Navigating Finance: Essential Steps In Securing A Small Business Loan

Mar 12, 2024 6 Min Read
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Stay focused on your goals and remain confident in your ability to take your business to new heights.

Disclaimer: The views expressed in this article are not of Leaderonomics, its directors, affiliates, or employees. This is not financial or investment advice. Please do your own research and evaluate your risk appetite before investing.

Are you a small business owner looking to take your company to the next level? Securing a small business loan can provide the capital you need to expand, invest in new equipment, or manage cash flow. 

But navigating the loan process can feel daunting. You don’t need to worry because this post has your back. Follow these essential steps to confidently pursue the financing your America-based business needs to thrive.

Understand Your Loan Options 

Before diving in, it's crucial to understand the different types of small business loans and lending companies like Credibly financing available. Here are the most common options:

  • Small Business Administration (SBA) loans: Guaranteed by the authorities, these loans offer competitive terms but can be harder to qualify for.
  • Term loans: Borrow a lump sum and pay it back over a set term, usually at a fixed interest rate. Term loans can be short-term (under 18 months) or long-term (up to 10 years or more).
  • Business lines of credit: Get access to funds when you need them, and only pay interest on what you borrow. Lines of credit provide flexibility for ongoing expenses or unexpected needs.
  • Equipment financing: Loans specifically for purchasing business equipment, using the equipment as collateral. This can include vehicles, machinery, technology, or other necessary equipment.
  • Invoice factoring: Get an advance on outstanding invoices, which can help manage cash flow gaps. Factoring companies typically advance 70-90% of the invoice value, then collect directly from your customers.

Consider other non-conventional lenders as well, such as online lenders, peer-to-peer platforms, Credibly in USA, and so on. These can offer faster approval and more flexible terms, but may come with higher interest rates.

This may interest you: Empowering Financial Stability: The Dynamics of Short-Term Loans

Determine How Much You Need 

Take a hard look at your financials and business plan to determine how much money you really need. You want to borrow enough to achieve your goals, but not so much that repayment becomes a strain. Take into consideration:

  • Your business’ current revenue and cash flow: Look at your monthly income and expenses to assess how much debt you can comfortably take on.
  • Detailed costs of your plans for the funds: Get specific about how you'll use the loan, whether it's purchasing inventory, hiring staff, or expanding your space. Itemise the costs.
  • Projected revenue growth from the investment: Estimate how the loan funds will help grow your revenue over time. Be realistic, and prepare multiple scenarios.
  • Your ability to repay based on realistic forecasts: Use your projected cash flow to see how loan payments would impact your bottom line over the term of the loan.
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It's helpful to run several scenarios to see how different loan amounts would impact your cash flow over time. This will help you find the sweet spot of how much to borrow.

Boost Your Borrowing Profile 

Lenders want to see that you're a responsible borrower who can repay the loan. Strengthen your profile by:

  • Building both business and personal credit scores: Pay your bills on time, keep credit utilisation low, and monitor your credit reports for errors. Lenders look at both your business and personal credit when evaluating your application.
  • Correcting any errors on your credit reports: Request copies of your credit reports and review them carefully. If you find errors, dispute them with the credit bureaus to get them corrected.
  • Paying down existing debt: Lower your debt-to-income ratio by paying off high-interest debt before applying for a new loan.
  • Gathering documents like tax returns, bank statements, and financial statements: Lenders will want to see a variety of financial documents. Gather them in advance so you're ready.
  • Creating a solid business plan with detailed financial projections: Show lenders you have a well-thought-out plan for using the funds and growing your business. Include realistic financial projections.

Being able to demonstrate that your business’ financial health and growth potential are in great standing will better your chances of loan approval. Lenders want to see a strong track record of revenue growth and responsible financial management.

Shop Around For The Best Rates 

Don't jump at the first loan offer you receive. Comparison shopping can help you secure the most favourable terms. Look at:

  • Interest rates and APR: The interest rate determines your monthly payment, while the APR includes other loan costs like origination fees. Compare both.
  • Loan fees like origination or early repayment fees: Some lenders charge fees for processing your loan or paying it off early. Make sure you understand all the costs.
  • Collateral requirements: Secured loans require collateral like real estate or equipment. Unsecured loans don't require collateral but may have higher interest rates.
  • Loan limits and repayment terms: Look at the minimum and maximum loan amounts, as well as repayment time frames, to find the best fit for your needs.

Start with the bank where you keep your business accounts, but also check out local credit unions and online lenders. Credit unions often have lower fees and more personalised service. Online lenders can offer quick decisions and streamlined applications.

Businessmen run their business with a visionary vision to work to bring the company to the top in the market beating the competition to the No 1 position

Don't be afraid to negotiate - lenders may be willing to compete for your business. If you have a strong credit profile and solid financials, use that as leverage to request better rates or terms for your company’s financing.

Prepare A Strong Application Package 

Once you've found a lender you like, it’s time to put your best foot forward with a solid application. Your packet should include:

  • A detailed business plan: Outline your company's goals, target market, competitive landscape, marketing plan, and growth projections. Show the lender you have a clear vision.
  • Financial documents like tax returns, bank statements, P&L statements, and financial projections: Lenders want to see at least a year of financial history, if available. Prepare year-to-date financials as well.
  • Information on your management team's background and qualifications: Highlight your team's experience and expertise. Include resumes and relevant industry credentials.
  • An explanation of how you'll use the loan proceeds: Be specific about how the funds will help you grow and generate revenue. Tie it back to your business plan.
  • Collateral you can offer to secure the loan: If you're applying for a secured loan, provide details on the collateral, such as property appraisals or equipment valuations.

Carefully review your application to ensure it's complete and error-free. A well-prepared application shows the lender you're serious and can help the process go more smoothly. Consider having a trusted advisor, like your accountant or attorney, review it as well.

Have Patience And Persistence 

Applying for a small business loan can take time and effort. Gather your documents in advance so you're ready to respond promptly to lender requests. Follow up regularly to check on your application status and provide any additional information needed.

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You may face rejection along the way - don't get discouraged. Many successful businesses get turned down for financing at first. If you're denied, ask the lender for feedback on how you can improve your application. Take their advice to heart and keep trying. You may need to apply to several lenders before you find the right fit.

Consider alternative financing options as well, such as grants, equity investments, or crowdfunding. Keep an open mind and explore all your options.

Read more: Leadership And Leverage: Smart Financing For Growth

In Conclusion

Securing a small business loan is a major milestone - it means a lender believes in your company's potential. Stay focused on your goals and remain confident in your ability to take your business to new heights.

With preparation, persistence, and these essential steps, you’ll be well on your way to getting the financing you need. Remember, to make of use the newly-granted capital wisely and invest in your business’ growth and success. All the best.

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Eli Johnson is a financial advisor for small business owners across America. With their two decades of experience, they’ve been able to help countless budding American entrepreneurs get the appropriate business financing that fits their company growth and objectives.


 

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