Not every small business is self funded or has sufficient funds. Often times, to start or grow a business or cover day to day expenses, including payroll and inventory obtaining outside financing becomes necessary. At such times a small loan can seem like the best option for the business. But, getting a business loan is a major hurdle for small businesses, mainly due to the tight lending standards and getting approved for a loan can be quiet challenging if you don’t have an insight on the lending process.
Here are some key steps you can take in getting a small business loan
1. Understand the types of loans you can avail
The government at present has launched various schemes for the benefit of entrepreneurs and startups. Performing a thorough research on the different types of schemes and loans you can apply for and what will best suit the needs of your company. Gather the appropriate information from multiple sources and seek guidance from those who have applied for a loan. First hand information will give you better insights on how to best apply for a small business loan. Research on the best possible lender as well, because there are more lenders than ever before willing to lend to small businesses.
2. Walk in the lender’s shoes
Anticipate how the lender would view your credit score and your risk profile. Lenders will ultimately make a decision based on your outstanding loans and debts to determine if your cash flow would be sufficient to pay existing loans and obligations as well as the new loan. Clean up any blemishes on your credit report because lenders will view your credit report, credit score and your assets in the business. A balanced and blemish free work report will show the lenders that they can trust you and your business.
3. Preparation and planning
Have a clear and detailed plan on how and where the money will be used and want kind of returns you can expect. Plan even the tiniest detail and don’t leave anything to chance. Vague or general responses will make you look like you are not completely invested in the business or haven’t prepared for the future. Give the lenders a detailed and structured report on where the money will be spent along with contingency plans for worst case scenarios. A lack of organization and preparation show’s you are a risky venture and are untrustworthy.
4. Be Specific
Preparation, organization and planning also mean that you know how much money you require for your venture and how soon you will be able to pay it back. Be specific about the amount you will be borrowing, for how long and at what interest rates. Specify whether the loan will be used for equipment or capital expenditures or expansion and mention if you will be borrowing extra money in case you run into a cash crunch.
5. Security and Collateral
Lenders are generally more concerned about the ability of the borrower to repay the loan. Provide adequate security and collateral against the loan to increase your chances of getting a loan on favorable terms. Include copies of legal documents like your articles of incorporation, contracts, leases or any licenses and permits that you need for your business to operate. As far as possible avoid giving personal guarantees or personal assets as security as that will put your personal assets at risk and not just the business assets.
Banks and lenders are very cautious about lending money to small business but loans are available from many different lenders with a myriad of choices tailored to the financial situation of your business. While getting approved for a small business loan is no easy feat, but by addressing your shortcomings and highlighting the positives you can improve your odds.