Private Business Loans: How To Apply For A New Loan?
A business loan is a money borrowed from a financial institution to support an enterprise. You can use the on loan money for investing in machinery, buying more capital, or advertising. But practically, getting a loan sanctioned is not as easy as it sounds in theory. According to a report, business loan approval rates have dropped by 50% in the last year. But, what if we tell you that there is a structured process to follow that will improve your chances of private business loan approval? Yes, you read it right! In this write-up, we will share the ways through which you can apply for a new loan.
1. Prepare yourself to qualify for a business loan.
Whether you will get a loan or not depends on an extensive range of factors. These aspects include your credit score, accessibility of collateral, operational time of your business, and financial statements. Enterprises with a good credit score have more chances of winning the confidence of the investor. If you believe that your credit score is below a threshold, then consider small business loans. Also, most banks demand at least two years of business experience before you get qualified for a loan.
Availability of collateral is a must for a secured mortgage. It is an asset that the bank will cease if you cannot repay. If you do not have collateral or want to risk your assets, consider getting an unsecured mortgage.
2. Deciding the loan type
In the next step, you should choose the correct financial loan type you want. We have broadly classified the circumstances when you might require private business loans into the following three categories.
- Loans for a start-up
Obtaining credit for a start-up from financial institutions can be a troublesome job. They reject applications with no experience and credit scores. Hence, consider other options like start-up financing business loans.
- Loans for managing daily expenses
These are for meeting funds like payroll or unexpected expenses like repairs. Accomplish such expenditures using the profits generated, but there can be situations when this is not possible.
- Loans for boosting your business
This category covers new investments you are planning to execute. You need to convince the investor of your plan and procedure. If the lender finds it profitable enough, getting a loan will become easy for you.
3. Comparing Lenders
You can get private business loans from the three primary sources as below.
- Online Lenders
Consider this option when you need funds more quickly and lack collateral. Together with faster funding, the probability of your application getting selected is higher.
- Banks
Consider a bank only when you have been in business for over two years and when you do not need fast cash. Interest rates are lower here; however, approval takes a long time. Once your application gets selected, the chances of getting a long-term credit will also improve.
- Microlenders
This option is advantageous for those who are just starting. Borrowing from microlenders has drawbacks like high interest rates and short-term loan offers. However, if you have no credit history, qualifying for a conventional loan is tough.
Each loan type discussed above has variable different interest rates, tax, and GST implications. If you are confused about which mortgage will be perfect for your business, you can seek professional advice.
4. Getting your paperwork done
Before applying for private business loans, make sure you bring together all the significant documents. The most commonly required papers are:
- Financial statements
These will include your assets, liabilities, and net worth. After checking your monetary statements, the loan amount will get approved. Additionally, you also have to submit your latest tax returns.
- Bank statements
These will help the lender get a clear picture of your finance and savings. The investors check the bank statements to ensure if you will be able to repay the loan or not. You can submit your latest bank statements either in paper or electronic copies.
- Proof of individual income
If you have other income sources apart from the business, you will have to provide that details too. It can include your rental property or any other investments. You will also have to submit the two most recent tax returns.
- Identification
It is the first process done for new applicants. You can submit documents like your driver’s license and passport for identification. You might also have to submit a partnership agreement and company registration, if applicable.
- Extras for start-ups
If your business is less than a year old, you need more documents like a business plan and cash-flow projections.
Remember that the above list of documents is not comprehensive. The borrower can still ask for other documents also, depending on your loan type and money amount. We will suggest knowing the checklist of papers necessary and preparing them beforehand.
5. Applying for a business loan
Now that you know what type of loan your business qualifies for, applying for it is the last step. Sometimes you also need to face an interview, especially if you apply at a big financial institution for an enormous amount. You can follow these tips to get prepared.
- Check your financial details and statements. Even if you have not prepared them yourself, go through them once.
- Be confident with your business plan. Being an entrepreneur, you must be well aware of the market fluctuations. Try to convince the lender with most of your knowledge. You can also seek advice from experts or an accountant.
- The most vital tip is to have patience and accept the refusal positively. You need to know that no applications get rejected due to personal grievances. In case of failure, take feedback and address those issues the next time.
Final Thoughts
Businessmen saying things like “Getting a loan is not our cup of tea” is incredibly common. But with strategic planning and the right approach, you can get a loan sanctioned for your business. Hopefully, our guide on how to apply for a new loan was helpful to you.