Important Tips For Those Looking For Business Loans For The First Time
Entrepreneurs looking to bridge the gaps of working capital, start a business or expand an existing one, often find business loans, which are available for different business purposes and scenarios, extremely beneficial. There are multiple company age and size-specific options when it comes to business loans. For example, there are traditional bank loans and SBA loans, which are ideal for those with high credit scores and considerable trade history, and alternative business financing options like Merchant Cash Advances(MCAs), ideal for those who have low credit scores but have been witnessing substantial profit since the last one or two years and looking for quick cash to cope with emergencies, temporary cash flow issues, etc., Business Lines of Credit, that offer the borrowers revolving credit lines and the option of withdrawing funds only when the need arises, and Invoice factoring, that is beneficial for those facing momentary cash-constraints due to multiple unpaid invoices. Business loans are also segregated based on the length of the repayment terms. The long term business loans offer larger amounts, that can be repaid over longer periods and short-term business loans provide smaller amounts, that need to be repaid over comparatively shorter periods, which are usually less than 12 months.
Hence, it is quite crucial for loan seekers to first gather knowledge about the different business finance/loan options available, and their eligibility criteria, and then understand their businesses’ core requirements, and current financial condition, analyze growth prospects, think of the repayment term that will be most convenient for them, and know their business and personal credit scores to get a clear idea about which type of loan their businesses can qualify for and will best meet their needs. After choosing a business loan, one must compare multiple lenders based on their market reputation, loan terms, the underwriting process, and their speed of giving approvals to avoid any future inconveniences.
However, the entire process of selecting the right financing option and applying correctly is not quite simple, especially for those applying for business loans for the first time. Certain things need to be kept in mind to make sure the process goes smoothly without any hassle. Among many, the two primary things first-time small business loan seekers must consider focusing on are their business plans and financial forecasts. This is because the two above-mentioned factors immensely contribute to the lenders’ decision-making process.
5 Things the first time business loan applicants must keep in mind:
Budgeting needs to be done accurately.
The loan applicants need to provide the lenders with a budget, with real research and calculations to substantiate the numbers. This will prove the profitability of the business. However, one should never overestimate his/her income. After the budgeting is done, one must go back to it and reduce the income to 25 to 50% less than what the report suggests, because, in most cases, the real income in the first year never goes as high as the projected income and the lack of income often causes small companies to go out of businesses. But, when it comes to expenses, one should ideally increase them by 25 to 50% as businesses often miss out on many expenses while making a budget and realize it after submitting it to the lender and sometimes, after they get the funds transferred to their accounts.
A strong business plan is mandatory.
To persuade a lender, a loan seeker must prepare a strong business plan, which will ensure the lender that the business is reliable and run with the necessary skills and ample industry knowledge. A good business plan includes the mission, competitors, operating expenses, past income and projected revenue, an analysis of the market, management and marketing strategies, and an elaborate expansion plan.
Available assets need to be listed.
Many lenders, especially the traditional ones, ask borrowers to put up their assets as collateral to lower their lending risk. Hence, it is quite crucial to make a list of the business assets like equipment, property, stocks and bonds, inventory, and receivables, that can be pledged as collateral. The listed collateral must be mentioned with their current market value and documents of the same need to be attached as well.
Multiple lenders must be compared.
Not all lenders are the same, even if all of them are providing the same type of loan. The repayment term, the total cost of the loan or APR(Annual Percentage Rate), and the customer support system often vary with lenders. Hence, after deciding on the loan type, one must conduct thorough research on different lenders and choose the one that offers the most favorable loan term and rates. Also, loan seekers must consider the market reputation of the prospective lenders before finalizing one among them.
Personal and business credit scores need to be checked.
Loan seekers must take a look at their current personal and business credit scores and try to raise them through certain actions if they are low. This is because traditional lenders, like banks and credit unions, that offer loans with low-interest rates, usually approve applications of entrepreneurs who have a high business and, sometimes, personal credit scores. However, there are other financing options like MCA, which consider applicants with low credit scores as well, given the businesses are highly profitable and witness substantial cash inflow. Hence, loan seekers need to get an idea of their current credit scores to understand which type of loan they can qualify for.
The required amount needs to be decided on, and the necessary financial documents should be collected before applying for the loan.
One must always apply for the precise amount he/she requires. This is because some lenders charge prepayment fees if a part of the total amount or the entire loan is repaid before the term ends. While borrowing more than the real requirement can make the borrowers pay extra charges during early repayments, borrowing less will be of no help to the entrepreneur, who needs funds to make certain payments, carry out day-to-day business operations, pay for emergency expenses, etc. Hence, entrepreneurs looking for business loans must sit with the accountants, understand the businesses’ financial needs, and also get the tax-related documents and financial statements ready.
Business loans often turn out to be a savior, when certain things are kept in mind before applying for the same. Otherwise, loans can be the heaviest burden that business owners often drown with. Hence, one must be extremely careful and calculative while choosing a business loan for the first time.