For entrepreneurs who just started their new business venture, one of the most difficult aspects to overcome is money problems.
This is because financing options for such small businesses are quite limited due to their lack of experience in the field. After all, most investors will look to place money in places most likely to make them quick and secure money.
All businesses start out small in the beginning, but in order to expand and achieve your business ambitions, a source of finance is a crucial lifeline. In order to obtain a small business loan, you need to be prepared and ready.
Here, you will find eight important things to know about small business loans that will give you a solid understanding, leading to informed decisions and boosting your chances of succeeding!
All Loans are Different
The first thing you need to know about small business loans is that there is a large variety of them. Depending on where you are and the type of business you are trying to fund, it’s not easy to find the right one for you.
Whether it’s SBA lenders in Texas or an equipment loan from the other side of the country, the experience and the way of doing business are bound to be different every time.
So, what can you do to secure the best possible loan for your business? Well, the most important thing you need to keep in mind is the purpose of the loan and whether the loan of your choosing fulfills that purpose.
You should become familiar with the different types of loans there are. SBA loans, traditional term loans, lines of credit loans, and equipment loans are just a few of them!
You also need to check the other variables when taking out loans, such as the rates, repayment options, and other various terms of the contract.
Are You Qualified For the Loan?
Even with the wide variety of loans out there, whether you are eligible for them or not is a whole different issue. Most lenders will have some minimum requirements that you must meet before obtaining loans from them.
For example, there may be a minimum time in business requirement of around six months to five years, a requirement based on your credit history or past financial statements.
Even with things being so convenient to the point where you can now get quick loans online, new businesses may still struggle actually to obtain one.
With a lack of business experience, new firms lack a solid business plan and financial projections that investors are going to be focusing on since there is little history to analyze the business in another manner.
Not to worry, as there are some nonprofit lenders, such as community development financial institutions, that specialize in giving out small loans to new firms in order to stimulate the economy. Hence, don’t be discouraged if your first few loan applications fail, and keep researching!
Be Aware of Scams
When you’re a small business looking to grow, you must be wary, as there is a risk of scams! Scammers can easily prey on your desperation if you do not educate yourself on all necessary procedures and make informed decisions instead of going out on a whim! This has become more of a threat, with online lending becoming bigger by the day.
As boring as it is, you must double-check all the paperwork and the firm you are dealing with to confirm their legitimacy.
Some scammers will try to bait you in with more than favorable terms so that you hastily make a decision to sign with them. We advise you to take your time before diving into what could otherwise be your own demise!
The Owner Must be Capable
Now, you might be wondering why the owner matters when seeking loans. Well, why wouldn’t it? The leader of the business, especially in the early stages, must be capable, both strategically and as the first backer of the business. Hence, lenders will often check the owner’s credibility before deciding to do business with them.
As the owner, you may have to provide the lender with personal data such as credit scores, financial statements, tax returns, etc. This is just for lenders to fully access you as an entrepreneur and your business venture so that they can place their trust in you.
That being said, although it is favorable to have enough personal finances to back your business, startups are not always expected to have them. Hence, you may be able to secure a loan even without strong capital backing.
Make a Plan They Can’t Refuse
As mentioned previously, one of the most important things to know about a small business loan is that it takes lots of preparation.
Dealing with finances is one of the most important tasks of operating a business, as it ensures that the business is running smoothly with sufficient cash flow. Now, let’s talk about how you can increase the chances of getting your loan application approved.
Instead of just winging it, you should do thorough research and planning, as if you’re presenting a business plan. You need to be confident in your business and try to show them why you are worthy of their investment.
You should explain all the details, such as how the money will be implemented into the business and how you plan on making returns to pay the lenders back.
Moreover, one more thing you must prepare yourself for is how you will behave in front of the investor. You should practice presenting your application with confidence. Despite the fact that the main focus usually lies in the numbers, lenders may be won over by a charismatic entrepreneur!
Be Ready With Your DSCR
The DSCR, or debt service coverage ratio, is one of the key aspects of your pitch that potential lenders are going to be interested in.
This will play a crucial role, and you should learn how to calculate yours before applying for the loan. Most lenders want a DSCR score above 1.5. The higher the score above this point, the better your chances.
Be Ready to Pay Them Back
Running a business doesn’t come without its risks, and history has shown us that bold moves bring great results in the business world. Hence, even though your business may not have the assets to pay back the loan, be ready to back it up with your personal finances. This means putting up personal assets as collateral for the business in case you are unable to repay the loan and interest.
However, being a businessman will always be a much riskier venture than working at an office, so you should already know that sometimes you need to take a gamble and believe in your business. Take the necessary precautions, do the required research, and you are certainly going to find a plausible route to expand your business!
Prepare the Required Documents
Lenders are going to want to see a few documents that will help them make the decision to approve your application or not.
If you go in there without all the necessary documents, then chances are the investors will already feel like you aren’t capable enough, and this may create a negative first impression.
So, what are some of the documents you could be asked for? Bank statements belonging to the business as well as the owner, the tax returns, income statements, balance sheets, cash flow statements, and business licenses and ID to validate the business.
There are other documents that may be required, depending on the lender, so be sure to bring all their requested information along with you.
Small business loans are the lifeline of new business ventures, especially for small firms. It is crucial for entrepreneurs to secure proper funding in order to make their businesses prosper and grow. Hence, you must prepare to your full extent before presenting the application for a business loan.
Educate yourself on all the different kinds of loans, the goals you plan to fulfill with the loan, and how you plan to repay the loan in case things don’t work out completely according to your plans. Just remember the 8 things to know about small business loans from above, and you should have a much better grasp of things now than you did before.
We hope that this article has helped you understand how you can obtain a loan for your small business, and we wish you good luck in your future business endeavors.