When running a small business, loans can be a great way to start up or expand your company.
However, applying for a business loan can be a long and complicated process. You want to make sure that you know all the details before submitting your application.
Here, we’ve compiled a few essential things to consider before you take out a loan to help you understand. Keep on reading to learn more about business loans and how they work.
1. Is the Loan Essential?
The first and most important thing to consider is if the loan is essential to your business. A business loan is something you should take out only if you only need it. This is because of the risk you’ll pose to your business if you’re unable to pay it back.
Taking out a business loan for unimportant reasons could leave your business in debt. Good examples of taking out a business loan are if you’re restocking inventory or restoring old facilities.
2. How Quickly Do You Need the Money?
Taking out a loan has a lengthy application and approval process. If you need the money right away, a traditional bank loan isn’t the best option. As the processing of your application alone could take from 60 to 90 days.
3. Good Credit History
One of the tools that lenders use to determine your credibility to pay back the loan is your credit history. The better your credit history is, the better chances of your loan getting approved. The ideal credit score you want will be around 720.
Anything lower than that, and your application might get rejected. Before applying for the loan, it’s important that you know your credit score. That way, you can work on fixing it before you start the process, if possible.
You can order free personal credit reposts yearly from sites like Annual Credit Report. Ideally, you’ll want to look through and spot any errors or drive down any personal debt.
4. Your Business Plan
Lack of a solid business plan can bring down your chances of getting your loan approved. Having a well thought out plan and sticking to it gives a better impression to your lender.
Many small businesses rarely have a formal business plan, so it’s a good idea to develop one before going to the lender’s office. This will usually include a summary of your company, market, and financials. Through this, your lender can better understand where the money you intend to borrow will go.
5. Consistent Cash Flow
One essential thing lenders look at to determine the success of your business is your cash flow. This measures how much cash your company has on hand, as well as the income that it’s getting. Limited cash flow is not something lenders usually overlook.
This is why you should be calculating your cash flow quarterly. You can also find out how big a loan you can afford. As well as get an opportunity to optimize your cash flow before applying.
6. The Amount of Paperwork
If you’re taking out a business loan, you need to prepare for the amount of paperwork that comes with it. Banks are thorough when it comes to looking into every aspect of your business. Have all your basic documents prepared before you even start with the application.
Here’s a list of the important documents you need to present before you submit an application:
- Licenses and permits
- Bank statement
- Payroll records
- Balance sheets
- Employee identification numbers
- Tax returns
- Business debt schedules
Submitting these and filling out the document is what takes up most of your time during this process. Some lenders may even ask for more if your business is in unique situations.
7. You Need an Established Business
Depending on your business, you may need capital right away. Of course, this doesn’t apply to all businesses, as some lean back on personal savings or private loans. But if this is the case, it may not bode well with most banks.
Many banks often require that you’ve been in business for at least a year to make sure that it is well established. Alternative lenders might be more considerate, only requiring six months. Regardless, businesses starting out have lower chances of getting their loans approved.
8. Do You Have Collateral?
When applying for a loan, you’re going to need collateral to put up. This is one of the first things banks will look at when considering your application. You can use commercial property, personal property, or a similar asset.
Most small business will most likely be renting a property, so finding collateral isn’t always easy. If you have to, you can put up your personal assets, but it’s better to keep your finances separate.
9. Personal Guarantee
One of the ways banks ensure the loan will get paid back in full is through personal guarantees. They will ask you, as the business owner, if you’ll be able to pay it back if your business doesn’t have funds. This means that if your business can’t repay the loan, the money will have to come from your pockets.
10. Get a Professional Opinion
Before taking out a loan, you need to consider getting a professional opinion.
Seeking expert advice from accountants is an excellent way to help you get an idea of what you’ll need. They can guide you on how to take out a loan and if your business will be able to pay it back. They can give you additional information about SBA loans or other kinds of business loans.
Consider These Things Before You Take Out a Loan
Business loans can be helpful when you need help with your small business. It’s important that you know everything there is to know. Making a mistake could lead to your business being in debt.
We hope that this article was able to help you learn about the things to consider before you take out a loan. If you enjoyed this article and want to read more financial advice, check out the rest of our guides!