A Complete Guideline To Get Approved For Small Business Loan
If you’re looking for a small business loan for growing your business or you want to convert your business idea into reality. The process of getting a small business loan can be terrifying. You might get disappointed by the offers on the table especially when your credit score is not impressive.
You need to know, the purpose of taking a small business loan or create a business plan if you’re finding a loan for a start-up. Decide how much financing your company needs and can afford. Determine, if your business can support debts. Get to know about types of small business loans. Improve your credit ratings. Get all your necessary documents in order. Get your collateral. Apply for a small business loan and make sure you can pay it back.
How To Get Approved For Small Business Loan:
- Purpose of taking business loans.
- Decide how much financing business need.
- Create a Business plan.
- Know about types of small business loans.
- Improve credit score.
- Put necessary documents in order.
- Apply for a small business loan through collateral
Step#1: Purpose Of Taking Business Loan:
First of all, lenders will be curious to know about your purpose of applying for a small business loan. Think about this because you should be clear about the fact that WHY YOU NEED BUSINESS LOAN?
There are two types of reasons for applying for a small business loan:
GOOD REASONS FOR SMALL BUSINESS LOANS:
- Equipment Financing:
If you want any equipment for your business use, like machinery, vehicles, etc. you can opt for an equipment lease.
- For Start-Up:
If you have a perfect business plan, which can cover all debts in the future, then opt for a small business loan. But, this can be a little challenging for you because you’re not sure if your business will succeed or not.
- For day-to-day operations:
The working capital loan is that small business that can keep your operations running like day-to-day operations e.g. advertising, etc.
- To grow your business:
Hence, you’ve discovered an opportunity for your business, and you need a small business loan to grow your business.
BAD REASONS FOR SMALL BUSINESS LOANS:
- Non-Essential Business assets:
Some businesses apply for a small business loan for acquiring assets which are not the basic need of business. This can be a very bad decision for your business.
- To cover financing losses:
No one will be willing to give you a loan on the basis of financing ongoing losses. Your credit report will show every loss, and it’ll create an adverse impact. If by chance you’ll get a loan, you won’t be able to pay back.
As we’ve experienced, many lenders work with the borrowers who need financing for multiple purposes. Like if you’re starting a business, you might need to borrow working capital loans and equipment loans etc.
Step#2: Decide How Much Financing Your Business Need:
After determining the purpose of acquiring business loans, decide how much debts your business need and can afford.
Most of the businesses don’t ask for a large amount of business loans, but underestimating the amount can cause a problem while covering business needs. Overestimating can also have enormous impact; lenders will get chance to question owner and its credibility.
- Estimate How Much Business Loan You Can Afford:
You need to check your Income Statement and Cash Flow Statement, to examine if you’ll be able to pay back your debts according to your revenues. Corporate Cash Credit will help you get small business loan according to your affordability. They will help you analyze how much interest your business can pay on a monthly basis. You can also get “Free analysis” from Corporate Cash Credit.
Furthermore, you have to make sure that you can support loan payments because missing a monthly loan payment is a significant issue, it can raise interest rates. Your credit score will also have a lousy impact, and it will affect future borrowings.
- Debt Service Coverage Ratio:
“Debt-Service Coverage Ratio(DSCR) is a measure of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.”
The business lender will examine from Debt Service Coverage Ratio, either you can pay back your debt or not. To calculate DSCR, take your average monthly net income and divide it by your monthly loan payment.
“A DSCR of less than 1 would mean a negative cash flow. … Typically, most commercial banks require the ratio of 1.15–1.35 times (net operating income or NOI / annual debt service) to ensure cash flow sufficient to cover loan payments is available on an ongoing basis.”
Therefore, get a clear understanding of how much money your business makes each year. How much do you think you will need to borrow a small business loan to invest in your growth, and what will that money cost you in regarding interest and fees? What do you think this money could help you achieve regarding business growth and additional profit?
Step#3: Create A Business Plan:
A detailed business plan can help lender evaluate that you’re aware of your way in a long-run. It will show how you plan on using your money, how the business will increase profits, and how those profits will help you pay back your debts.
Contents of a business plan:
A business plan should consist of following things,
- Executive Summary.
- Business Description.
-> What is the business model? (What are your customer base, revenue sources
-> Do you have special business relationships that offer you an advantage
-> Where are you located?
-> Who are the principals?
-> What is the legal structure?
-> What are some of the market opportunities?
-> What is your projected growth?
- Market Analysis
- Organization Management.
- Sales Strategies.
- Funding Requirements.
- Financial Projections.
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
This will help lender analyze your long-term business position and will you be able to pay your debts back with interest or not.
Step#4: Know about the Types of Small Business Loans
Next step is to get yourself knowledge about all kinds of business loans so that you’re able to evaluate which type will be best for you.
The options of small businesses may vary according to your business needs, interest rates you can pay, the length of the loan required and the specific terms of loans. Here you will see the different types of small business loans you can get.
NO.1: SBA 7(a) Loan Programs
They provide loan to small businesses with “Weaknesses” in application.
Provide the lender with guaranty against default.
The SBA warns, though, that lenders do not have to accept 7(a) loans.
NO.2: Disaster Loans
Low-interest disaster loans.
Available for repair and replacement of damaged business assets in a natural calamity.
The qualified businesses can have business loans up to $2 million disaster loans.
NO.3: Equipment Loans
Requires an installment of 20% of the purchase price of the equipment.
Interest on the loan monthly.
Principal is amortized over a two to four-year period.
The small business loan amount ranges from $5,000 to $500,000
Used to buy equipment, vehicles and software, etc.
NO.4: Microloan Program
The credits can be utilize for working capital or the buy of stock, supplies, furniture.
Can’t be used to pay existing obligations or buy land.
Funds accessible to middle person loan specialists, which are non-profit with experience in giving loans and specialized help.
They make loans up to $50,000, with the average loan being $13,000.
NO.5: Invoice Factoring Loans
Invoices are treated as collaterals, which are sold to factoring companies.
Company then receives the cash in advance with each invoice sold.
The amount of capital available grows with your business.
NO.6: Line Of Credit Loans
It provide small businesses money for day-to-day cash-flow needs.
Not recommended for larger purchases
Available for as short as 90 days to as long as several years.
You take only what you need and pay interest only on what you use, rather than the entire amount.
These loans are usually unsecured and don’t require collateral.
NO.7: Professional Practice Loans
These business loans are for the service providers like healthcare, accounting, legal, insurance, engineering, architecture and veterinary fields.
Use for purchasing a practice, real estate, or new equipment; renovating office space; or refinancing debt.
How 80 paydex can help you achieve a Small Business loan:
Before applying for a small business loan, you should know that your company has good credit ratings, if not, then consider and 80 paydex program provided by Corporate Cash Credit. It can have a major effect in your financial prospects. You can have at least four positive exchange encounters reporting on your Dun and Bradstreet record with $500 as the most elevated conceivable credit limit on each record, you most likely have a 80+ Paydex. This is on the grounds that Dun and Bradstreet’s appraising framework just requires at least four payment experiences. Nonetheless, if every one of the four of those payment experiences have generally small points, at that point your business most likely won’t meet all requirements for huge loans or credit extensions/line of credits.
Step#5: Improve Credit Score:
Now check your credit report free from http://noinquiry.procredit.com thoroughly, before applying for a small business loan. Remove your credit inquiries on your credit report fast because hard inquiries can cause a significant problem while borrowing.
Lenders want to know whether you repay your debts on time or not through your credit report. Before going to a lender, calculate your credit score first,
- The score will represent your repayments of debts, it will show car loans to credit card payments. Therefore, it will show every borrowing of your business. Your credit score falls somewhere between 300 to 850, with the higher number being better.
- You can have free analysis of your credit score from Deletion Expert. They will help you improve your finances. On the basis of your situation and goals their experts will plan a financial security.
Your FICO score is one of the most common credit scores and is calculated based on five different things:
- Payment history (35%)
- Amounts owed on credit cards and other debt (30%)
- How long you’ve had credit (15%)
- Types of credit currently in use (10%)
- Recent credit inquiries (10%)
For improving your credit score, use “Remove your credit inquiries on your credit report fast” as a guide.
Step#6: Now, Put Necessary Documents In Order
Financial institutions will require many documents related to your company to check whether you qualify for a small business loan or not. They will not be giving you loan verbal basis. Banks require most documentations because they compare different businesses and provide loans to the most qualified. Apart from that, online lenders require less documentation.
The documents mostly required by financial institutions are:
- Tax returns
- Credit Score (Free Credit Score Check from http://noinquiry.procredit.com)
- Bank Balance
- Time in Business
- Annual Revenue
- Bank statements
- Balance sheet
- Income statement
- Photo of driver’s license
- Commercial Leases
- Business licenses
- A resume
- Financial projections
- Articles of incorporation
Note: A Paydex score of 80 to 100 is considered the top level of creditworthiness for a company, therefore, it is important to do everything possible to make certain that your score meets or exceeds 80 Paydex. Unlike FICO scores for individuals, Paydex is calculated on whether a business makes payments to its creditors and suppliers “as agreed” or “better than agreed”, which means payments are made before their due date. You can use Aged Shelf Corporations to achieve 80 paydex score in order to get loan for your businesses.
These documents will give confirmation to lenders that they will get their debts back on time by discovering your past business records. Documents should be clear, informative and easy to read so that you can get a small business loan as soon as possible.
Therefore, we know that documentation is a time-consuming process, but it will be worth it. If you’re in a hurry apply for online business loans that will require fewer documents.
Step#7: Apply For Small Business Loan Through Collateral
While applying for a small business loan, the more collateral you put in the more, the lender will be comfortable to lend you money.
Collateral means an asset you own that the bank can take if you default on your loan. This could be real estate, inventory, equipment, or any other asset that is worth money. If you fail to repay, the bank has the right to seize the collateral and sell it.
The final step is to narrow down the types of small business loans discussed in step 4. Do no apply for more than 2 loans because it can affect your credit report.
After applying for loan application (either online or in person), the lender will review your documents, and verify them. They will also check your credit ratings and if you meet the criteria, the lender will provide you loan agreement.
On that agreement, you will see several kinds of fees like,
- Application fees
- Origination fees
- Late payment fees
- Prepayment fees
Read the terms and conditions carefully and make sure that lender has answered all your cost and loan related queries.
THE BOTTOM LINE:
Acquiring a small business loan is a difficult task, but if you follow these steps in order. You’ll not face any problem in getting a loan.
Similarly, Just be patient because the process is time consuming, but you’ll not regret after performing all the steps. You can take help of Corporate Cash Credit; and get “Free analysis” of your credit score from them, they will also do Detailed Research on available Lenders based on your unique Geographic Location, and by referencing our own Internal Lender Database and related Client Experiences.
This article is for Grand Teton Professionals for Corporate Cash Credit. For Credit Repair Solutions and Support, please contact us at 203-528-0587 or email us at Support@CorporateCashCredit.com. For Media Relations, please contact Misty.Burrell@GrandTetonProfessionals.com.
KWs: Small business loans, business loans, small business loan, credit inquiries, hard inquiries