While it is not as easy as it used to be in securing a loan, all banks and other lenders still need to lend money to small businesses. The point here is to know how to go about it and secure the best terms. Here is a simple process on how to obtain a loan for your business:
1. Start the business before the loan is needed.
It is important to build a relationship with the bankers before the business actually needs to loan. Ensure the key contact gets to know about your business before asking for anything. Have it at the back of your mind that people do business with who they know, like and trust. Lenders think the same way.
2. Decide what the money is needed for
Businesses have various reasons for obtaining business loans. It could be for a good reason or a bad reason. Good reasons include financing a piece of equipment, real estate, long term software development, or large seasonal sales variances. Bad reasons include financing ongoing losses, office build-outs, or acquiring non-essential business assets. Ensure you ask for a loan for the reasons.
3). Decide the Amount of Money the company needs
Most small businesses don’t ask for loans that are enough to take care of their needs. Underestimating the amount of money needed can lead to a lack of working capital earlier than expected. Overestimating can make lenders doubt the owner’s assumptions and credibility. Have a good plan out a budget that is backed up by financial projections such as Profit or loss statement and cash flow statement that is reasonable and shows that financial analysis was done.
4). Know the score.
Lenders also look at personal credit scores as a way to judge the reliability of the owners to pay the credit back. Lenders will look at your credit history when they calculate your credit score, which will show them the level of risk in lending you money. It is important to know what lenders look for and how the score compares to those expectations.
5. Find a Lender.
Find out which type of lender is the best fit for the business loan you require. Examples of such lenders are commercial banks, Non-bank lenders, region-specific lenders (Local community), and micro and alternative lenders.
6. Prepare the Loan Application package
The loan package application is the paperwork that needs to be submitted in order to apply for a loan. It normally includes:
• A business plan and the business owner’s resume.
• Financial results and projections such as projected profit or loss statement, statement of financial position (balance sheet), and cash flow statement.
• Personal financial information and three years of tax returns.
7. Get a Guarantor to Cover You
A guarantor is a person who guarantees to pay the bank in the event that you are unable to repay the loan and any interest it accrues. This usually gives banks assurance they need to classify your loan application as low risk.
8). Wait. Expect to get an answer within a stipulated period of time. Ensure you check in each week for status. It is most likely that the lending institution may require additional documentation.
Getting a loan helps the business grow quicker.