One of the most important questions that boggles the minds of entrepreneurs, is how to finance their business. Whether you are looking to finance your startup, or expand your current business, one possible source of capital is a business loan.
To get the right kind of loan, you will need to pay attention to several crucial factors. Here are 5 tips that will help you secure a business loan and finance your initial expenses.
Know Your Credit Score
The first thing you should do before applying for a business loan is to review your credit score. Know that your personal credit score, as well as you business credit history, will be evaluated if you’re just launching your business or if it’s less than three years old.
Your credit score will give the lender an idea of your habits when it comes to paying off loans. It will also determine which types of loans you qualify for. If your credit score is in good shape (over 650) you will have more options to choose from.
Know How Much You Need and Why
Before choosing a lender, you will need to know exactly how much money you need. You should have a realistic amount, and you shouldn’t go overboard. After all, you will need to pay back the loan, so think carefully about how much you can afford. Besides, it’s not likely that lenders will consider an unrealistic amount.
You will also need to know why you need the loan. If you’re just starting your business, a business loan can help you get your business going and enable you to finance your initial expenses. You could use it to buy equipment or cover rent and payroll.
Other reasons for a business loan might be a business expansion or new business opportunities. Whatever the reason is, make sure you’re able to clearly define it to the lender and improve your chances of getting a business loan.
Before settling for a lender, explore your options to see who offers the most favorable terms. You can get a loan from online lenders, nonprofit micro lenders, as well as traditional banks.
Once you have chosen a few favorable lenders, compare their offers and see which one would be the best choice for you. See whether they offer the type of loan you would like and check the Annual Percentage Rate (APR). APR is the total amount the loan will cost you over one year. Also, pay attention to prepayment penalties and other fees.
Once you have chosen the right lender make sure you read the terms and conditions carefully. Don’t skip any vital details and read the fine line to know what’s exactly at stake if you can’t repay the loan.
Don’t Come Unprepared
Once you’ve chosen the right lender, you’ll need to prepare all the necessary documents before applying for a loan. There is a lot of different information and documents that a lender will review when you apply for a business loan. The exact amount will depend on the type of loan you are applying for.
If you are just starting your business, one very important document you will need to prepare is your business plan. Your business plan will tell the lender how you intend to make money, and give them an idea of your expenses. This way, the lender will be able to determine if your business is worth investing in.
Other documents you will need to prepare might include:
- Bank statements
- Tax returns
- Articles of Incorporation
- Financial statements
Don’t Be Afraid to Seek Expert Advice
Finally, if applying for a business loan seems too challenging for you, there is no reason to not seek expert advice. If you are a first time entrepreneur, you can certainly benefit from seeking advice from experienced business owners.
You can also get advice from a local SBA office and get help with preparing a business plan and applying for a loan
Acquiring a business loan is sometimes a necessary step for financing your business. Whether you’re just starting out or looking to expand your business, a loan can help you cover various business expenses. For some entrepreneurs, applying for a business loan might seem like a daunting task. However, the above-mentioned five tips can help you go through the process almost effortlessly.