1. Business loans are not easy but not impossible
Business loans never get enough funding in the beginning. Banks or traditional lenders only loan money to established, serious businesses that have a monthly regular revenue stream. The five C’s bankers want to know about business owners before giving a loan are:
- Character to maintain a good management team
- Credit score above 700
- Capacity to repay the debt
- Capital to handle day-to-day cash flow
- Collateral to show as an asset
2. Business loans should have a purpose
Both the borrower and the lender need to completely understand why the borrower is seeking this type of capital and what it is needed for. A lot of time and expenses are involved in business loans. Consider whether you actually need a business loan and if it will benefit your company before applying.
3. Business loans need thorough research
If you are able to determine the purpose of your business loan and you feel the loan is necessary, then do some research and take some evaluative measures in choosing the right lender to get funding for your business. Take experts’ advice and recommendations and watch YouTube podcasts and other recommended videos to educate yourself and be aware of the risks involved in the business loan application process. Prepare a list of questions to bring along when you compare loans from different lenders. Check online loan search engines such as Magilla Loans, who is not a direct lender but a platform that connects borrowers to lenders without requesting their personal information. Finally, check for genuity, office locations, contact details, a valid website, social media presence, reviews, and recommendations.
4. Business loans are time consuming
Business loans need thorough research and extensive amounts of paperwork so they can be very time consuming. A lot of time is involved in assessing, evaluating, documenting, appraising, and closing a business loan request. Give lenders enough time to get back to you with an answer.
5. Business loans need paperwork
Documentation is a part of business loans. The following is an important list of paperwork that you will need to prepare for a business loan:
- Your equity investment in the business
- Personal and business credit reports
- License or registration
- Franchise agreements
- Articles of incorporation
- Commercial leases
- Third-party contracts
Existing businesses should provide financial documents such as tax returns for the past three years, accounts receivable and payable, balance sheets or profit and loss statements, and bank statements from the past year. A missing form could disqualify you from getting the business loan you need so it’s important to ensure you get the exact required paperwork the lender requests.
6. Business loans need personal credit history
Business loans get approved only if you showcase a good credit score. Lenders want to see how you have handled debt in the past and make sure that you do not have a history of defaulting or making late payments. This goes a long way in assuring them that you are responsible with your financial commitments. You must be current on your mortgage or rent payment and have no bankruptcies in the past three years.
7. Business loans need business credit history
Business loans ask for company credit history depending upon how old the business is. Before beginning the application process, it is advisable to review your business’ credit report. Your business credit score must be above 600 to secure financing from a traditional lender, such as a bank or credit union.
8. Business loans need investment information
Lenders want to know about the investment information related to a business loan application, such as how much money are the owners putting into the company. Lenders want to know estimation of sales, revenues, and return on investment information. They also look for appendices, such as any research borrowers have conducted, charts, graphs, logos, and other images.
9. Business loans require a solid business plan
Whether you are applying for a loan from a traditional lender or an alternative lender, a thorough business plan is a must. You need to demonstrate that you have a well thought-out and organized plan of action and explain how you plan to spend the loan in order to achieve your goals. A solid business plan includes the following:
- What does your company do? What product or service does it provide? Explain what makes your business unique.
- What is your company’s location and its target customers?
- What is the management structure of your business and the qualifications of your management team?
- How do you differentiate your business to ensure its success?
- What are your sales and marketing tools, as well as promotions or public relations campaigns?
- What does your company do to attract new business?
- How do potential customers learn about your business?
- What is your financial data such as detailed estimates of expenses, expected sales, and costs, a break-even analysis, and cash flow projections?
- What is your latest education and employment history?
10. Business loan options
Before approaching a lender, educate yourself on the types of loans available in the market, the terms you can expect, and what documentation will be required to determine eligibility. Business loan applicants should understand one fact, that there is way more options available. If the one that they are looking for doesn’t work, there are multiple other options. There is not just one source of funding to lean on and get yourself trapped. Following are the business loans that you can choose from:
• Secured loans require collateral to back up the amount of the loan,
• Equipment loans are granted specifically for the purchase of new equipment, using what you purchase as collateral.
• Construction loans provide funding to expand your existing location or build a new facility, and the building is considered collateral.
• Micro loans, they match borrowers with lenders. They kind of do the real hard work for borrowers.
• Crowd funding is an innovative way, of giving little bit of loan to somebody else who is keen to start out a business and raising money by taking a little bit from everyone. Crowd funding works best for startups with visually appealing consumer products like tech gadgets, apparel and food and beverage
• Rollover for business startups (ROBS) allow business owners to invest funds from their retirement account i.e your 401 k account into your new business without paying early withdrawal penalties or income taxes. Essentially they are buying stock in their company with funds from the 401k and holding that stock inside their retirement account. ROBs are best for people who have at least $50k in their retirement account. Very little risk is involved if it is done in the right way.
• HELOC/HEL Home equity loan and lines of credit are used by 25% of US small business owners to fund their business. That’s because the Home equity loans and lines of credit allow borrowers to leverage equity in their homes to borrow money for their business. Because the loan is backed by borrower’s home this is generally the lowest interest rate financing options for startups. This is the best option for those who have more than 15% equity in their homes and a credit score above 620.
• Peer-to-peer loans enable borrowers to get a three to five year by filling out an online loan application and finding investors willing to lend them money. If they qualify, they can get upto $5ok in just two weeks. If their credit score is above 700.
• Borrow money from friends and family. They sometime jumped right out since they believe in borrower’s business idea and offer money. With a stellar business plan that business owners sign to formalize borrowing money from friends and family.
• Raising money from angel investors and venture capitalists. Venture capital generally comes from a company or firm whereas angel investors are usually wealthy individuals acting on their own. With both angel investors and VCs borrowers can raise debt free money. But it is important to establish upfront and contractually how much control they will have in your company. If you have a solid business plan with your financial projections and you are confident that your business can provide a ten times ROI enough angel investors and venture capital might be right option for you.