One great way to finance a business is to apply for a business loan. Loans can help cover day-to-day operating expenses, especially for a growing business. While you might have sufficient cash flow to cover your daily expenses, you might need to raise capital for expanding your business for major equipment purchase or leasing a commercial property.
A business loan is believed to be a better source of capital than share capital, giving you better leverage to establish a more profitable business. You could get rewarded with the higher return rate over the loan interest you pay.
However, when getting business loans, it’s crucial to consider certain aspects such as loan requirements, interest rates, terms, and your business needs, which will be discussed in detail below.
- Interest Rates
It only makes sense to determine the interest rate that would apply to the type of loan you’re planning to have. Interest rates may be fixed or variable, depending on the terms. For instance, a business term loan usually involves fixed interest rates. The borrower pays back the lump sum in regular payments with a fixed interest rate and usually at one- to five-year terms.
Loan interest rates are affected by competition among banks to retain more customers. Also, the government creates laws and makes amendments, influencing banking rules, including interest rates. Inflation rates, stock market trading, and economic factors also affect the final rate. You could find more info on how banks set interest rates relating to business loans.
There are certain documents the financial provider needs to ask to assess your business’s financial situation when applying for a business loan. The most common business loan requirements include the following:
- Financial statements: Your income statement, balance sheet, and tax returns make up the bulk of your financial statements, showing your net worth, assets, and liabilities. Financial statements give insights to loan providers on whether you’re able to make repayments.
- Bank statements: Lenders require borrowers to present bank statements to obtain a clear picture of their financial situation. They provide proof of business and personal income. Also, bank statements can reflect financial flow by determining other types of loans, credit cards, and other bank transactions.
- Identification: New loan borrowers would have to provide identification, such as a passport or driver’s license. In some instances, company registration, partnership agreement, or trust deed could be asked.
- Other requirements: This may include a business plan, cash-flow projections, lease agreement, and business contract of sale.
- Roadblocks To Getting Approved For A Business Loan
There are certain obstacles that could keep a small business owner from getting approved for a loan. Here are some of them:
- Poor credit history: You might get denied a loan if your credit report shows unpaid or long overdue debts. Bad personal credit could be a result of divorce, medical condition, or other extenuating circumstances. A credit score below 700 may not be good. Strive to land above 700 to get qualified for a small business loan.
- No solid business plan: Lenders always mean business. If you’re serious about repaying your loan and making your business successful with the money you’re planning to borrow, it’s best to have a solid business plan. This is the reason lenders require documents, including projections and financial information. A good business plan may include a summary of your company, finances, products, services, and marketing strategies.
- Limited cash flow: Can you afford your projected loan amount based on your cash flow? This question could also be asked by loan providers. Try computing your cash flow quarterly and optimizing it before you approach a bank or any lending institution to apply for a loan.
- Several loan applications: Applying for several loans could be a major red flag to credit bureaus.
- Collateral Capacity
Some types of loans require applicants to present some form of collateral for a secured loan. Thus, it’s crucial to determine the type of collateral you could vouch for and how much it’s worth. In this way, the lender could hold on to something with a tangible value securing the loan. It’s advised to carefully think about your collateral. You don’t want to end up defaulting on your business loan and losing the collateral property you have chosen later on.
A business loan could make a great source of capital, allowing you to sustain your daily business operations and cover other expenses while expecting higher business returns because of a higher amount of investment. However, before applying for any business loan, it’s crucial to determine the requirements, interest rates, and possible roadblocks you’ll face along the way. It’s best to assess your ability to pay, the form of collateral you can use, and your projected cash flow.