Whether you want to expand your company or fuel a new business idea, you can’t do it without adequate funds. Not having the luxury to look for the required capital from friends and family members, a fair proportion of people opt for a business loan. However, availing a business loan can be a tough nut to crack if you fall short about its basic know-how. That is where business loan guides can come very handy.
A lot of business owner’s loan applications are not entertained by the lenders owing to their lack of knowledge. The refusal from the lending party could be a massive blow if all your hopes were pinned on the loan.
More than anything else, the lack of preparation hinders your chances of winning the confidence of a loan provider. Therefore, it is essential to know the following key points before signing up a business loan:
1. A solid business plan is a must
Pursuing a business loan without a rock-solid business plan is arguably the biggest blunder a borrower can commit. A business plan is no small thing. It gives your lender an idea about how responsible you are as a borrower. Naturally, the lending party would find it less risky to sanction money when you can show a roadmap of using it profitably.
At the same time, the way you construct your business plan can also make a lot of difference. For example, an over the top explanation of your project may dwindle your chances to appease the lender. So if you don’t want your loan application to get rejected for showing up with a half-baked scheme, you need to take the following measures:
- You must unveil basic information like your company’s background, vision, and financial standing in your business plan.
- After laying out the executive summary, you need to cite a definite reason why you need more money and how you are going to execute it.
- Finally, you should mention the strategy to return the loan.
Since the approval of your loan application greatly hinges on the business plan, you should take your time to formulate it. If necessary, consider an expert to give a run down to the proposal before final submission.
2. Figure out what you can pay every month
Sometimes borrowers apply for a bigger loan amount just because they can easily qualify for that. This is a flawed strategy. The reason being, you will have to confront a lot of challenges during the repayment process if you borrow more than what you can afford. Needless to say, you will be liable for various penalties in case you miss out on the Equated Monthly Installments (EMIs).
But how can you determine your loan affordability? Well, going by the rule of thumb, you should not take a loan, which is two times bigger than your company’s gross income. Or, to be on the safe side, you can also exploit a loan affordability calculator. You don’t have to be tech-savvy to exploit this tool with utmost authority.
In all likelihood, you may overlook the underwriting or origination fees during the calculation. Thus, it is pertinent to read the fine print. If there is anything you find ambiguous, ask your lender to explain it. Otherwise, out of your ignorance, you may be entitled to pay more EMIs than what you anticipate.
3. Be attentive to personal and business credit score
Robust credit history is the foremost criterion for business loans. Typically, if your organization’s credit score is over 680, the odds are your application will sail through. Anything under 680 means you will either be refused point-blank or get a high-interest rate.
In addition to that, your credit score is also critical. When you show your inability to keep anything as collateral, the lender will ask for a personal guarantee. In such a situation, the personal credit score can save the day for you.
So if you are speculating that your company might need financing in the near future, you should fetch your personal as well as the company’s credit report from a reporting agency. Once you know how far you lag in numbers’ game, you can make prior efforts to improve your standing in the eyes of a lender.
At times, the credit bureaus fail to provide correct figures. It would help if you made it a point to glide through the report and notify errors to the respective agency.
4. Staying on top of paperwork is key
Unfortunately, it is not very uncommon for borrowers to be denied the loan due to their inefficiency in maintaining documents. Depending on the lender and loan term, the documents could vary. Yet, every business lender would like to drill down the following papers:
- Balance sheet: The balance sheet exhibits the overall health of your company. By looking at this document, the lender can come to terms with your liabilities and assets. Ask your accountant to prepare a balance sheet beforehand.
- Bank statement: A lender can figure out average account balance and the state of cash flow through the bank statement. Both these factors unveil whether you can pay back the loan efficiently or default in the half-way.
- Profit and loss statement: If a lender is unsure about your company’s future profitability, they will demand the profit and loss statement to put their doubts to rest.
When you try to extract all these records at the 11th hour, you are likely to commit blunders. Remember, there is no room for sloppy bookkeeping when you are applying for a business loan. So it is advisable to get your documents on time. This is so that you can improve your odds for qualification, and get them verified from a professional bookkeeper.
5. Consider various loans
Well, businesses require money for various reasons. So lenders offer a variety of loans so that borrowers can meet their specific needs. For example, if you want to buy equipment, then equipment financing is more suitable for you than any other type of loan. Similarly, obtaining a business line of credit would be ideal for dealing with cash flow challenges.
Falling upon the wrong financing will aggravate the problem instead of combating it. You must narrow down your needs first and then start shopping around.
The final verdict
Understandably, when a business’s survival depends on urgent financing, the owner would fill the loan application in haste. But, that way, you will only end up denting your chances of qualification. You should thoroughly consider the above factors first in order to emerge as an ideal candidate to the lender.