Technology has made applying for a business loan easier, but that does not mean that getting the fund is also simple. Especially if you have a small business, the competition is too high so you cannot be very sure about getting a loan. This is where it becomes important to know all the necessary details about the business loan before applying.
10 Things to Know Before Applying for a Business Loan
While there are various options for getting funds for your business like borrowing from friends and family, personal capital, and many more. Opting for a business loan is one of them. Let us delve into the most important steps you should take before applying for a business loan.
Unlike a personal loan, for business loan lenders look for some security. Especially if you are a start-up getting a loan can be a little difficult, but collateral may smoothen the process a little. Thus, having a hard asset to back your business loan is always a great option, to cover the risk. The need for collateral also means that most small business owners have to pledge personal assets, usually house equity, to get a business loan.
2. Having a business plan
Most of the lenders in order to ensure that you will not default, require a business plan document. Whether it a short plan or a full-fledged file, a business plan with a summary of the company, product, market, team, and financials make your case for a business loan a little strong.
3. Credit pull
No matter how well your business plan, if your personal credit has been hampered due to some uneventful payments, then your business loan will be adversely affected. With easy online apply options, business owners tend to apply to various lenders and start defaulting. Thus, the credit profile of the owner is an important part of the profile and application process.
4. All of your business’s financial details
this will include your current and past loans, any debts incurred, investment, credit card accounts, and obviously the tax ID numbers and contact information. With this, the lender will be able to better understand your present situation and accordingly decide on your application process.
5. Insurance Information
Since the lenders will try their level hard to reduce the risk, lenders ask the new business for their insurance coverages. The insurance will cover the expenses if one of the founder dies. In that case, the bank also makes the owners sign a document claiming that the insurance amount should first cover the debt and then the other things.
6. Copies of past returns
To avoid any fraudulent transaction, the lender also asks the owners for their corporate tax returns. This also helps them see the real picture of the business, and decide on the loan amount and interest to be charged o the loan.
7. Agreement on future ratios
Most of the business loans include loan covenants. Through this the company taking the loan promises to keep some key ratios like current ration, debt to equity, quick ration, and others, with some defined limits. If anytime in the future the financials of the company fall below the threshold, then you will be considered to have technically defaulted the loan.
8. Manage your Bank Statements
Apart from your business and personal details, the bank statement is also an important factor considered while underwriting the terms of the loan. The statement will help the lender understand how you manage your business and thus determine if you will be able to read the loan in the future. A lot of negative balance days may lead to your loan not getting approved. Mostly the lenders look at the past 3 months to determine your approval status.
Also, do not try to doctor your bank statement to make it more pleasing, as it is a crime. If caught then you can be debarred from getting a loan ever in life.
9. Read the documents
While all the above points focus on some tips to get your loan approved and the various things that must be taken care of before applying for a business loan. Make sure to read all the terms and conditions that the lender offers you for an online business loan. The terms will also include the loan amount, interest being charged, tenure, and other terms. You can also compare the terms of various lenders before you apply to anyone. You can use the business loan EMI calculator to know all the details, it will help you make a better decision.
10. Use to build credits
Once you have secured the loan and received the payment, make sure to manage your credits properly. Make sure that you are continuously paying off your debts, and not adding more to your burden. You can keep some of the loan amounts for your future use.
While we all dream of starting a business, not having enough capital is one of the roadblocks we hit. Well, not anymore, with these tips you can now get a business loan easily, but ensure that you do not spend it on non-business activities.