Looking for a loan to help your small business finance a purchase or investment? The effort to identify the right loan product and lender can be fairly arduous – but it doesn’t have to be that way.
You just need to have the right approach. Here are several tips and best practices to get you moving in the right direction.
Get Your Ducks in a Row
Nothing is worse than starting the loan process and then gathering documents and preparing your finances. It can take weeks (if not months) to get everything in order.
If you wait until the last minute, you risk slowing down the process. Here are several things you can do to set yourself up in advance for success:
- Reduce your debt-to-income ratio to a reasonable level before you apply for the loan. If your existing debt is too high for your income, it could make lenders wary of handing out more money.
- Start stockpiling cash immediately. Because even though you’re pursuing a loan, if you have cash on hand, that will work to your benefit.
- If you don’t already have a strong, well-documented business plan in place, you need one. This is one of the first things a lender will ask for (and you don’t want to scramble to produce one at the last minute).
On a related note, it’s worthwhile to have a bookkeeper for your business. Many small business owners try to save money by doing their own books, but it’s too often disastrous. When you have a bookkeeper to handle your finances, you’re much more likely to be suitably prepared for the loan application process.
Be Open and Transparent
Not every business has a spotless financial history or perfect credit score. In fact, most don’t.
Bad marks won’t automatically disqualify you. There’s no sense in hiding information or supplying misleading answers to the lender’s questions.
That’s because everything will come out in the due-diligence process. If you are open and transparent from the start, that will save time and help you connect with the appropriate loan product.
Choose the Right Lender
Right off the bat, most business owners assume choosing a lender means little more than finding the one that offers the lowest interest rate. But that isn’t necessarily the case.
Other factors come into play. For example, it’s imperative for you to work with a lender that has the proper infrastructure to streamline the loan origination process.
Some lenders still use archaic processes that are clunky and slow, while others call on impressive platforms like SPARK, which features intuitive borrower-facing dashboards (among other things). Inquire about the processes your prospective lenders use and take that into account.
Though every lender has its own criteria, it’s fairly easy to know if you’re on the right track (in terms of getting approved). But you have to be realistic about your expectations. If you don’t have enough assets within the business to guarantee the loan, you must expect to guarantee it with your personal assets as collateral.
Pursue All Options
Don’t become so fixated on one specific option that you miss out on the array of other financing options that may be available to you. Depending on your need, an alternative you hadn’t expected could be superior to the one you sought.
If you’re seeking a loan to start a business, for instance, you’ll probably have to rely on alternative forms of financing such as personal loans or business credit cards. If you already have a business and simply want to manage some of your day-to-day expenses, a business line of credit could be an acceptable option.
If the goal is to expand your existing business, however, government-backed SBA loans or private short-term loans could work for you. The point is that you have to be flexible.
Pursue all options and let the process play out. By the end of it, you should have a clear idea about what’s reasonable and realistic.
Don’t Rush Into a Loan
One thing you certainly don’t want is to be rushed during the loan process. This increases your stress level and puts unnecessary pressure on the lender, which could lead to shoddy processing and a host of other pitfalls.
Don’t wait until you suddenly need an infusion of cash to begin shopping around for a loan. It’s best to begin as soon as possible so as to give yourself plenty of time.
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