Here’s what you need to know
Financial institutions are now tweaking their strategies and have become increasingly flexible to granting loans for small businesses. However, the entire process to secure a loan may not be as easy as it seems.
Many institutes, particularly banks, are apprehensive about granting a loan to a small business due to the high probability of loss. If a business fails to garner traction, the chance of getting repayments reduces. Having an impressive portfolio, good credit history and sound business plan can make it easier for you to secure a loan.
Generally, lenders expect businesses to invest their own money while starting a business. Therefore, if you make a good investment increasing your overall net worth, there’s a high chance that they will grant you a loan.
Here are a few steps that you can take to increase your chances of getting a loan:
1. Check Your Credit History
While applying for a loan, your credit history and score play an increasingly important role. If your business makes revenues in the future then you will easily manage your repayments. However, in situations where the business fails lenders require evidence to testify your reliability. Credit history and credit score represent your reliability to such institutions – so check them.
Therefore, if you have successfully managed your repayments without any delinquencies then your chances of securing a business loan increases exponentially.
If your credit took a hit in the recession which was the case with many small businesses, work to restore that credit before applying for a loan.
2. Strengthen Ties with the Lender
Unlike other loans, small businesses are required to build trust with a lender before applying. You also want your lender to have faith in the success of your idea. If your business seems promising, your chances of getting a loan may increase. Furthermore, the lender will also assist you throughout the process, giving sound advice and guidance for your betterment.
3. Be Prepared
If you want to secure a business loan, make sure you have a business plan ready. If you are not prepared before approaching a lender, then your chances of getting a loan will reduce. As the loan you apply for is for starting a new business, a business plan will help the bank in evaluating the growth trajectory and will give an idea about your business’s future standing.
A business plan is essential to the success of any business as it creates a path for the business to follow. Moreover, it gives the lender solid proof that the business has potential and the owner will be able to repay the loan in future. Your business plan should emphasise the nature of the business, industry trends and competitive advantage, showing that the business has the potential to succeed. If you want to strengthen your position, add a three-year cash flow forecast that can give your lender perspective.
Do your research before you apply for a loan and calculate the amount you will require with the help of a loan calculator. The calculator will take your income and expenses into account deriving an amount you will be able to manage within your budget. You also need to study the eligibility criteria of the institute you’re getting your loan from. The last thing you would want is to get rejected over incomplete documentation.
4. Take Risks
When an individual applies for a business loan, the lender gets into a tricky and risky situation. For instance, if the business does well the bank will get timely payments. On the other hand, if it fails then the chances of paying the money back is bleak. Thereby, if you want a lender to approve your loan, get ready to take risks and be convincing. Invest a substantial chunk in the business to eliminate doubt.
5. Be Upfront
When a lender gives money to a business, they nurture relationships that are not just limited to money. You need to be upfront, open and honest about your financial situation to get support in case any problems arise. You cannot expect to just randomly acknowledge a lender about a misfortune; rather you need to thoroughly communicate your financial condition.
Thus, if you have secured a loan and things suddenly get difficult, do not hesitate in communicating about the issue.
Ensuring transparency will help you build credible relationships with your lender. After all, nobody wants collection agencies or poor credit history.