Here are 6 Things to Keep in Mind
Small businesses often rely on small business loans for financing growth opportunities and other profitable projects. It has become more difficult for small businesses qualify for bank rate financing. The latest PCA Index Survey Responses Trend Analysis 2019 shows that only 31% of small businesses were capable of obtaining working capital via small business bank loans.
Hence, it is more difficult for smaller businesses to get financing.
Smaller loan amounts yield less profit. Harvard Business School found that more than 70% of small-business owners are looking for loans below $250,000 and 60% are seeking loans below $100,000. Banks shouldn’t lend money to small businesses, as it is just as expensive to underwrite a $1 million loan than it is to underwrite one worth $250,000.
Regulations have been increased. After the 2008 recession, banks had to review their risk appetite. Because smaller companies are more likely to be borrowers than larger ones (due to a lack of collateral, less years in business and/or poor credit ratings), banks may reconsider approving applications.
Insufficient credit history and collateral. Lenders often require collateral to obtain a loan. This can be a problem for businesses that don’t possess valuable assets. To determine a company’s creditworthiness, lenders also look at a business’ credit history. For companies with a new credit history, this may prove difficult.
Although it can seem overwhelming to apply for small business loans, it is possible. Your preparedness is the key to securing working capital. Before applying for a small-business loan, here are some tips:
1. Find out why you need a loan
Lenders will want to know what you plan to do with the money they have entrusted to your company. This is a good thing, as how you spend the loan will impact your bottom line and your ability to repay it.
A variety of small business loans can be offered by banks and cooperatives. These loans are available in different forms and may prove more difficult to obtain. A Small Business Administration loan is recommended for those with excellent credit ratings. These loans are some of the most competitive on the market. We like them because: The SBA guarantees lenders a percentage of every loan, and also caps interest rates.
These are some of the most popular reasons to apply for small business loans
- Managing day-to-day expenses
- For unexpected expenses, build a cash cushion
- More employees
- Profit from business opportunities
- Marketing campaign launch
- Expanding your product/service line
- Renovating your space
- Equipment upgrading
- Purchasing inventory
- Increasing working capital
2. Find out which type of loan is best for you
You want to ensure that you choose the right loan for your company when applying for a loan. This tip is similar to tip 1. Take the time to assess your company and understand why you require a loan. Inventory financing might be the best option if you are looking to purchase more inventory. SMB Compass has more information about inventory financing.
Here are some financing options available for small businesses.
- Business Line of Credit
- SBA Loans
- Equipment Financing
- Asset-Based Loans
- Business Term Loans
- Inventory Financing
- Invoice Financing
- Purchase Order Financing
- Bridge Loans
3.Learn How Lenders Evaluate Your Application
Lending companies have their own criteria to assess small businesses and the ability of those businesses to repay the loan. These five factors are generally considered by lenders when they evaluate an application.
Collateral. Valuable assets (real estate, inventory, invoices, vehicles, equipment, etc.) If you default, these assets can be used to secure the loan.
Cash flow. Loan risk is lower the higher your profit and the better you manage it.
Credit score and credit history. This will tell you if you have paid off your debts and loans on time. Your chances of approval drop the lower your credit score.
Industry. High-risk industries like gambling, cannabis, mining, etc. It may be more difficult to qualify for a loan. Lenders are more likely not to approve loans for companies in high-risk industries.
It is important to be in business for a long time. Companies that have been in business for a long time are more attractive to lenders. It is important to have a business plan that you can execute in order to achieve your short-term and long term business goals, especially if you are a new company.
Although there is a chance that your small business won’t be successful in all five of these areas, lenders may still consider your application if your business excels in at least three.
4. Examine your personal and business credit scores
Your creditworthiness is determined by your personal and business credit scores. This means that your ability to repay the loan will be affected. It’s a key factor that lenders will look at. They will examine your credit history in relation to personal and business payments (mortgage or credit cards, car loans, etc.). and business obligations (past/other loan, vendor contracts, credit card, etc.).
Experian estimates that a 700+ credit score is considered good credit. An excellent score is 800 or higher. Equifax Business, Experian Business and Dun & Bradstreet can help you determine where your credit scores are.
You can improve your credit score if your credit rating is not stellar by paying your bills on-time, paying off your debt, and keeping your balances low with any revolving credit. Do not apply for too many credit cards as it can lead to hard inquiries and negatively impact your credit score.
5. Make sure to prepare important documents
You can speed up the application process by becoming familiar with the types of documents that you will need to present for your business. Prepared and organized. Lenders will often request that business owners submit the following documents.
A detailed business plan
- Statements of financial information for business and personal use
- Credit reports for personal and business credit
- Personal and business tax returns
- Business forecast
- Licenses and registration of businesses
- Legal documentation such as articles of incorporation and commercial leases.
6. Provide Collateral If Necessary
No matter what loan you choose, the lender is most concerned about your ability to repay it. They may request collateral such as property, equipment, business real estate and accounts receivables to lower their risk. If you default on your loan repayments, lenders have the right of seizing and selling your assets. Your chances of qualifying for the loan and receiving more favorable terms are higher if you use a high-value asset.
You can apply for an unsecured loan if you don’t have assets or don’t feel confident using them. These loans do not require collateral, but lenders might charge higher rates to compensate for the additional risk.