Looking to expand your landscaping business? or cleaning service and need a loan to increase your business? Small business owners often find themselves in binds due to lack of enough money. Small business loans breathe life into these businesses and make it possible for them to keep running even during tough moments. While there are different small business loans tailored to benefit small to medium-sized businesses, it is not automatic all get approved to access these loans. Some qualify and others fail to secure even after following all the defined steps.
Making sure you are fully prepared to secure a loan (which goes beyond following the outlined steps) increase the approval rate.
Business loans you can qualify for include:
- U.S. Small Business Administration (SBA) guaranteed loans
- Banks loans
- Equipment loans
- Business lines of credit
- Merchant cash advances
- Invoice financing or accounts receivable financing
Common type of loans for small businesses
But what actually do you need to do to get approved for a business loan? Before we dive in, let’s have a look at the common types of loans suitable for small business owners.
- Equipment loans: Help you pay for both heavy equipment and physical assets your business needs to operate.
- Merchant cash advances: You get a lump sum payment in exchange for an agreed percentage of your future sales.
- Business lines of credit: With this type of loan, you pay interest on the amount you have spent.
- Invoice factoring loans: With these loans, no more waiting for your customers to pay you. You run your business as usual. The lender pays you the invoice amount minus a fee and then proceed to collect from your clients.
- Term loans: Can get you a lump within a short period, for example, within 24 hours but be prepared for the high-interest rate.
- Peer to peer lending: Here, you borrow a certain amount from a group of investors. Often in an online format.
- SBA-backed loans: These are reliable and low-interest loans recognized by the U.S. Small Business Administration.
- Working capital loans: Allow you to access funds you need to run your business core functions such as employees’ salaries and daily operations.
- Unsecured business loans: You don’t need collaterals to access them. Most lines of credit and credit cards are unsecured loans.
Short term or long term loans?
You can either apply for a short-term loan or a long-term one. Short-term loans are ideal when you need quick cash urgently. For example, when you need a crucial piece of equipment. Long-term loans are perfect when you need a lot of money to grow your business. You get enough time to repay them. What is the eligibility for small business loans? To qualify for business loans there are a few things you must meet. Below we have outlined some of those requirements.
- Credit score: Your credit score is very valuable when applying for a loan. Make sure it is above 650. If below, start working on improving it before applying for a loan. Fortunately, it is possible to improve it.
- Annual revenue: Most lenders will ask for your annual revenues before starting the loan application process.
- Net operating income: To be confident you can repay on time, some lenders will go an extra mile to make sure your income is higher than your total expenses.
- Age of your business: A good number of lenders have limits on when a business qualifies to access loans. For example, you may be told your need to be in business for at least a year to secure a loan. Although lenders have different terms regarding when business qualify for loans, some have friendly terms. So, find a lender who suits you best.
- Potential collateral: When applying for secured loans, make sure you have some securities you can use upon request. Otherwise consider unsecured business loans.
- How you intend to use the money: Planning to buy new equipment, pay your employees or foot other business expenses? Some lenders require stating why you are applying for a loan to determine how much you qualify for. Make sure you are particular about the reason.
8 Steps to getting a business loan
1. Know the reason for and the amount you need
Do you actually need a loan? Why do you need one? It is easier to apply and secure a loan once you identify the need. For example, your business may be needing a crucial piece of equipment to run seamlessly. In such a case, it will be easier for you to calculate the amount you need. If not sure how much you need to borrow, consider preparing or revisiting your financial statements.
2. Design a business plan
A business plan is the most powerful tool every business must have. With a well-designed business plan, you can easily tell how much you need, why you need such money and how fast you can repay. Without it, you may end up making huge mistakes that can sink your business.
3. Review your credit history and credit score
Your credit history and score either increase or decrease your chances of securing a business loan. If your business is less than three years old, be prepared to have your credit history evaluated. So, you may want to make sure your credit history is in order. Make sure to analyze your credit reports very well for any error, and if you see any, don’t hesitate to notify the concerned agency. Always make sure your credit score is above 700 to increase your chances of being approved for a loan.
4. Review your borrowing options
Today you have many options when it comes to finding funding for your business. For example, you can opt to approach a microfinance instead or a large commercial bank. To be sure which lender has the best products for your business, make sure to research well. Feel free to consult if you find it daunting to pick the right lender.
5. Visit your local SCORE and SBDC offices
SCORE and SBDC offices are very resourceful places to visit when planning to secure a business loan. SCORE is a non-profit, volunteer group of retired business executives. You can count on them for reliable advice before applying for a business loan. SBDC (Small Business Development Center) which are part of the Small Business Administration (SBA) also exist to support businesses in many ways. You can visit a center near you if you have any concern about loan application.
6. Keep proper financial records
It is easier to secure a business loan when you have proper financial records. Lenders will always want to see how you manage your money. So, do everything possible on your end to practise the best financial record-keeping practices all the time.
7. Plan a presentation
Loan officers consider a lot of things to approve business loans. To make your application compelling, make sure to put together a professional package. A good package must have all crucial information, including financial statements, charts, graphs and spreadsheets.
8. Make an appointment
Once your presentation is ready, make sure to schedule for the appointment and request enough time. Remember to be fully organized that day. As you can see, getting approved for a business loan requires enough preparation. So before you make an appointment with a loan officer, make sure you are fully prepared for the entire process.
Hopefully, you enjoyed reading this piece. Once you obtain a loan for your business and looking for an invoice recurring billing software, we are here to help!