In order to start or grow a business, you may need to obtain a loan from a financial institution. However, the process of securing a business loan can be challenging, especially for small businesses.
The amount of red tape and paperwork involved can be overwhelming. And if your business is just starting out, you may not have the credit history or assets needed to qualify for a loan.
Below are the steps you need to take to get a business loan and tips on how your application can stand out:
1. Gather the Necessary Documents
The more information you have, the better. Organize your loan request by putting together a “one-pager” that includes all of your business’s pertinent financial data. This should include:
• A list of creditors and monthly payment amounts
• Current profit/loss statement
• Balance sheet for current assets, including equipment, inventory, and more.
• Personal tax returns for the past five years. If it’s available, an interim statement would be helpful as well
• List of shareholders or partners in business
• Summary of business experience
2. Determine What You’ll Use for Collateral
Some lenders require borrowers to put up collateral in order to secure a loan. If you’re purchasing equipment, your lender may require that you have title to the assets before giving you the loan. In other cases, lenders will lend only a percentage of the value of the collateral as determined by an independent appraisal.
3. Choose the Right Type Of Loan
Different types of loans are suited for different purposes:
• Term Loans/ Lines of Credit – Used to purchase fixed assets such as land or equipment
• Working Capital Loans – Provide cash flow by financing inventory and accounts receivable
• Bridge Loans – Used until a business obtains permanent financing or can generate sufficient cash flow to pay off its debt
• Asset-Based Loans – Loans backed by the borrower’s real estate equity, machinery and equipment, accounts receivable, and inventory
4. Prepare For the Application Process
You’ll need to provide a lot of information to secure your loan, and you’ll often need to be able to answer questions about it immediately.
• Gather any and all documents that will help document your business’s past and current financial condition.
• Familiarize yourself with the types of loans available so that you can apply for the one that best suits your needs
• If possible, look for funding from an organization or individual who has experience working with businesses in your industry.
Getting a business loan can be daunting. Before you get a loan, it’s important to find the right lender for you, and not just any bank or lending institution. When reviewing your options keep in mind that each company will have different rates of interest, terms of repayment, and other fees associated with their loans.
The best way to know which is the most advantageous option for you is by doing research on what types of businesses they offer to finance as well as reading reviews from customers who have used them before. Once you feel like you are armed with enough information about various lenders it becomes easier to make an informed decision.