When your business is expanding operations, starting on a new project or getting back on track after losses you might need a small business loan. Other times, you might need outside funding to cover running expenses such as inventory and payroll.
However, securing a loan can be a major obstacle facing small businesses. Some entrepreneurs are even intimidated by the idea of getting a small business loan. And the truth is that it can be difficult for owners of small businesses to find, apply for, and secure funding.
But if you need business funding, read on. We’re going to show you step-by-step how to be prepared so you can obtain the funding your business needs.
How Can I Obtain Funding for My Small Business?
According to financial experts, you can avoid most of the frustration around getting funding for your small business through due diligence. Here’s what you need to do:
Know Why You Need the Funding
Lenders, including online lenders for bad credit installment loans, will want to know why you need the funds. You might need funding for:
- For starting capital
- To meet day-to-day costs
- To expand your business
- For financial security, a safety cushion
Determine the Type of Loan That Is Right for Your Business
The reasons why you need funding will determine the type of a loan you get.
For starting up a business it’s very difficult to get funds. This is because lenders need to know that you can repay the loan. Therefore, they need to see cash flow from your business before they’ll lend you money. So if you’re starting up, explore options such as personal loans, crowd-funding, micro-loans from nonprofit lenders, or family and friends.
You’ll have more options if your business has at least a year of history and revenue. In these cases, your financing options will include term loans, government loans, invoice factoring, and business lines of credit.
Decide on the Right Type of Small Business Lender
There are several sources of small business loans, including online lenders, banks, and nonprofit micro-lenders. Together, they provide a number of financial products, including lines of credit, accounts receivable financing, and term loans.
Decide on the financing vehicle and type of lender that is right for your business. Then, compare 2 or 3 similar options based on the total cost of borrowing, that is, the annual percentage rate and terms. Choose the one with the lowest borrowing cost, ensuring that you can manage the regular loan repayments.
Choose a Bank Loan If You:
- Have good credit.
- Don’t need quick cash.
- Can offer collateral.
Choose a Micro-Lender If:
- Your business is so small you cannot get a traditional loan.
Choose Online Lenders If You:
- Need funding fast.
- Lack time in business.
- Lack collateral.
Determine If You Qualify
Once you have determined the type of lender you will approach, make sure you can qualify for a loan.
Know Your Credit Score
Your credit score is one of the factors which will determine the type of loan you qualify for. In the US, you can obtain your credit report free of charge once a year from one of the 3 main credit bureaus. They are TransUnion, Experian, and Equifax. Also, you can obtain your FICO score from several credit card companies for free. You can also use personal finance websites.
RELATED ARTICLE: 5 STEPS TO BUILDING A ROBUST BUSINESS CREDIT PROFILE
Determine How Long Your Business Has Been in Operation
Lenders take into consideration how long your business has been in operation. You need at least a year in operation to qualify for online small business funding, but most banks require at least two years in operations.
Calculate How Much Money You Make
Most online lenders need minimum annual revenue, ranging from $50,000 to $150,000. It is important not only to know your annual revenue but also to find out the lender’s minimum revenue requirements before you apply for a business loan.
Make Sure You Can Afford the Repayments
Determine if your business can meet the payments. Carefully examine your business’s financial statements, especially the cash flow statement, and evaluate how much it can afford to contribute monthly toward loan repayments. Many online lenders need daily or fortnight payments. Take this into consideration.
To repay the loan comfortably, your gross income should be at least 1.25 times your total expenses, including the loan repayment amount.
Gather Your Documents
After determining your best options, apply for the loans that you qualify for that will meet your financing needs. In fact, you can apply for several loans within a short duration, about 2 weeks, without negatively affecting your personal credit score.
Depending on the type of your business and the lender, you will need to submit some or all of following documents with your application:
- Business financial statements
- Personal and business bank statements
- Personal and business tax returns
- Business legal documents.
Parting Shot
If you need a small business loan, be prepared. Make sure you know how much money you need and why you need it. And be sure to have all the necessary documents before you begin.
