For small businesses to get off the ground or keep operating optimally, they require financing, which is often in the form of small business loans.
Small businesses can apply for funding from various lenders such as banks, credit unions, and other financial institutions.
Now, if you’re looking to fund your small business, here are the six crucial steps that you need to follow.
Assess your Needs
The first step to applying a loan is determining why you need it in the first place.
My recommendation is to start here before you ask a loan from lenders; In any case, the “cause” is the primary concern of any lender.
Also, determining why you need a loan might play a huge role in determining the type of loan you apply, and the amount the lender will be willing to grant you.
There’re various reasons why small business owners might need a loan, ranging from purchasing equipment, invoicing to expanding.
Whatever the reasons, carefully assess your needs and be honest with the lenders.
Calculate What You Can Afford
Understand the amount you need is not necessarily the amount you can afford.
You need to have realistic goals of what you can afford to repay.
According to Entrepreneurship, repayment capacity provides insights into your ability to generate funds and clear your debt.
If, for instance, you take too much, you might end up in debt. On the other hand, if you take too much little, you might miss the boat with the venture you’re looking to fund.
Ideally, when calculating your financial muscles, you should strike a balance between your business needs as well as your financial health.
Your financial projection should satisfy your business venture, and at the same time, they should not be hard to clear.
Two effective ways of calculating the appropriate loan amount for small businesses is through a loan calculator or using a debt service coverage ratio.
Pursue Different Types of Loans
By now, you are aware of the ideal amount you’ll need for your project, and it’s time to look at the various funding options.
There’re numerous loans in the market for small businesses.
Some of the loans include;
- Term loan
- Equipment loan
- Lines of credit
- Merchant cash advances
- Invoice financing
Each of the above loans is suited for different business models.
For instance, an equipment loan is a suitable option for small businesses looking to purchase machinery as opposed to renting.
Term loans, on the other hand, is a suitable option for small businesses looking to get advanced with a lump sum of money.
When selecting a loan, you need to keep the reason for wanting the loan, as well as your budget.
Finding a Lender
The next step is to find a lender that is suitable for your venture.
With plenty of lenders in the market, choosing one that fits your needs can be challenging.
Three of the most popular lenders that you seek your funding are banks, micro-lenders, and online lenders.
Each of the above lenders has its benefits and drawbacks. You will need to compare their services thoroughly and determine which is best for you.
Here is a suitability guideline for the three lenders we’ve mentioned above;
Banks– They’re ideal if you can provide collateral and have good credit. However, they don’t process funds right away
Microlenders– They’re suitable if you can’t get any other loan because of the size of your company.
Online lenders– They’re ideal for small businesses with no collateral and need cash fast.
Assess your Eligibility
Once you’ve settled on a particular lender, the next step is to assess your eligibility and see whether you’re fit for their funding.
To determine your eligibility, you need to assess your credit score, assess your financial muscles, and factor in how long you’ve been in business.
The three, however, are just some of the factors to consider.
Ideally, you should determine the eligibility criteria based on the requirements of your preferred lender. This is because every lender has varying requirements.
Prepare and Apply
Assuming you’ve successfully found a loan option that will work for you, you need to prepare and apply.
First things first, compile all the necessary documentation and apply.
Typically, lenders will require;
- Tax returns
- Legal documents
- Financial statements
- Business plan
- Business license
While preparing and applying for a loan is immensely intimidating; it’s worth the risk.
After all, if the request is granted, it easier for you to take your business to new heights.