If you want to start or grow your small business, securing funding is essential. However, it can be tricky to figure out which financing option is right for your specific needs. The key is to understand how each loan works and decide which one will best meet your needs.
Getting a loan for your business is a lot like getting a personal loan, but with more specific requirements and a higher risk of rejection. You must understand what you need the money for, show that you have a strong ability to repay it and present the lender with a clear plan on how to use the funds.
Get ready for the application process by collecting the documents you need, such as a financial projection and expense sheet, and assembling them in a way that helps the bank determine how much to offer. Having these materials ready before you apply for a loan will help you increase your chances of approval, and the lender will appreciate your honesty and due diligence.
Lenders are also looking for proof of revenue. This can be in the form of a sales or receipts statement, which should be accompanied by a separate business checking account that shows the amount of money you bring in. This can prove to a lender that your business is profitable and demonstrates that you have the capacity to pay back the loan.
Make sure you have a solid business credit score and that your personal credit is clean, and not too far behind your business’s. Having a good credit score can improve your chances of getting approved for business loans and other forms of business funding, such as invoice factoring or a secured business credit card.
Your business’s debt-to-income ratio is another factor that lenders will look at. A lower debt-to-income ratio means you have a better chance of repaying the loan, and will allow the lender to offer you a loan at a better interest rate.
The debt-to-income ratio is a number that can be calculated in many ways, but is typically expressed as the percentage of your annual revenues that go to paying off existing debt. This is important because a high debt-to-income ratio suggests that you’re more likely to struggle with repayment, which can negatively impact your credit and prevent you from getting the business financing you need.
Boost your business’s revenue before applying for a loan to demonstrate to the lender that you have the capacity to repay the new loan. If you’re just starting out, this isn’t always possible, but if your business has already been in operation for a while, you may have enough of a track record to show the lender that you are financially stable and can afford to repay the new debt.
Talk to a financial adviser before choosing a business loan. This will give you insight into different financial institutions and their loan programs, and it can help you create a plan to repay the money you borrow in the most efficient way.