Read along for 4 steps you should complete before sitting down to apply for a business loan.
If you’re a small business owner looking to expand your business, you will likely need access to cash in order to invest in your business’s growth. Small business loans can be used to make long-term investments into your business, such as financing new equipment, purchasing inventory, hiring staff, marketing your business, and other big business investments. In addition to big ticket purchases, a business loan can help you manage seasonal cash flow fluctuations and keep staff on payroll. No matter what your goal is, you can start with these four steps before you apply for a small business loan to simplify and streamline the application process.
Understand requirements to apply for a small business loan.
Before you apply for a small business loan, take some time to review your personal credit history to ensure that you are in good standing. If your business credit score isn’t well established, lenders will consider your personal credit score as an indicator of your ability to manage repaying debts. To improve credit, check your credit report for errors that could negatively impact your score and address them with the credit reporting agency, avoid late payments, and try to pay your credit balances in full each month.
It is also important to review your business credit score, if applicable. A business can establish and build a credit history that is separate from your personal credit history, which can minimize any impact on your personal credit. Lenders evaluate your business credit history and credit score, personal credit history and credit score, and business finances when making credit decisions, so it is important that you monitor your credit scores and ensure you take all the necessary steps to maintain a good credit score.
Make a plan for your business loan.
In order to secure funding, you need to be able to explain why your business needs a loan, how you will use the money, and when you plan to pay it back. Preparing to answer these questions before you apply is important as lenders will gauge whether your business has strong management, experience, and an understanding of the market. Your goal of this exercise is to show the lender that your business is creditworthy and capable of repaying debt. If you can clearly state the purpose behind the loan and how you plan to use the money, your lender will likely have more confidence in your business, increasing your chances of approval.
Gather your financials and legal documents.
In addition to having a clear plan for using and repaying your business loan, lenders will likely require you to provide financial statements and legal documents to assess if your business is healthy and credible to repay the debt. Here are a few documents you may need to provide:
- Your recent business and personal tax returns
- A recent cash flow statement
- Personal and business bank statements
- Recent financial statements
- Your business licenses
- Collateral
Research the best small business lender for your business.
After you have compiled all of the small business loan requirements for your loan application, you can begin to shop around for the lender that best fits your business’s needs. It is important to remember that every business has different needs, so there is not a one-size-fits-all lender. Consider how quickly you will need the loan, any additional services that the lender provides, and if there is collateral required for a loan.
Determine which lending options may align with your business plan and take the time to thoroughly research the potential uses, available borrowing amount, length of loan, and any additional benefits. Comparing these factors can narrow down the type of application you will apply for and can reduce the time spent filling out the application. Your banker will be able to answer any financing questions you have and may be able to suggest options you have not considered.
While applying for a business loan can be a daunting task, there are several steps you can take beforehand to better position your business to secure financing. Ensure you are familiar with the requirements to apply for a small business loan, clearly outline your loan plans, and do your homework on the right lender for you.
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