Are you searching for a way to get a small business loan to grow your business? Or do you just need a capital to start a new business?
Getting a loan for a business is not hard as most people make it look. The fact is that most people lack proper information when it comes to getting a loan for their small business. Today, you can get business loans online; you can get from family and friends, banks, government or investor. No doubt, if you have the right information, you won't struggle to find a small business finance source.
Nonetheless, starting a new business can be very confusing, you need many things and most of them require money - lots of money. Before now, most people that want to start their own business or refinance their small business usually get any amount of loan they need easily from the banks. However, banks have become a lot more selective these days. A report showed that more than 82% of small business loan applications are currently being denied by the big banks.
Most banks are reluctant about giving out loans to new businesses because of the inherent risk. Moreover, it cost banks just as much to underwrite large loans as it does small loans (lower than $250,000) and most small businesses do not need a larger loan.
In this article, you will learn the ultimate six steps to get a small business loan:
Step 1: Decide Why You Need a Small Business Loan
You need to have a clear idea and understanding why you need a loan for business. Don't just decide to get a loan because others are doing it. You have to figure out where the loan will go and how it can help your business grow.
Before you begin seeking for a loan; first check if your personal savings can take care of your business need. If you have enough in your savings to finance your business, there is no need to go and put yourself in debt. Every lender, including the bank and private lenders, will certainly want to know why you need a loan, how you plan to spend their money and your payback plan.
You must have these things figured out before you start searching for a small business finance source.
Step 2: Decide How Much Business Loan You Can Afford
The amount you want to start your small business may vary from the actual amount you need. You can be able to decide how much you actually need when you figure out how to spend the fund and how much of your savings you want to invest in the business.
When you are searching for a loan for a business, some small business finance source will try to convince you to take the maximum amount they offer. This could be a trick to put you in debt and take over your business. Figure out exactly how much you need so that you don't get too much that you enter into debt or too low that you still need more loan.
You can know how much you need by calculating your Debt Service Coverage Ratio (DSCR). This is the number business lenders use to know whether you can afford to service the debt. If you don't know how to calculate DSCR, get an accountant.
Step 3: Prepare Your Business Plan
Obviously, you need a business plan when you want a loan for business. Whether you want to get a loan from traditional sources such as banks or business loans online lenders, they must demand to see your business plan.
The secret of getting the loan you need lies in having a great business plan. Your business must have accurate projections, it must state the nature of your business, how to fund the business, and also show profit projections. Remember that business plan could be a lifeline, make sure it looks professional; you can hire a professional to help you write your business plan.
Step 4: Gather All Essential Documents and Information
When your business plan is ready, you will need to add other supporting documents that are needed by small business finance sources.
These documents are important in verifying your intention, your identity, your business, and of course, will determine if you will get a loan or not. They are documents that contain information such as your:
- Credit Score
- Average Bank Balance
- Proof of Identity
- Employment Status
- Time in Business
- Balance Sheet
- Profit and Loss Statement
- Annual Revenue
Step 5: Approach Banks and Government Agencies For Small Business Loan
Ideally, you can try your hand on banks if you have a stellar credit score. The great thing with big banks is that most of them can be able to provide you with 70% of the fund you need for your small business. Once you have a good credit score, business plan, necessary documents, high DSCR, most banks will give you the loan you need.
The second option will be to approach government agencies for small business loan in your region. The type of loan and rate may vary depending on your region. However, this is a great option since it usually involves small interest rate. I will recommend checking if you qualify for this option before seeking for a loan from other small business finance source.
Step 6: Approach Private Investors and Business Loan Online Lenders
If the bank denied you or you do not qualify to get a loan from the government, the next viable option is to get the loan you need from private sources.
You can get a loan from friends, family, Angel investors, venture capitalists, Grants, and more. Another great alternative is to search for business loan online lenders. There are many organizations online that are willing to give you the fund you need to start or re-finance your small business.
The great thing with these loan sources is that they don't demand a lot of documents and they are most likely to approve you faster. You can find these lenders online when you need to get a small business loan.