6 Tips to Prepare for Your First Business Loan

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6 Tips to Prepare for Your First Business Loan

Is your business growing faster than you can keep up with your cash flow? Or do you need financing to start your new business? If so, it may be time to think about getting your first business loan.

In 2018, 43% of small business owners applied for a business loan, but less than half received the full amount they applied for. You can improve your chances of getting approved for a loan and avoid any shortfall in funds by laying the right groundwork beforehand. These tips can help you prepare to apply for (and hopefully qualify for) your first business loan.

 1. Clarify why you need a loan

This important step is one you don’t want to skip.

Think about your purpose or goal for getting a business loan. You may be starting a new business or expanding an existing one. Or you could buy key equipment, refinance existing business debt, or cover your day-to-day operating expenses.

Read Also: 7 Reasons To Get A Business Loan

Considering your reasons for seeking a business loan is important because it can provide clarity on how much you need to borrow, what type of loan best suits your purposes, and whether a loan is the best financing option.

2. Find out what you can reasonably borrow

A business loan is debt financing, which means you’ll pay it back over time and with interest. Your estimated loan payments must be affordable for your business; otherwise, you could be putting unnecessary pressure on your cash flow.

 Numerous business loan calculators allow you to run the numbers and estimate your payments. The key to getting an accurate picture of your payments is knowing how much you really need to borrow.

This amount goes back to understanding why you need the loan in the first place. For example, if you’re interested in using a loan to expand to a new location, you’ll first want to calculate all the costs that might be involved. Taking the time to realistically decide how much you need to borrow can help you avoid getting a loan that is too big or too small.

3. Compare business loan options

Business loans are not all the same and it is important to understand your options. For example, the most common types of business financing include:

  •  short term loans
  • long term loans
  • equipment loans
  • Purchase Order Financing
  • startup loans
  • Small Business Administration (SBA) Loans
  • Cash advances for merchants
  • Inventory financing
  • invoice financing

Each one is designed with a different need in mind, and that is reflected in their cost and payment terms.

Short-term loans, for example, offer lump-sum financing that you pay back over a fixed term, usually 1 year or less. A long-term loan can spread the repayment over 5 years.

Equipment loans are used to purchase equipment and can have repayment terms that last the life of what you’re buying. The equipment itself serves as collateral for the loan. A business cash advance, on the other hand, is usually paid off in a matter of months and does not have any collateral requirements.

The other thing to consider is where you’ll get a business loan. Your bank or credit union may be your first choice, but online lenders are also an option. When comparing where to get a loan, consider:

  • The interest rates offered by individual lenders
  • Any fees charged by the lender, such as a loan origination fee or a prepayment penalty.
  • Repayment terms and how long you will have to repay the loan
  • Minimum and maximum amounts of indebtedness
  • funding speed

The latter can be especially important if you have an urgent financial need. A loan from a bank or credit union can mean waiting several weeks for funds, while an online lender can fund your loan in just a couple of business days.

4. Check your credit reports and scores

One of the most important criteria lenders consider for business loan approval is your credit profile.

In general, the stronger your credit score, the more likely you are to be approved for a loan. A good credit score can also result in a lower interest rate on what you borrow.

As you prepare for your first business loan, check your personal and business credit reports and scores. If you’ve never checked your business credit scores before, this guide explains how to do it and how to improve your scores if they’re not as high as you’d like.

Compare your personal and business credit scores to the minimum scores that various lenders seek from loan applicants. This information can help you narrow down the list of loans with the best chance of approval.

5. Consider other approval requirements

In addition to credit scores, lenders consider other factors, including:

  • your time in business
  • Average annual income
  • Actives and passives
  • Collateral

When reviewing business loan options, look at the minimum requirements for each. If you need to post collateral for a loan, for example, that’s something you’d like to know ahead of time so you can decide which business assets to use to secure the loan.

Also, consider whether the lender requires a personal guarantee along with the collateral or instead of it. A personal guarantee is essentially a legally binding agreement in which you are personally responsible for the business debt.

6. Prepare your documents

Lastly, make sure you have your paperwork in order before you apply for your first business loan. Lenders will want to see key documents, such as:

  • Business bank statements 2-3 months
  • 2 years of personal and business tax returns
  • Documentation for your guarantee, if necessary
  • A recent balance sheet
  • Profit and loss statement
  • Cash Flow Statement

Having these documents on hand can help you save time when applying for a business loan. The sooner you can get the approval and underwriting process up and running, the sooner you can be on your way to getting the financing your business needs.

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