As a small business owner, you might have come across those difficult times when you need capital to sail through the ebbs and flow of your small business. Before you jump into securing capital for your small business, the important thing to understand is how to apply for a small business loan in order to get instant approval. Here is a guide for you to understand how to apply for a small business loan so you can prepare for it.
Step 1 – Lay the Groundwork
First thing first, lay the groundwork by start assessing your small business financing needs so you can choose the right business loan that makes the most sense for your business. You need to understand how much funding your needs and for what purpose, how quickly the cash is required and at what repayment terms.
- Understand your affordability
Predicting your return on investment (ROI) is the most critical factor you should consider when taking on business financing. When you need capital for short-term needs, estimate your affordability by considering factors like the loan amount, loan term and projected annual percentage rate to determine your total interest cost and monthly payments. You can also use your cash flow projections to see how much capital you can have at one time to manage the debt. The key is to secure capital, not more than you can actually afford.
- Prepare Business Information
Every small business loan type requires borrowers to provide basic business and personal information to their eligibility and the loan amount. So before making a loan application, make sure to have the following information ready:
- Contact information
- Business entity type
- Social Security Number
- Financial Statements
- Business and personal tax returns
- Business and Personal credit score
- Insurance and licenses
- Business plan
Most small business lenders typically require recent bank statements and other relevant financial documents. Traditional lenders require extensive paperwork and financial documents for loan evaluation. The more cash you need to finance, the more documentation you will need to provide. Gathering these documents takes a lot of time and effort, so you preparing early can help get you easy approval on your loan application.
Step 2 – Explore Your Loan Options & Eligibility Requirements
- Know your Loan Options
The next most important step is to know your small business loan options and which will be more appropriate for your small business based on your financial needs. Not all small business loans are the same. Knowing your loan options that will make the most sense for your situation will help you get the best loan deal. There are many business loan types available from traditional business loans, term loans to invoice factoring, lines of credit and crowdfunding, and comparing their pros and cons will help you choose the best loan product.
- Determine your Eligibility
Every lender has its own set of eligibility requirements, but most lenders consider proof of business revenue, time in business, and credit score to conclude your business’s eligibility.
Step 3 – How Lenders Evaluate Loan Application
Before submitting your loan application, for review, understanding what factors lenders consider while evaluating your application is important. Some loan applications get approved in days, some take weeks or even months to approve. Lenders typically take into account certain fundamental metrics to determine a loan application for small business loans. This set of metrics typically consists of “The 5 C’s of Credit.” Lenders use these metrics to determine what factors can affect your ability to repay the financing.
The 5 C’s of Credit
- Character: A measure of your business performance and credit history demonstrating how effectively you were able to manage earlier debts and your likeliness to be responsible in the future.
- Capacity/Cash Flow: A measure of your business’s financial capacity to afford future loan payments while managing cash flow and expenses.
- Capital: A measure of how much skin you have in the game, representing your savings, investments, and other assets that can help you repay the loan.
- Conditions: A measure of your business industry, your target market, business stability, and the environmental and economic conditions.
- Collateral: A measure of your provided valuable assets as collateral that can be liquidated in case you default on the loan. However, unsecured business loans don’t require collateral for the loan.
Step 4 – Understand How Loans Work Before You Borrow
- Examine your Loan Structure
After you receive the loan offer, examine the basic loan structure. You should also know how and when you will receive the funds and how long and when you will be making loan payments (weekly, or monthly), and how the loan will increase your business credit score.
- Compare the Loan Cost
Different small business loans have different cost structures. Before you borrow, make sure you compare the costs of different loan offers you receive. You should assess the total cost that you’ll repay along with any additional fees like origination fees, late fees or prepayment penalties.
The Bottom Line: Choosing the Best Small Business Loan Option
Choosing a small business loan is a crucial decision that should be taken with due diligence. Considering factors like loan cost, the reputation of the lender, the complexity of the loan process, how quickly you can have the funds and will you be able to secure a personalized loan to meet your business’s financial needs will help you choose the best small business loan option for your business. Don’t get overwhelmed by the loan process: using the tenacity and due diligence can help you navigate how to get a small business loan with instant approval.