The Covid-19 pandemic has led businesses to look for financial resources. It’s been a tough time for them and especially small businesses. Even as lockdown restrictions start to be lifted gradually, most businesses are still worried about their ability to stay afloat.
Now might be the right time to consider a commercial loan, but in order to be approved, business owners should know what to expect during the process.
Knowing how to prepare to get a small business loan can speed up the process, at a time when access to capital is essential and could mean the difference between survival and closing the doors of your business.
The following are things to know as far as preparing and getting ready to apply for a small business loan.
Is a Loan Right for Your Business?
Before you apply for a loan, you need to make sure it’s the best option for your business.
For example, if your primary issue is with cash flow, you might first explore other options. You could, as an example, try to speed up receivables by offering a discount for anyone who pays early.
Before you apply for a loan, you should clearly define what your financial objectives are and how the receipt of loan funding will help meet these goals.
Types of Business Loans
There are different types of small business loans as well. These include:
· A small business line of credit, which lets you access funds as you need and then repay them as you use them, instead of getting a lump sum.
· Accounts receivable financing, which lets you get cash right away based on the level of your accounts receivable. You pay this type of financing down as your AR is paid by customers.
· Working capital loans, which can help you manage revenue and expense fluctuations. Sometimes working capital loans are unsecured, but you may have to sign a personal guarantee if your business doesn’t have a lot of credit history.
· Term loans are for a set dollar amount, and interest is usually paid monthly with the principal repayable in a period of anywhere from six months to three years.
·are available from some banks, and these loans are low-interest and guaranteed by the U.S. Small Business Administration.
What Determines Approval?
You need to be clear on what a business lender is looking for when they decide to give you financing. They want to see that you’re going to be able to repay the loan, ultimately.
You will have to provide information about your personal credit history, as well as how long you’ve been in business and your yearly revenue.
Traditional banks may have stricter lending requirements than an online bank.
If you’re a new business or you haven’t been in business long, you’ll have a harder time securing financing, especially through a traditional bank.
If you want to speed up the timeline as much as possible for a small business loan, make sure you have the necessary documents.
These include both your personal and business tax returns and bank statements. If applicable, you’ll also need your business financial statements and any related business legal documents. These legal documents include commercial leases and articles of incorporation.
A lender is likely going to go over your personal credit report and your history of timely payments on any personal financial loans you have under your name.
Lenders will look at your outstanding debts and loans to see if your current cash flow will allow you to make payments on a new loan.
Lenders may look at the assets in your business currently which can include accounts receivable and whether or not you have any investors.
Other possible information you may be asked to provide, depending on the lender and type of loan, are:
· Federal tax ID
· Names of your executive officers, if you have them
· Details of your legal structure
· Financial statements for the past 2-3 years
· Financial projections to show future cash flow
· Copies of liability insurance policies
· If applicable, details of collateral you’ll provide
· A business plan, or investor pitch deck
Finally, as you’re preparing to apply for financing, you will need to be able to show how much you want a loan for.
You’ll have to show a specific amount you’re seeking and what you’ll see the funds for. For example, are you using lending to develop a new product, get new equipment, or keep yourself afloat through Covid-19? You may also want to borrow a bit more in case you’re facing a cash crunch or you believe you could in the near future.
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