Getting a business loan is difficult for businesses that are just starting out. This is mainly attributed to the strict lending standards that banks have in place. Getting outside financing is essential if you want to cover daily expenses and grow your business. Applying for a loan and getting approved can be difficult, so you need to be prepared. Here are some steps that will help you:
Ask Yourself Why you Need the Loan
Because a lender will ask you this question, you need to be ready with an answer. Your answer can fall into one of four categories: safety cushion, managing daily activities, starting a business, and growing a business.
Once you figure out what your loan is for, you will be in a better position to spend it properly.
Decide the Right Type of Loan
Your reasons for requesting a loan will determine the type of small business loan that you will receive. When you are starting a business, it is almost impossible to get a loan during your first year. Lenders need cash flow to support loan repayment, which automatically disqualifies startups from financing.
As a startup, you have to rely on borrowing from friends and family, crowdfunding, credit cards, and personal loans. If your business is more than a year old, you will have more funding options, including business lines of credit, invoice factoring, and SBA loans.
Determine the Best Lender to Borrow From
You can get small business loans from several places, including online lenders, banks, and nonprofit microlenders. These lenders usually include offers such as lines of credit, term loans, and accounts receivable financing. When shopping for a small business loan, you should approach it just as you would car shopping.
Once you choose the right financing vehicle and lender, you should compare several similar options based on terms and annual percentage rates. Out of the loans that you qualify for, you need to choose the one with the lowest APR. You also need to make sure that you can handle regular payments.
When borrowing from banks, make sure that in addition to having good credit, and collateral, you do not need fast cash. Traditional bank funding options include lines of credit, term loans, and commercial mortgages. The US Small Business Administration (SBA) partners with banks to provide loans for small businesses through programs such as disaster loans, 7(a), and short-term micro loans
Since small businesses typically have low sales volumes and cash reserves, they have a hard time getting approved for loans. Although getting funded by banks takes a long time, they are your best option in terms of APR. You should opt for micro-lenders when you cannot get a bank loan because your business is too small.
Online lenders are a great choice for those who lack collateral and need quick funding. Such lenders give small business loans and lines of credit to those who apply. However, online lenders cannot compete with traditional lenders when it comes to APR.
Find Out Whether You Qualify
You should start by getting your free credit report from one of the free credit bureaus. Moreover, you can get your free FICO score from several credit card issuers. As stated earlier, banks offer the least expensive loans, but your credit score needs to be above 680.
In addition to your credit score, lenders usually take how long your business has been in operation for consideration. To qualify for online loans, your business needs to have been operating for at least one year. According to businessloans.co, you need to look at your business financials then evaluate whether you can afford monthly repayments.