Originally posted on https://www.formulafunding.com/small-business-loan/
Getting a small business loan can help your business add to its offerings and gain momentum, both in terms of profitability and growth. This is especially true when a business is first starting and is seeking market credibility. But the process itself can be daunting for those who have never been through it before, but when you break it down into manageable steps, you will realize that it’s not nearly as intimidating as you might initially think.
Before taking out a loan, you need to ask yourself why you need it. This will also be the first question that any lender will ask you too, so it’s good to reflect on the answer before applying for the loan. As a business owner, you may need working capital for a variety of purposes, or you may have one specific need in mind. Common reasons for seeking a small business loan can include the following, among others:
If you don’t know your exact needs at the outset of seeking a loan, it’s always a good idea to refer to your business plan. It can remind you of your overarching business goals and help to tie the loan to your overall plan for your business.
Once you know why you need a loan, you then have to identify how much you would like to seek (or can qualify for) and then select the right type of loan.
In order to determine the amount to request, you have to take into consideration your company’s financial health, which will determine how much you can qualify for, and then understand the terms of different types of loans to make the best possible decision.
When considering your company’s financial well-being, you will want to account for several factors, including:
Looking at current profits and losses will also help you to determine if your incoming revenue will be enough to cover the payments for the loan you are seeking. Frequently, lenders use a Debt Service Coverage Ratio (DSCR) to determine whether you can afford the loan you would like. This ratio looks at your average monthly net income divided by your monthly loan payment. If the number is over one, then you can cover your payments.
When considering the right type of loan, it’s best to go back to your identified purpose. Depending upon what that is, you may want to seek a startup business loan, an SBA loan, term loans, business lines of credit, or a working capital loan. Each of these comes with their own terms and rates, depending upon the lender so you will want to shop around for the right lender too. Lenders can be banks, crowd funders, micro-lenders, or online lenders. You have many options, so it is best to explore all of them before making a decision.
Usually, if you have a good idea of how much your company can qualify for given its current financial situation, and you know the type of loan you are seeking, the qualification process will go very smoothly. Lenders will take a deep dive into your finances at this point, so you should be ready to provide them with the necessary information. This process can include looking at your credit score, how long you have been in business, what your annual revenue is, and whether you can afford the monthly payments. The process by which lenders consider these factors is subjective, and some may be tolerant of more risk (usually with a higher interest rate), which is an additional reason why shopping for the right lender is a crucial part of this process.
This part of the loan process is generally the most tedious since it often requires the completion of large amounts of paperwork; this is especially true if you are applying for an SBA or USDA loan since you will have to complete paperwork for both the lender and the governmental agency that oversees the loan program. While each application will vary in terms of what documents are necessary, usually you will be required to provide the following:
In short, the more prepared you are for applying for a small business loan, the smoother the process will go. While this process may be incredibly time consuming, securing the right loan from the right lender can ensure that your business is ready to meet any needs it encounters as it moves into its next phase of growth.
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