Financing is necessary for getting a small business off the ground or keeping it in operation. In most instances, this financing comes in the form of a business loan. To get this funding, SMEs apply to banks or other financial institutions like credit unions to get commercial loans – banks typically do not offer loans to startups but would give one to existing businesses.
However, there are still major steps that you would have to follow whether you are a start-up or an existing business.
Steps To Take Before Applying For A Business Loan
● Determine why you need a business loan — clearly outline what the funds will be used for.
● Calculate how much debt you can afford — look at your finances to determine your debt service coverage ratio.
● Browse the different types of business loans — so you can ascertain which products would work best for your needs.
● Compile the necessary loan documentation — the documents you would need will depend on the product type you are applying for.
● Apply for and close your business loan — remember to read all the terms of the offer before you sign any paperwork.
What Are The Best First Time Small Business Loans Available?
There are a lot of great first-time small business loans out there, some of them include:
● Short-term lines of credit
● Traditional bank loans
● Short-term loans
● Medium-term loans
Your option as an SME is not limited to the above list; there are also alternative financing options like the use of a business credit card.
Business Loan Requirements
Business loans involve more risk for the lender, unlike personal loans, which is why the application process is usually longer and the eligibility criteria stricter. To get a business loan, you would have to put together a number of important documents and provide details of your finances.
Small business owners today have more funding options than they did years ago. However, the eligibility criteria for these loans will vary depending on the lender. Here are some common business loan requirements that you would encounter while applying for a business loan
Industry: During the loan approval process, lenders assess the industry your business is in. So, you might discover that it is easier to get loans in certain industries than others.
Collateral: An application that is backed by something valuable is viewed as less risky by lenders. What this means is that collateral-backed loans are easier to get and often have lower interest rates.
Current amount of debt: Business owners with too much debt will find it difficult to get new loans.
The lifespan of the business: Most lenders preferred to offer loans to businesses that have a track record of at least two years. Thus most new businesses will find getting funding difficult.
Income and cash flow: This is another criteria lenders look at when assessing loan risk. The higher the income to debt ratio for your business, the higher the chances of your loan application being approved.
Credit — When a small business owner applies for funding, lenders will check the personal credit score of the owner. A good personal credit score would go a long way in improving your chances of getting funding.