What Should You Know Before Applying for a Small Business Loan?
As per the reports from Intuit, 64% of small business owners start with $10,000 or less.
It’s true. Most of the small business owners start their entrepreneurial journey with a very less capital. However, once the business gets operational, you’ll have a variety of reasons to borrow money.
Your first thought will be taking a small business loan. Of course, the US federal government has designed this program to help small business owners like you who need small business financing. It’s definitely the most convenient option. You’ll get longer payment terms, low-interest rates, and there is less risk.
But before you apply for a small business loan, there are certain things you should know. For instance, look at these data.
- In 2016, there were 28.8 million small businesses. (SBA Gov, 2016)
- Large banks approved only 24.1% of small business loans. (Biz2Credit, 2017)
If you see the numbers, it is quite clear that qualifying an SBA loan is not easy.
But if you want to see yourself getting approved for an SBA loan, then see to these things.
1. You Should be Having a Good Credit Score
Only a few manage to have a good credit rating.
But there are a lot of ways to develop a good credit score.
For instance, every loan you have taken and all the accounts payable/current liabilities must have been paid on time. Doing this, you’ll automatically improve your credit score and find it easier to qualify the loan.
Under SBA loan program, the credit score of the range 700-800 is preferred from the borrower. So keep your credit score above 700, because, anything below 620, lenders will not take you as the right candidate to trust their money.
2. Your Business Balance Sheet Matters
Banks see your creditworthiness by looking at your balance sheet.
Balance sheet explains your financial stand in the market and your lenders wish to see that. They analyze how much assets you have, the amount your business owes/the liabilities and the total net value of your company. Looking at what you have and what you owe, your bank will determine whether you should be receiving a loan or not.
Make sure the difference between your assets and liabilities is positive. This will automatically increase the value of your equity.
To show that your financial records are accurate, get them audited by a reliable source. This may look like a small work, but is important and may increase the chances of loan approval.
3. Approach with a Strong Business Plan
Why should they give you a loan? Lenders or banks want to understand what you’ll do with the money.
By submitting a good business plan, you’ll affirm them that you are putting the money for a good cause. And you’ll pay back their money without defaulting on the loan.
Be upfront with your business plan. Do you need money for purchasing equipment? Are you planning to expand your business?
Suppose your current business is not giving you any revenue and you are branching out to other places, then probably you’ll be rejected for the loan.
It’s just an example. Lenders will take it as an impractical decision as it puts them in a risky position of getting back their money.
4. Have Adequate Collateral to Back your Loan
You are yet to face the biggest challenge from your potential lenders.
I agree it’s a startup and it’s not possible to have a good balance sheet or credit score in such a less time. It’s obvious even you need some time to meet all the criterions.
But think as a lender. Why someone would give you funds just because you have a business plan or good credit score. What is the guarantee that your business will do good this year? Or how can you predict that you will make enough sales to repay every loan that you have taken?
Maybe things can go wrong or you would approach for more cash. Under such circumstances, there is a very less chance of you repaying the banks.
To avoid such risk, banks ask for collateral for the amount of loan you are taking. So, in case of loan default, they can take over whatever you have pledged and make up for their loss.
But the question is do you have the required assets that you can pledge and get a loan?
Qualifying for an unsecured business loan is a dream of every businessman, but not everyone will be fortunate enough to enjoy such privilege.
The point is if you are applying for a small business loans, be prepared with all these criterions because you’ll not get past without qualifying these factors.
In case if you are rejected for a small business loan, you can always approach online lenders or other financial institutions that present fewer restrictions. You need not exhaust yourself or spend your precious time running after lenders who are giving you hard time for a loan.