Outside financing is a common occurrence in small businesses considering their low flow of income and small scale of operation. A small business faces the hurdle of financing, especially in form of loans resulting from the many requirements set by banking institutions. Factors necessitating a loan for small business include need for expansion and need to finance daily expenses in inventory and salaries.
This process of finding a small business loan can be tedious and hence requires preparation from the loan applicant, in order to navigate through all the bottlenecks set by the financial system.
The five steps are highlighted as shown below:
Evaluating the need for the loan
The need for the loan is a key question asked primarily by the lender. The reason could be for a business startup, for expansion or for financing daily business expenses.
Choosing the type of loan
The type of loan is determined by the need for the loan. Startups have a hard time getting a loan in their first year of operation, as lenders are assured of repayment when cash flow is seen. Startups are left with the option of business credit cards, friends, and family, personal loans or crowd funding. Already existing business have wider options, including SBA Loans, business lines of credit, invoice factoring and term loans.
Choosing a lender
Lenders vary, from banks, online lenders to nonprofit microlenders. Like a search for any other seller in the market, searching for a suitable lender requires keenness in comparison of different financing vehicles. The total cost of borrowing and the terms and conditions for the loan are considered in comparison. Lenders are encouraged to choose a lender with the lowest Annual Percentage Rate as well as observing the loans regular payments.
When the need is not urgent, coupled with the availability of collateral and good credit, the bank becomes the most preferred lender. Microlenders have a higher APR and demand that the borrower provides a detailed business plan, lengthening the process. The amount given under such borrowing is also small. Online lenders are the easiest option for small business loaning as they do not require collateral and the time spent in loan processing is also shortened.
Checking loan requirements
An acceptable position on the Credit spectrum forms the basis for this decision. Other factors for consideration when analyzing the loan requirements include the borrowers experience in the business environment, the amount of inflows and expected revenue and the borrowers’ ability to repay. The loan affordability should also be highly regarded.
Getting required documents
At this stage, the borrower can now apply for the small business loan, provided they qualify for the type of loan.
Some of the documents required during application are:
- Tax returns for the business and the owner
- Bank statement for the business and the owner
- Financial statements for the business
- Legal documents for the business, including Article and Memorandum of Association.