However, with the right preparation, acquiring approval for your loan is actually possible.
Here are major steps you should follow to ensure the success of your loan application.
It’s highly probable that the lender will ask you this question, so it’s vital that you give them a reasonable answer. Your answer should more or less fall into these categories:
- To start a business
- To grow the business
- To obtain a safety cushion
- To manage daily business expenses
Before you decide to apply for a loan, the amount you intend to borrow should be justifiable. Whether you are an existing or a startup firm, you need to carefully determine and clearly articulate why you need a business loan and how much you need.
Often, you’ll be able to answer the question of how much you need to borrow the moment you prepare your financial statement.
The reason you have for getting a loan will determine what type of business loan you should get.
If you’re just starting a business, there is a very low chance for you to get a loan during the first year of your company’s operations. Most lenders require cash flow to sustain the repayment of the loan, which is why startups are normally ineligible for financing.
But if you’re a business with more than a year of revenue, you have more options for financing. Out of the loans which you qualify for, choose one that has the lowest Annual Percentage Rate (APR) as long as you’re capable of handling regular payments.
The way you should carefully choose your type of loan must be similar to how you shop for a car. Once you determine which lender is right for you, compare two or more similar options based on APR or total borrowing cost and terms, and then make your informed decision.
When looking for the best source for your loan, look for a consumer finance services provider that offers the following:
- A simple, straightforward eligibility process
- Prompt, friendly answers to your enquiries
- Fast, efficient processing
- No extra fees for early loan settlement (prepayment charges)
Your credit spectrum status is one factor that will dictate which loan you’ll qualify for. If your company is a start-up, the lender will assess your personal credit history as well as your business credit history. Before you send in your application for a small loan, take time to get your credit history in order.
Request your credit report from any of the major credit reporting agencies and review it. If you notice any errors on your credit reports, write a letter to the agency requesting them to fix it. Take note that a credit score of about 700 is quite good and will increase your chances of getting an approval.
In addition to your credit score, lenders may also require the following:
- Length of business operations must be at least one year to qualify for most small business loans and at least two years to qualify for bank loans
- Minimum annual revenue
- Capability to make repayments
Once you know your options and requirements, it’s time to apply for a business loan that you qualify for and that fits your financial needs. Depending on who your lender is, you may need to submit a combination of these documents together with your application:
- Financial statements of your business
- Personal and business tax returns
- Personal and business bank statements
- Legal documents of your business (e.g. commercial lease, franchise agreement, articles of incorporation)
When applying for a business loan, you need to demonstrate your professionalism by being concise and organized in meeting the requirements. Different lenders have different standards, so make sure you choose one that you can afford to make repayments to and that suits your financing needs well.