also speak for your business for the past two to three years.
Positive figures are a plus for acquiring a loan because banks won’t lend you a single penny if you’re running into losses every year. If the bank believes that you’re doing good enough that you can pay them back, only then you qualify for a loan. Remember, you can’t misstate your financial statements because to qualify for a loan you have to present the audited ones.
Dig Down into your Credit History
Any past defaults or minor risk of defaults can completely eliminate your chances of acquiring a loan. Banks want you to have a crystal-clear credit history, to avoid any doubts and problems. For this, they would be looking at all your bank statements and tax files to make sure you’re financially stable enough to make repayments. So, keep them prepared beforehand.
If you’re new into this business world, then you need to take a dig at your own credit history. If you have a clean record and most importantly a good credit score, you’re a suitable candidate for acquiring a loan. However, if your credit history is not up to par, mind waiting a little more to get a loan.
Capacity for Collateral
Even after looking at your financial statements and credit history, banks want to be very sure. This is obvious because they’re lending you money. Well, there are two options available either you give a down payment which is 10% of the total loan amount or fixes collateral.
Usually, banks ask for collateral that is a ‘security’ to insure against the loan. For this, you need to determine if you’re willing to set collateral and if yes, how much is it worth. It needs to be a worthy asset with good market value for instance – a house. Banks need it to ensure that in case of failure to pay back the loan, they’ll use your collateral to cover the loss.
You need to decide everything earlier because, at the time of acquiring a loan, you should be aware of all the possible procedures and outcomes.
Business Plan
If you’re looking to fund your startup business, you need a business plan too to qualify for a loan. Banks and lenders want a reason to lend you money, which can be seen in your business plan which portrays the potential of your business.
A business plan would speak for your business, showing credibility and skills. You need to acknowledge your goals and growth strategies to demonstrate that your business is worth financing. Furthermore, you can also add on, explaining to the lender why you’re the best fit for this loan.
Moreover, you’ll have to prepare budgets to give some financial representation of your business. this would also present where your business stands in the next few years. Representing its ability to pay back the loan or not.
Review your Borrowing Options
There are many banks in every corner of the city, but not all of them would be willing to lend you. You need to do your research well before heading towards any bank. Surprisingly enough, we would ask you to refrain from going to the ‘big banks.’ Not only they would ask for a million documents, but their interest rates would also vary.
Look into smaller banks because the chances of acquiring a business loan from small banks are always higher. They are looking forward to making clients while the big banks already have well-reputed clients. Moreover, with some negotiations, they can also lend you a low spread. But again, to find the best rates you need to conduct a proper market analysis.
The Final Verdict
It’s true you can’t acquire a business loan with your eyes shut, you need to fight tooth and nail to get your hands on a loan. There are many things you need to prepare before even asking for a loan. If you’re clueless about it, then look at these five things before asking how to apply for a business loan. It can surely benefit you in every possible way.
