Small businesses often find it a challenge to acquire the startup capital that they need. This is often due to the fact that banks have tight lending standards. A small business startup is a high-risk investment for a lending institution. It’s usually necessary to acquire outside capital in order to cover daily expenses and invest in business growth. Daunting as the task might be, if you are adequately prepared, your chances of being approved are much higher. Here are the essential steps you need to take in order to score that much-needed loan.
1. Determine why you need the money
Since lenders will surely ask this question, you need to put some thought into this. The money usually goes toward starting the business, daily expenses, business growth or having some cash reserves if business takes a downturn.
2. What type of small business loan is right?
Lending institutions usually deny a loan during the first year of a new business. They need to see some previous history of sales and cash flow so that you can prove your ability to repay the loan. It’s often necessary to use credit cards for the initial startup costs.
You could also go to friends and family to help with the initial costs for which you will give them a percentage of ownership at least until they are paid back. Once you have at least one year of operation on record, you can more feasibly approach a financial institution for an SBA loan, line of credit or term loan.
Find the best lender
There are many places where you can apply for business loans. These include microlenders, online lenders, banks and many others. The loans they offer could include accounts receivable financing, lines of credit and accounts receivable financing. Once you know the right type of loan and the best lending institution, shop around for the best interest rates and terms. A bank is your best option if you have collateral, good credit and you don’t need cash right away.
Check your credit
Before you begin approaching lending institutions, you should know your credit score in order to narrow down which types of loans you will qualify for. You can obtain a free credit report once a year from the three major credit bureaus. You can find out your credit score from various credit card issuers.
Gather essential documents
Once you know the type of loan you will qualify for, the next step is to get all the necessary documents together in order to apply and get the paperwork underway. If you want to apply for loans from multiple lenders, you can do so without harming your credit score if you do it all within two weeks.
Applying for a small business loan is a big hurdle. Once it’s done, then you’ve completed one of the hardest parts of starting a business. Once that’s done, you can concentrate more on how to offer the best service or products to your customers.