Small businesses often need external financing to help them make large purchases or get through slower business periods when cash flow is low. A small business loan is one way that business owners can address their short and long-term financing needs. Before you start the process of taking out a loan for your small business, you should consider these four tips to help you prepare for the process.
Know Your Credit Score
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Check your personal credit scores for all three reporting agencies. To do this, you can request a free credit report at AnnualCreditReport.com. Check for errors and resolve these immediately, if possible, before beginning the loan application process. If you have payments that you’ve fallen behind on, try to bring your accounts to date to help your chances of being approved and receiving a favorable interest rate.
Your chances of being approved are greater with a credit score above 600. However, there are options for individuals with lower credit scores which offer financing at higher interest rates.
Analyze Your Financing Needs
Clearly establish what you need extra financing for. Is it for a long-term investment like real estate or equipment that will last 10 years or more, or do you need short-term financing to buy more inventory or meet regular expenses? This will direct you to the options that you’ll need to evaluate to meet your business’s needs.
Evaluate Your Loan Options
If you need a short-term loan, inventory financing and loans to increase working capital are available from traditional lenders like banks and credit unions. There are also alternative financing options like merchant cash advances, which help businesses get short-term loans in as little as 24 hours to quickly resolve cash-on-hand shortages. To obtain a merchant cash advance, a business leverages its future revenue. These loans typically carry a higher interest rate and fees. For business owners with low credit scores or serious funding time constraints, online lenders like Bad Credit Business Loans can represent a viable option for their business needs.
To invest in areas like real estate, make large equipment purchases, or undergo considerable expansion, you will most likely need to seek out a long-term loan. There are also special small business loan programs available from the Small Business Administration, many of which are specially designed to help you grow your business and often offer more favorable interest rates and repayment terms.
Prepare Yourself for the Process
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Go over your financial statements to make sure everything is up-to-date and in order. These documents show your business’s profitability, as well as the assets available as collateral for your loan. If you’re planning to expand, you’ll need to have a well-crafted business plan and marketing strategy. This will prove to a potential lender that you’ve prepared well for a successful expansion. If you need to, enlist the services of a professional consultant to help you with these documents.
Use small business loans responsibly, and do not take on more debt than you can handle. Small business loans are helpful tools that allow businesses to grow and contribute more to the local economy by hiring additional employees and offering better services to their customers.