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Business loans are common alternatives for companies and new entrepreneurs who need financing for their ventures. You may be expanding or starting a new business and need the funds to help with your plans. A business loan may be your best solution to get finance for your small business, but the process can be intimidating.
Given the numerous products offered by lenders and the extensive requirements that institutions impose on small business, it is understandable to be scared. However, with a few basics of how to navigate the process of requesting for a business loan, you can get your enterprise or startup the assistance it needs.
Have a Business Plan
The first step for getting approved for a small business loan is to have a plan in hand when approaching lenders. ‘Why?’ is one question that every lender will ask when you are applying for a loan. Why do you need the money? How do you plan to use it? How do you expect to pay it back?
A business plan will address all these aspects. It serves as a blueprint of what you intend to do with the money you get. Lenders have to see that there are goals that are driving your decision. For instance, if it’s a loan for diversifying small business, what type is it? Are you getting a bigger warehouse, increasing your inventory or hiring more staff members? Make a potential financier understand why the money is important. A plan instils confidence, which will improve your chances of getting a loan.
Know the Products Available
Small business loans come in various solutions, each one suited for different borrowers. Not every product, though is appropriate for your business. The plans you have for the enterprise will guide your choice of loan.
Before you approach a lender, find out what would satisfy your requirements. Entrepreneurs can select between a fully drawn advance (upfront loan), a line of credit or an overdraft. One type of loan that a small business can take out is an accounts receivable line of credit. It is where a company uses its accounts receivable to secure funding.
A line of credit is another option to try. With a line of credit, the lender provides a certain amount of funds that the business can access when it needs to. This loan type is suitable for replenishing cash flow to meet operational costs.
Invoice financing, equipment financing and merchant cash services are other products offered. Calculating the repayment costs and considering the terms is necessary before picking a loan.
Gauge Your Risk Profile
Every borrower presents a risk to a lender; it’s just a matter of finding the ones that are lower on the scale. Know where you lie on the risk scale before asking how to get approved for a small business loan. Lenders look at various aspects when assessing the credit risk of a business.
The security that your business has available to put up is one of the risks. Your credit history will matter because it shows how well you pay debts. Some ventures carry higher risks than others. A startup, for example, may find it harder to get approval than a small business that has been existing for several months.
An industry with high barriers to entry can also make it hard to secure a loan for your new small business. However, when you know what works against you when presenting to lenders, you can design a loan application in a way that paints your business favourably.
How Much Can You Afford?
Just because you want 1 million AUD for injection does not mean that you should get it. Taking out a big loan that your company cannot afford can lead to debts that may cripple the business.
Once you decide what type of product you are applying for, find the interest rate then start calculating the repayment costs. What will you have to pay monthly? From your financial records, check how much revenue your venture generates. These calculations may be a tad difficult with a startup, but you can use projections. With an investment loan repayment calculator, you can minimise the guesswork and see what your business will be dealing with.
Research Several Lenders
Don’t be restricted to your local bank when looking for financing for your small business. Entrepreneurs have many options when it comes to lending institutions they can partner with.
Financial institutions will vary significantly in how much they may be willing to give a small business, their repayment terms and other requirements. Be patient about finding a lender that you can work with because you may be holding that loan for a few years. Compare interest rates of several institutions to see which ones suit your needs.
Between all the paperwork requested by lenders and the stringent requirements that borrowers have to meet, a business loan application can be daunting. By educating yourself on the basics of how to get finance for small business, you can avoid common pitfalls.
This written article has been collaborate with MOVE, a member-owned credit union based in Brisbane where provides financial products such as home and personal loans, saving accounts and refinance a loan.
“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."
