In order to grow their business, owners are often required to apply for a business loan. It’s an efficient way to acquire capital for new investments and business development. Given proper research, getting a business loan is not an overly complicated process, although it can be rather time-consuming. However, before you can even contemplate applying for a business loan, you will have to consider several things. As you will learn from this article, there are often more factors involved in getting a business loan than you would think initially.
Your Reason to Apply
Before looking into the loan application process, you will need to establish a valid reason for getting the loan. Do you want to improve the quality of your service by establishing connections with high-end providers? Or expand your company by beginning to provide a new service or product? Whatever purpose the loan would serve, you will have to have it clearly defined.
Only after doing that will you be able to work out a business plan you can present to your potential lenders. Your end goal can give you a clear picture of how much money you need and a time limit on when you would be able to return it. Plus, it will often determine what type of loan you can apply for.
Business Plans
The first thing lenders will look at when considering approving you for a loan is whether you have a well-established plan to grow your business. They will want to know how you are planning to invest the capital once you receive the money. You will have to show that given the funds, you will increase your business revenue. And have a detailed description of how you plan to do that as well.
Besides dealing with products and employees, this plan should also contain the marketing strategy you intend to use. By having a sound plan to deal with the competition and survive on the market, you will show that you will have enough capital to return the loan in due time.
Evaluation Time
While banks are considered the safest option for a loan, they will ask you for a lot more paperwork to collect, which will take a considerable amount of time. For small businesses, the loan process from the initial application to receiving the money can take more than six months.
If rejected, this evaluation time that you could have spent to further your business already will be wasted.
On the other hand, alternative lenders may offer you a faster way to get your capital, which is not always the safest option. If the evaluation doest take enough time to recognize certain risks, you can find yourself in a difficult financial situation. Because some businesses are considered to be at a greater risk of failing, taking the time for a deeper risk evaluation will be worth it for them.
Financing Options
If you want to find the best option that suits your business, you should contemplate all your lending options. Banks are usually everyone’s first choice for getting a loan, but they often require a lengthy and complicated application process.
On the other hand, alternative lenders offer more simple options and have a quicker evaluation process. The loan you are qualified for will also depend on the size of your business. If you have a smaller company, it’s a good idea to get matched with small business loan options so you can find the capital you need. This way, you won’t get railroaded with unnecessary and often problematic financial situations and be able to put up your business more quickly. Larger companies may have more options available, as they are more trusted by banks and other alternative lenders.
Your Credit History
In order to lend you money, reputable financial institutions will require proof of your good credit history. Most lenders will make decisions about potential clients only after they perform a hard credit inquiry on them. This entails checking your financial records for payments, overall credit history, and existing outstanding loans. The result of this inquiry can determine whether you will get approved for a loan or not, as any previous unsuccessful applications or nonpayment can get you rejected.
If this happens, your credit score will get lowered automatically, and you will have to work really hard to get any kind of loan in the future. Banks usually perform this check immediately after you have submitted your application. Unfortunately, alternative lenders do this when the application process is almost completed, so you will lose a valuable amount of time if they reject you.
The Stability of Your Business
Besides your own personal financial history, you will also have to show records of your company’s existing finances. The length of time you have records for can determine who will approve your loan application and how much money you can get. Most banks require that you have an established, profitable business for at least a year. This means that if you need a loan to start up your start business, you will hardly get approved by any bank.
Some alternative financial institutions may be more lenient, but most of them will still require you to prove that you have been in business for no less than six months. The good news is, if you can show that your company has the potential to be successful in the near future, alternative lenders can help you qualify for a loan.
After considering these crucial factors, you will be able to decide whether expanding your business is worth the risk of applying for a loan. And whether you qualify for one in the first place. Should you choose to move forward with your application process, you will have to be prepared to supply every document you need. You should also remember that there will be things to watch for after you get approved as well.
Don’t be tempted to deviate from your initial plan, as this can have serious financial consequences. Use the newly acquired money responsibly so you can watch your company grow and you can enjoy the fruits of your labor.
