How to get a loan for a new business in few simple steps

Getting a secure source of finance is the first step towards beginning any type of business. If you have just started on a new endeavour and don’t know how to get a small business loan, this guide will be handy for you. Several business owners may find it to be a daunting task- from meeting the perfect credentials to getting down to making a convincing application.

Fortunately, we have got you covered. There are various facts you must know to understand how to achieve business loan eligibility and then how to proceed with the application. You will also have to choose the type of loan by understanding each type of loan’s differences. Follow this step-by-step guide to successfully get the loan of your choice.

What to do before you apply?

Preparing yourself to apply for a loan would imply you have to clear all the steps to be eligible to get the loan. If you don’t attain the eligibility criteria, your loan application may be rejected, and all the efforts shall go in vain. Thereby, it’s better to be aware and vigilant. Take the effort to do the bare minimum. The first step would be to attain a good credit score.

Having a good credit score can significantly boost your chances of having your loan application approved. Any money lender or bank would notice your credit score before proceeding with the loan application. A credit score is a statistical score that helps determine if you are capable of repaying the loan.

The credit score is directly dependent on your reliability with finances. Your personal credit score may not indicate your professional side, but it would be highly valued to get a loan for your new business loan. To have a good credit score, you must do the following things-

1. Pay all your debts on time.

2. Don’t depend too much on credit.

3. Always keep your credit accounts open.

4. Keep checking your credit report for errors.

The next thing to do before applying would be to analyse the amount of funding you need for your new business. If you are focusing on a small business, it should be easier to understand your expenses. Your loan application should denote that you must be capable of paying it back on time irrespective of what amount you demand.

All your expenses should be well accounted for. You must clarify how you plan to spend different portions of the loan for your business. This would mean a lot of planning along with business partners and financial experts. The amount can vary depending on the type of business and the market growth it offers.

The next step is to gather all the right documents to substantiate your qualifications. As a first-timer, you will have to gather more documents for the task. You should also discuss the type of documents along with the lender that you have chosen. The following documents should be kept handy:

1. Statement of purpose

2. Personal information documents

3. Business information

4. Bank statements

5. Financial plan

6. Tax returns for personal and business

7. Credit scores

8. Proof collateral

9. Financial documents, including balance sheet and income statements

10. Proof of collateral

11. Permits, licenses, and contracts

12. Business resume

What kind of loan to apply for?

There are various types of loans that are available for businesses.

Bank loans- They can be considered the most traditional option that can be good for most businesses. You can avail of business loans from any traditional bank, based nationally, regionally, or locally. Credit unions are also a good option. These bank loans can offer you the most affordable rates of interest and comfortable methods of repayment. However, they often have higher requirements from applicants, and it may be difficult to avail loans from banks for first-time business owners.

SBA Loans- These loans are provided by Small Business Administration and lending partners, including banks. An SBA guarantee makes your application more convincing for a money lender. They offer similar loans like banks, but they make it easier for applicants to be qualified. You would require the same merits as you would for bank loans. Some loan programs are also very welcoming for new businesses. Being customised for startups, they do offer certain points to relax credit score and other criteria.

Business Lines of Credit- This type of financing is somewhat different from the loans mentioned above. Here, you will have access to a pool of funds, and they can be used as per your business needs. They will remain unhampered if you don’t use them. Interest is only applicable once you have drawn out some amount of fund. After repayment, the line of credit is refilled. Thereby, this is also known as revolving lines of credit. They can be a great option for start-ups and new businesses. They are easier to access for new business entrepreneurs and also offer a lot of flexibility. Nonetheless, you must have a good financial report to be applicable for all the benefits.

Finally, just apply!

We have mentioned all the necessary facts that you should know to begin with your business loan process. The rest of the details shall depend on the type of loan you take up according to the business type. As intimidating as it may look, now you know how to get a loan to start a business. If you have always been careful with your money and have always maintained a good credit report, having a loan approved can be an easy task. Certainly, you have to be careful with documentation and other formal procedures. Make sure that you are friendly and polite to your lender. Having good connections can take you a long way in the business world!

Also Read:

1) Small Business Loans for Women
2) 8 Factors That Keep You From Getting A Small Business Loan - Eligibility, Process & more
3) Personal Loan for Women - Mahila Loan
4) OkCredit: Simple, Paperless & Secure solution for businesses

FAQs

Q. How can I determine the debt my business can afford?

Ans- You must calculate your debt service coverage ratio, i.e. DSCR. This is basically your cash flow divided by your loan payment. Your DSCR should always be more than one. This would ensure that you will be able to repay the loan that you are undertaking as your principal amount. This can be a useful parameter for your lenders to determine your applicability for the loan.

Q. What reasons should I give for a first-time business loan?

Ans- There are plenty of reasons that you can give for a first-time business loan. It could be to cover startup costs or to cover payroll. It could involve the purchase of equipment or machinery items. It could also be about covering rent payments to accommodate the office. You can also state the reason for business expansion or exploring a new business opportunity.

Q. What are medium-term loans?

Ans- Medium-term loans are offered as lump-sum amounts meant to cover one-off expenses that may be necessary to kick-start a new business. It provides you with a good amount of capital that can be repaid on a regular time scale. They also offer a convenient rate of interest than regular banks. Qualifying for medium-term loans can also be considered to be easier than other types of loans.

Q. Why should I have collateral?

Ans- A collateral is an option that can be used to make your loan secured and increase your chances to get your loan approved if you know how to get a business loan from a bank. A collateral is a property that can be seized by the money-lender of the failure to repay the given loan. It can be considered risky for first-time business owners, but it can increase your leverage to ensure getting approved for the loan.

Q. When should I go for micro-lenders?

Ans- Micro-lenders are non-profit organisations that offer short-term loans for businesses. They can be considered if you happen to have bad credit. You can go for them if you cannot get the traditional loan you had been planning for. They also require similar financial details like a bank, and they may also take a longer time. But they can be a good option for new business owners.