With a bit of hard work you can put your dream of starting a business into action. It’s by no means an easy task but if done correctly it can be hugely rewarding. Choosing a name for your business, registering your business name, and finding out your state’s laws regarding licensing and insurance are some of the first basic steps. Any type of business venture requires money to start up. Fortunately, there are small business loans that can help you achieve this goal. If you are in need of a small business loan it’s beneficial to follow the below necessary steps.
Check Your Credit Report and Score
The very first question you need to ask yourself is, do I even qualify for a small business loan? One very large factor that will come into play is your credit history and score. Check to see if you have a credit score high enough to qualify for a small business loan. You can obtain a free credit report on line. Examine the report thoroughly. The score is important but the history is very important as well. If there are any negative spots on your report such as late payments or collection debt be prepared to explain these to the lender. In the event that your credit score or report might be an issue getting a loan there are several steps you can take to improve your score but that will take time.
Establish How Much Money You Need
Once you are sure your credit score and report are both up to par you will need to establish how much money you need. Taking out more than you need can really put you in a bind in the future. Be sure to take everything into consideration when making calculations. Will you need to purchase a building? Equipment? Do you need a budget for travel expenses or a vehicle? Making a spread sheet is helpful to keep your thoughts and potential financial needs organized. Bring the spread sheet with you when applying for the loan. It will be helpful for the lender to see a break down of all you need the loan for.
Figure Out How Much You Can Actually Afford to Borrow
While establishing how much money you need is very important, figuring out how much you can actually afford to borrow is imperative. Consider your debt to ratio income. Debt to ratio income is the amount of money you have going out each month to pay debt divided by the amount of gross money you have coming in as income monthly. The result amount is what a lender would consider when establishing the monthly payment, you would need to make to pay off your small business loan. It’s ideal to have quite a bit more coming in than going out. Doing that calculation ahead of time can help you see how much you can actually afford to borrow. It may be less than you need, but it could be more.
Select the Type of Loan Best Suited for You
There are several types of small business loans. Doing your research ahead of time to establish which type of loan you need can save you time and trouble. There are term loans available for small businesses. Term loans require the interest to be paid monthly and the principal is usually due within 6 months to 3 years. There are also small business loans in the form of a credit card which require just a flat minimum to be paid monthly over a period of time. If you need a loan for equipment there are loans specifically for equipment only. Most equipment loans usually require a 20% down payment of the equipment cost up front though. Once you have established which type of loan you need it’s time to move forward.
Find a Lender
Once you have completed all the above steps, it’s time to look for a lender. You can find a lender many ways. Word of mouth from a trusted friend is one way to find a lender, online research is another. Pick a few you are interested in and call them and ask questions. Read reviews on google. The most important thing is to do your research before making a decision.
Gather all Necessary Documents
Before sitting down with a potential lender, it is wise to gather all of the necessary documents needed to apply for a small business loan. You will need statements from your financial institute, your business license, your Federal Tax ID, future financial projections, the legal structure of your business (LLC or corporation documents), and tax info. This is just the basic paperwork. Your lender my request other things as well. Coming in as prepared as you can saves you and the lender a lot of time and extra trouble.
Calculate Your Total Collateral
You will have a much more successful chance of obtaining a small business loan if you have collateral to put up. Collateral is something valuable put up as security for repayment of a loan in case of default. This can include any equipment, real estate, vehicles, or accounts receivables. Remember if something goes awry with this loan you will lose your collateral so it’s important to only put up collateral that you are willing to lose.
Apply for Loan
The process of actually getting the loan approved and pushed through by a lender can sometimes take several weeks or months. When you have completed your research and prepared as best as you can don’t waste time, fill out your application right away. Depending on which loan you are applying for you may even be able to start the application process on line.
In conclusion, there are many different small business loans available and several different lenders to chose from. Doing your research and preparing ahead of time will give you the best chance at obtaining a small business loan successfully.