To successfully get a business loan is no longer as easy as it used to be. These days lenders require a lot of guarantees. In order to ensure that they are financing the right business. The term ‘right business’ refers to any business which will bring a profitable return on investment.
All kinds of business no matter how small need capital to be able to stay on its feet. Without capital, there is no point in even owning a business. Some business owners are unable to meet the capital needs of their business. As a result, people try to get a business loan. Here will be talking about all you need to know to get a business loan.
What Is a Business Loan
A business loan is essentially a financial assistance rendered by a third party to a business. This financial assistance is usually termed as a loan. The loan comes with an interest which serves as the fee you pay for acquiring the financial assistance.
Before any you can apply for a loan, you must know how a loan works. You should also try to find out what the lender will be looking for in a business that needs a loan. Knowing all this leaves you properly prepared. There are basically two types of loans you could get. They are;
- Secured business loan.
- Unsecured business loan.
A secured loan is the type of loan which is backed by a collateral. This collateral could be an asset owned by the business which is equal to or more in value than the loan taken out. If you default on the loan repayment agreement, the collateral will be forfeited. In order to ensure that the lender has a chance to get back the financial assistance rendered.
The other type of loan for businesses is the unsecured loan. From the name you can guess that it does not need backing. If this was your guess, then you are right. This kind of loan attracts a high-interest rate. So if you declare bankruptcy, the lender has a claim on your business assets.
Why You Should Take Out a Loan For Your Business
Taking out a loan is not a decision that should be taken without a good reason. Lenders will be reluctant to grant you the financial aid you seek if they feel it’s not worth it. Therefore, you create a loan package which is professional and detailed. A loan package is a document which you prepare to apply for a loan. Here are some reasons which business owners apply for loans;
- To finance a business project. The business project involves plans to expand and/or restructure your business. This takes a lot of business capital and might endanger the business if it is carried out with aid. As a result of this, you justified to take out a business loan.
- Loans are also taken out to run the day to day administrative activities of the business. In order to pay salaries and buy office stationaries.
- You can also take out loans to pay debts. This involves asking for assistance to pay for a loan which is overdue. The lender can decide to pay for the outstanding loan and extend the deadline. In this kind of arrangement, the lender becomes the new creditor.
These are just a few reasons to seek financial aid from a lender. Your creditor will always like to know why and how the loan will be used. So be sure to properly state the reason the for the loan and details how the loan will be used.
How To Get a Loan In 4 Easy Steps
Taking out a business loan is a tricky arrangement. The littlest detail might make your loan package to be rejected. Also getting the best possible terms for your business can prove to be difficult. With these steps outlined here, you have a good chance of getting the loan you want;
- Before you apply for a business loan, ensure that you have a cordial relationship with the lender. The lender could be the bank who handles your business accounts. It could also be the firm that takes care of the pension account of your business. This ensures that there is an existing cordial relationship between you and the lender. A cordial relationship which exists between you and the lender means there is trust.
- The next step is knowing what the business loan is for. There should also be a detailed outline of why you need the loan. Present this in a way that makes the lender think that you are the right business to assist with a loan.
- You must make an accurate estimate of how much the business needs to finance whatever the loan is for. Underestimating the loan amount needed leaves you in a position where you run on capital. Also, overestimating the loan amount might have the lenders think that you are trying to swindle them.
- Also, prepare a loan package which adequately describes the entire business. A loan package usually contains the business plan of the business; cash flow statement and information which you don’t find in public records.
Once you have submitted the loan package, all you have to do is wait. It usually takes up to 3 weeks or more to get back to you. This is because the lenders will carry out research of their own.
5 Factors That Improve Your Chances of Getting a Loan
- Business Credit Score.
- Debt to Income Ratio.
- Age of Your Business.
- Industry Risk Ratings.
- Cash flow of the business.
There are certain factors which every lender concerns himself with. This is usually a deciding a factor as to whether you the get the loan or not. They are;
- Business Credit Score – having a high credit score gives you a good chance of getting a loan. High credit scores are what lenders look out for. Business credit score range of 650-700 is considered above average. A credit score range of least 700-800 is even better.
- Debt to Income Ratio – a debt to income ratio of any business should be kept at the barest minimum. Lenders like a business where the debt payable is less than or equal to 33% of the GMI (Gross Monthly Income)
- Age of Your Business – the older your business the higher your chances of getting a business loan. This is because a business which is 2 years and above are said to have a cash flow history. You also get the chance to apply for unsecured loans.
- Industry Risk Ratings – any credible business should be able to find out the rating of their industry. This rating is gotten from the SIC codes. These codes are ranked and are given by the government.
- Cash flow of the business – a lender likes to give business loans to businesses which have a high operating cash margin. They feel that such a business has a good chance of growing on a long-term basis.
With these steps and tips, any business should be able to get a loan with little or no issues. If this helps you get the loan you desire you can let us know.