If you already own a business or intend to start one, you should be ready to apply for a loan at one point of your career or another. Whether to get a starter capital, to keep your business afloat during particularly lean times or to expand, you should also understand that you cannot just get one whenever you want or need.
Here is a list of things you should know before you decide to apply for a loan.
1. Do I Qualify?
Before applying for a loan, you should find out the requirements of a specific bank you are going to deal with. If you contact them, they will most likely be happy to provide you with all the factors they study to decide whether one is eligible for a loan, such as credit score and cashflow. It won’t hurt to raise your credit score before you apply – you may find plenty of information on that online.
You may ask: why not just apply and see what comes out of it? There is a very good reason not to – a rejected loan is going to hurt your credit history and make it even harder to borrow in future. A history of rejected loans make you look like a bad risk, something no bank wants to touch.
2. What Are My Options?
Don’t think that getting a loan from a bank is your only option – modern market offers a lot of other opportunities to get the necessary cash. In addition to banks, there are nontraditional options like, for example, OnDeck – a platform providing loans to small businesses.
Now of course these nontraditional methods have their pros and cons: the aforementioned OnDeck will most likely charge you a much higher interest rate than average. The payoff is that the approval rate is higher and the approval itself is much faster than with traditional banks. In addition, you will have an option to pay in small daily instalments rather than in bigger monthly increments, which makes coming up with the necessary sums easier.
3. Does the Loan Have Prepayment Penalty?
Prepayment penalty is a penalty you pay if you decide to repay the loan before a particular period of time elapses. These are included in contract to protect the lender from the loss of paid interest over time.
In some states, banks are allowed to include this clause, which means that you certainly should pay attention to whether your particular bank does. If yes, and you believe that your business is likely to grow quickly, you may try to work out a compromise – for example, to shorten the period of prepayment penalty.
4. How Much Money Do I Need Exactly?
It may be a difficult question to answer, especially if you don’t have any prior business experience. Don’t rely on your inexpert estimates – consult a good financial adviser or accountant before you start drawing up your plans. He will tell you what documentation you are going to need to prove your needs, and will help in estimating the exact amount you should ask for. Business plan, future expansion plans, finances – you should be prepared to discuss it all with your lender, and an accountant will run you through this future discussion.
It pays to be prepared – if you ask for a certain sum, the bank may (and will) ask you to build a cashflow projection, and if it shows that in actuality you need twice as much, it isn’t going to stand very well with the lender. Here is a great list with how much loan actually offer. There are many companies compared.
5. Do I Have All the Necessary Documentation?
Speaking about documentation, a fun fact – according to a number of studies, as much as four loans out of ten never close – not because those applying for them are outright rejected by banks, but because they businesses cannot provide all the necessary documentation on time. Your resume, business plan, business credit report, income tax returns, financial statements, accounts receivable and payable, collateral, business licenses, commercial leases, copies of contracts with companies you deal with now, franchise agreements – these are just some of the documents that a bank may demand of you.
Again, it is better to learn of requirements beforehand – if you go to a bank unprepared, it a)demonstrates your unprofessionalism and b) means that gathering all the documentation is going to take even longer.
6. Do I Have a Business Plan?
The first thing a lender wants to know when you apply for a loan is whether you will be able to repay it. How feasible is your business idea? Do you understand the market you are going to operate in? Are your products or services really in demand? In most cases, a business plan should contain at least an executive summary, definite description of the business’ mission statement, projected revenues and expenses, analytical information on market and existing competitors, growth and expansion strategies and cashflow projections.
Make sure your business plan shows that you are going to have enough money to make timely payments. Writing up a business plan can also uncover some problems with your project that you may have not realized until now – all the more reason to treat it seriously.
7. In Case of My Death, Who Is Going to Repay the Loan?
Not exactly a happy question, but one you should certainly consider if you have a family and want to be prepared to all eventualities. You should understand that borrower’s death doesn’t automatically cancel the debt out. Banks can and will come to collect from the members of your family. Which means that you should pay special attention to learning about the lender’s policies in this respect. It is also a good idea to use personal property and casualty insurance that takes business debt into consideration.
8. Do I Have a Clean Personal Record?
In addition to your projected ability to repay the loan, the lender will want to know who trustworthy you are. Do you have a history of being late with payments? Have you ever accumulated too much debt? In other words, you should know your credit report and, if possible, improve your standing. Repay your debts, get personal references, complete tax returns for the last few years – all this is going to take some time, but it is all going to pay off in the long run.
9. Will the Loan Go into Growth?
Ask yourself what you are going to use the loan for. If the money is intended for everyday operating expenses with the hope that your business is going to look up in a short while, it simply means that you struggle to keep it afloat. Half a year from now you are going to be in an even worse situation than before, because it will be exacerbated by a new loan to repay.
If you take a loan, you should make sure it will be used to grow, expand, make qualitative changes, so that you have more cashflow when the time comes to pay back.
Getting a loan that will actually do your business good instead of burying you deeper under a mountain of debt is a difficult task – but if you approach it well prepared and know what you are doing, this task is quite manageable.