Capital is one of the core things that any business must have in order to smoothly run its operations. Many of us have wonderful ideas that when implemented can lead to the creation of new business empires. However, the only obstacle that stands between the ideas and launching of the business is a lack of capital.
The most common option for getting funding is through a loan given by banks or other financial institutions. Nowadays, getting a loan is not as easy as it was before. The 2008 financial crisis has made banks restrict lending to small businesses. In 2021, only 11% of companies received all the financing they applied for.
Key Takeaways
- When seeking out a business loan, be sure to have your business plan in place and ready to present.
- Know how much money you need and what you'd like to spend it on before you head to the bank.
- Make sure your credit report and score are ready to be scrutinized.
It is therefore very important for you to know the necessary steps for getting a business loan from a bank so you can improve your chance of getting approval. Here are seven steps to take when applying for a business loan from the bank.
Have A Proper Business Plan
In order to secure a loan, many banks need you to have a strong financial plan which brings out what your business entails. It forms an introduction about who you are and what your business is all about. A business plan should be able to state the business' goals, mission, and how it will be run in order to achieve all the objectives stated. Remember a great business plan means that the business is likely to succeed in the mind of the lender.
State How You Want To Spend Your Finances
Banks have a tendency to assess how the loan applicant wants to spend the funds borrowed. If you want to purchase equipment for example, you need to apply for an equipment loan. On the other hand, if you want funds to keep the business running before your debtors pay you, it would be advisable to apply for a short-term loan. Thus, stating what your loan will be used for makes it easy for the bank to determine whether the amount applied for will meet all your needs.
State The Amount Of Money You Need
Whenapplying for a loan, it is good to do thorough research in order for you not to underestimate or overestimate the amount of money you require. This is due to the fact that underestimating could lead to financial problems in the future. Overestimating on the other hand makes the bank question whether thorough research was done before writing the business plan. To avoid all these doubts, have a good budget with proper financial projections.
Know Your Credit Score
Nowadays, all banks have to verify whether every applicant is eligible to be given a loan. When applying for financial help, it is advisable to check your personal credit reports and scores. A personal credit score of 700 and above is excellent. If your score is below 680, it would be hard for you to get a loan but you may want to consider a revenue-based loan as an alternative. If your score is low, work hard and raise it before applying for any bank loan.
Note
Both you and your business have a credit score. Your business credit score measure how your company's accounts are managed while your personal credit score covers your credit history as an individual. Both could be considered when seeking a business loan.
Clean Up Your Credit Report
Sometimes there could be errors in your credit report and if you are not careful, it might negatively affect your credit score. This is why it is always advisable to monitor your business credit and personal credit files regularly. In case you notice some errors, contact a credit reporting agency immediately to rectify and raise the score by removing the discrepancies, otherwise, no loan will be approved by a bank when your credit rating is low.
Assess All Your Lending Options
After checking your credit report and ensuring that it is okay, it is time to research and come up with a list of banks that are viable to extend the type of loan you are in need of. Choose the bank that offers loans at low interest rates and offers the most flexible approval guidelines.
Keep Proper Financial Records
Getting a business loan from a bank becomes easier when you have proper financial statements. Banks will always want to check your balance sheet, cash flow statements, and income statements so as to ascertain whether you have the ability to repay the loan or not. This means that if you have not been keeping these records, it is time to start since they could be of help in the future when applying for a loan.
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