Obtaining small business loans is not always an easy task because there are multiple factors at work here which the lending party considers before granting or denying a loan request. The most important of which is, of course, whether or not you will be able to pay back with interest what you are taking from them.
Nevertheless, there are ways to make sure that their decision sways towards granting you your loan request and we are going to discuss a few of them here.
Preparation
It doesn’t matter whether you are starting a new business or trying to expand your old one, you will need to prepare before asking for a loan. In case you already have a business that you are looking to expand, be ready to present the following details.
- Personal financial status
- Business profits for the last few years
- Accounting records
- Proof of debt clearance
If you are a budding entrepreneur, you will have to bank on your personal finances, credit score, credit report and your presentation of the business plan to the money lenders. It takes time to prepare before asking for a loan, so take that time and use it wisely.
The Different Types of Loans
You must know the difference between the various types of loans to understand which one is the right choice for you.
- Term Loan – This is the general type of loan which the borrower pays back with interest in installments within a prefixed time schedule
- Short Term Loan – Similar to term loans but with a shorter timeframe to pay it back
- Long term Loan – Huge loans that span for a long time and usually have a low rate of interest
- SBA Loan – Term loans endorsed by the Small Business Administration
- Business Line of Credit – It’s a loan that’s always available to a business and only the money you use from the total available amount needs to be paid back
- Equipment Financing – Loan given to buy new business machinery necessary for operation or growth
- Alternative Financing – All other types of loans that don’t have anything to do with the bank; peer-to-peer loans, cash advances, crowdfunding, etc.
While these are the main types of small business loans, this is not a conclusive list and some lenders even offer other types of credit such as specialized startup loans, invoice financing, personal business loans and business credit cards. Look over your options and the various terms of agreement before signing anything.
Know the Risks
Any business can fail and small businesses do fail more often than large ones with multiple investors behind them. This is why it is important to calculate your risks first before asking for a loan if you have plans of launching a startup. Besides, if you are aware of the risks involved, you will be able to answer your potential lenders when they ask about them, with confident responses. It also makes sense to be aware of certain properties of the borrower which lenders see as a red flag.
- Insufficient collateral
- Unimpressive profit history
- Bad credit history
- Dubious or messy financial records
- New business with an unclear plan of action
Just like you will have a hard time getting a loan in certain situations, you may also be getting a lot of loan offers if you tick all the right boxes. However, do go through the details of all the offers and don’t just sign up for the first one you get. If required, feel free to ask for legal assistance in the matter.