For many aspiring and new business owners, obtaining a loan to grow their existing business or jumpstart their big idea can really help turn their dreams and passion into a reality.
While low-cost business ideas will likely by less risky, there are often so many common and hidden expenses associated with starting a business but often times, you have to spend money in order to make money.
If you’re considering getting a business loan, there are a few things you need to do first to prepare.
Check Your Credit
One of your first steps before applying for a business loan should be checking your credit. Lenders are going to want to know what your credit score is and your credit history will play a major role in what type of loan you’ll qualify for.
Your personal credit score needs to be at least around a 640 or higher to qualify for a small business loan. Credit score standards may be stricter if you wish to borrow more money.
Your personal credit score can range from 300 to 850 and demonstrates your ability to repay your debts in a timely manner.
It’s best to download a copy of your full credit report by visiting AnnualCreditReport.com. You can do this once for free every year.
You can also track your credit score online and your FICO score for free using Discover’s Scorecard service.
When reviewing your credit report, you want to check for any misinformation or reporting errors large or small. Don’t disregard and minor errors like a misspelled address or a common mistake in your name because you don’t want to raise and fraud suspicions when you apply for a business loan.
If you do find errors, you’ll need to contact the company/institution that made them and/or the credit reporting agency to get it cleared up.
Go Over Your Business Plan
When applying for a business loan, you’ll often be asked to include a business plan or proposal with your loan application documents. You can get one step ahead by preparing your business plan ahead of time.
Your business plan doesn’t have to be super long, but it’s one of the most crucial steps you need to take when starting a business. It should be thorough and aid you when asking for a loan.
Your business plan can include market research, your credentials, industry statistics, the mission of your business, the products or services you’ll offer, marketing strategies, and so on.
You should also include aspects of your business that will require funding to better explain why you are asking for the loan.
Include current and projected earnings and expenses, along with a SWOT analysis which identifies strengths, weaknesses, opportunities, and threats.
Take your time when coming up with your business plan and a mentor or a few people you trust to review it before including it in your loan application.
Determine How Much You Need to Borrow
Some small business owners make the mistake of focusing so much on obtaining a loan, that they forget to calculate how much they really need.
As with any loan, it’s important to avoid taking out more than you actually need. Having some extra money to invest in your business is nice, but if you borrow too much, you will actually lose money after you pay back the funding plus interest.
Your business plan and the goals you set for your business should help you determine a realistic educated estimate of how much you’ll need to borrow.
Determining how much you need can also help you choose the right lender since lenders can offer a wide variety of small business loan funding. If you don’t need anything close to a $500,000 loan, there’s no point in choosing a lender that offers big loans like that.
Figure Out What You May Need to Put Up For Collateral
To obtain a small business loan, sometimes you will be asked to put up collateral whether it’s personal property, equipment, inventory, etc. This will act as a security if your business fails and you are unable to pay back your loan.
Usually, this occurs with larger loans, but it’s worth considering so you’re not blindsided during the loan application process.
Some SBA loans require collateral for small business loans along with a guarantee for each owner to put their credit score and personal assets on the line to ensure the loan gets repaid.
Compare Lenders’ Offers and Requirements
Finally, you’ll want to shop around and compare small business lenders before you decide on which loan you’d like to apply for. You don’t want to have your credit run several times for no reason so be sure to use the internet to do some digging and find out as much as you can about your business loan options.
You’ll want to consider things like the loan amount and term, the best interest rate offered, fees and fine print, type of collateral required, and other requirements.
Some business loans require that you’ve been in business for a certain period of time or earn a certain amount of revenue annually. Common business loans fees include the origination fee, an application fee, and a processing fee.
It’s important to keep all these things in mind when comparing your options and take your time so you can find the best business loan for your situation.
Rushing to apply for a business loan is usually never a good decision. It’s best to take your time, get organized, and make sure you meet all the pre-qualifications before you start applying.
Would you ever consider getting a business loan to jumpstart your business idea?
Good tips! It’s always a smart idea to shop around when looking for loans. Loans are often regarded as a bad thing, as you may accumulate debt…however a smart loan where there is verifiable proof of new revenue or profit in your area means it could be well worth it!
Well said, getting a loan might not be everybody’s first option and I don’t think it should be. Yet and still, I can see why certain businesses can benefit from them.
Great article I think if you have collateral will go a long way in convincing the bank to lend you, my bank told me that if I don’t have one 6 – 8 months of positive business account is needed.