Applying for a loan is something you may have to do for your business at some point. Whether you mean to expand your business or to just keep it afloat during hard times, a business loan is definitely something that could help you achieve what you want.
Though this is a big decision, you don’t have to worry about biting off more than you can chew, since there are different types of small business loans you could avail of. If you work with a reliable provider, they could give you different options that cater to your specific business needs.
That being said, the process of getting a business loan may still be intimidating for most. There are many things you’ll need to consider and prepare before you can confidently say you’re ready to apply for one. If you’re planning on getting a business loan and you’re not sure where to start.
This article will take you through the steps you’ll need to take before you proceed with the application for business loan:
1. Assess Your Financial Status
One of the crucial considerations before applying for a loan is your current financial status. It would be best to go for a loan you can pay back without straining your finances. The larger the loan, the more fees you will have to pay. So you need to know the exact state of your finances and clearly set your expectations of how much you can afford to pay the loan back with.
2. Determine The Amount You Need
Once you decide to take out a business loan, you need to be realistic about the amount you’ll apply for—and don’t forget to include the fees in your consideration. Of course, you need to make sure that the loan amount is enough to cover your business needs. But at the same time, you should be careful not to take out more than you need, as this could result in a higher interest, which would not be ideal for your income-to-debt ratio.
Additionally, some lenders might not be able to provide you with the amount you need. Figuring out the size of the emergency loan you want to take out beforehand could help you narrow down your options as you choose among several providers.
3. Obtain Your Credit Score
Your credit score or your business credit score is a crucial factor when applying for a business loan. You should ensure that there are no errors in your credit score that require intervention. Request a copy of your credit report and check for any irregularities. If you suspect an error, get in touch with the credit bureau to fix the issue before proceeding with your application.
Keep in mind that if you have a high credit score, you could get a low-interest loan. A middle credit score will usually come with a slightly higher interest rate.
4. Look For Other Loan Alternatives
Today, there are various lenders you can consider that are available for funding. You will need to consider the pros and cons of each one, taking care not to fall for shady agencies that try to exploit clueless business owners.
Lenders come in two groups—traditional and nontraditional. The traditional lenders consist of credit unions and banks, and they’re the option you often hear about. Generally, they offer lower interest rates and lenient repayment terms, but it comes with stringent credit, cash flow, and collateral requirements. They also require you to provide several important documents, such as financial statements, debt schedules, and tax returns.
Nontraditional lenders, on the other hand, have higher interest rates but fewer requirements and a brief processing period. Some lenders, such as merchant cash advance companies, even specialize in providing flexible repayment options. Usually, most businesses with low credit scores opt for nontraditional lenders.
With the variety of options available, you should be sure to do your research so you can find one that best suits your needs.
5. Read The Fine Print Carefully
Before agreeing to or signing anything, you should fully understand what you’re getting into. Always remember that not all loans are the same. There are different options available, so you need to look at the terms of the deal closely.
Prioritize the payment structure, whether there’s a balloon payment with a set date or early payment penalties, or if the interest will go higher than the principal throughout the duration of the loan. These considerations need special attention before you make the decision.
6. Be Aware Of The Collateral Value
The value of your collateral serves as the basis for the amount of money you can borrow. It essentially acts as assurance for your lender that they can still recover the loan amount if you default on it. So, if you decide to take out a loan, you can’t borrow more than the worth of your collateral.
Applying for a business loan is not a decision you can make lightly. Since it isn’t exactly a one-time deal and is something you will have to spend some time making payments for, you don’t want to end up with one that could end up straining your finances. With the tips given above, you can ensure that you choose the right business loan for your needs.