In 2020, 43% of small businesses applied for loans. In a year where cash flow could be a particularly challenging feature of running a business, a small business loan from a bank was a viable tool for many entrepreneurs. Additionally, the ability to maintain and manage normal business operations even when encountering interruptions in payments from customers is vital.
Unsold inventory, outstanding invoices, and other struggles present a need for more capital than business owners may have on hand. Staffing, rent or a mortgage, and even utilities are regular expenses that require the attention of business leadership. Some other reasons entrepreneurs might consider applying for a small business loan include:
- The expansion of the business into new opportunities
- Establishing a more robust inventory than cash on hand currently permits
- Equipment repair or replacement
- For the improvement of terms on an existing loan
- Cash flow, as mentioned above
Staying afloat when profits are low is a more pressing need than ever. Innovative business banking includes keeping options like small business loans from a bank on the table. Here we will discuss how to go about securing one for your business.
Requirements for Small Business Loans
Most small business loans require proof of a personal credit score, and it carries substantial weight with financial institutions. Moreover, as the business owner, you guarantee a loan in many cases, so your credit score represents your creditworthiness. As a result, this can lead small business banks to decide if they want to lend to you.
Your institution will also likely request a copy of a revenue or balance sheet and banking statements and ratings. Transparent background of who will be repaying the loan is vital for banking institutions, which is all a part of that process. Additionally, they will want to know about changes in income and the standing debt-to-income ratio of your enterprise. The start date for your business is also usually tied to when you opened a business bank account. That date is connected to your history in the eyes of banks.
Listing your existing assets is a valuable segment of the process when deciding on collateral when a loan requires it. Being in business for 2+ years is also a prerequisite of many loans. Continue to read to learn how you can prepare these items.
Calculating the Size of the Loan You Need
Applying for a loan means taking an earnest look at how much money your business needs. Asking for too little could impact your ability to fund your business. Conversely, asking for too much may alter your chances of repayment.
Cost projections for any funds you borrow should be drafted by you or your team, as well as financial projections with your P&L sheet. The cash flow statement we mentioned above is also handy as you will get a better picture of what is already coming in and going out. The preparation also lets lenders know that you are informed and ready to take on the responsibility of increased capital.
Decide what You Will Use as Collateral
It’s critically important to remember that lending institutions do not want to own your collateral, though it does serve as a secondary means of repayment of your loan. Lenders have a loan-to-value ratio that is useful in deciding collateral that will be necessary. Choosing collateral comes down to picking assets that match the amount you are requesting.
Consequently, your lending institution may have a loan-to-value ratio they prefer if you pledge particular types of assets, such as real estate. The difference between the collateral’s market value and the loan amount is often referred to as a haircut and serves as a loan discount. Low liquidity assets tend to have a robust haircut.
Have a Business Plan
Some lenders do not require a business plan, but having one can present your organization as a standout among other applicants. In addition, gathering all of the items you need like personal credit score, business expenses, and bank statements are tangible evidence of your fitness to repay a loan.
Imagine this as a cover letter for your application, as the lending team may know nothing about your industry. However, a thorough explanation of your business may help the lender see the demand for your enterprise.
Small Business Banking Research is Critical
Some online small business banks specialize in small business loans. Factor this into your research so that you can make a pairing with an institution that is well suited for your needs. The ideal lending institution will have a track record of funding the type of loan that fits your business. Additionally, the bank ought to have even support to make financing possible.
Getting your affairs in order is another integral piece of small business loans. It is not a process that is reserved for exceptionally wealthy individuals. Setting a living will and advance directives covers those closest to you in your absence. It also does not have to be an expensive process. A physical copy of your digital items is also a suggested step. Ensure you are careful and diligent about each step in the process and keep the interest of your business in mind. The right lender will help you make sense of this process for your specific circumstance and help you keep forward momentum in your business journey.