Knowing how to go about getting a loan for your business can be very daunting, especially if it’s the first time you’ve gone through the process. Over the last six or more years, funds have become much harder to secure from banks and many other lending institutions, and the hoops to jump through have often increased.
There are, however, a variety of lenders to keep in mind when you need a business loan, and steps that you can take to help increase your chances of success. If you’re ready to grow your company in 2015, read on for some of the essential steps you can take to secure yourself a business loan while avoiding the following mishaps.
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1. Wait Until You Need the Funds to Apply
To secure a business loan, it always pays to build rapport with key contacts at lending institutions before actually asking for anything. This can take time, and shouldn’t be rushed. Always keep in mind that it’s better to start thinking about getting a loan before you need the funds.
Trying to secure a loan under tight time constraints can negatively affect your ability to do a thorough job on loan applications. Short deadlines plus being worried about cash flow can cause you to rush the collation of information when filling out forms. Often this results in higher interest rates or lower funds due to the lack of time spent looking for the best deal possible.
Being desperate for cash can only attract a desperate situation. Putting off a vibe of neediness is a red flag that you are the type of person that doesn’t think things through, and might end up having a negative effect on the decision about whether or not to lend you funds. Always allow enough time for the process to go at its own pace and you’ll generally find you receive a more favorable result.
2. Have an Overly Simple Business Plan — Or No Plan at All
Most lenders won’t consider a loan application without a solid business plan being submitted. To have the best chance of success, your plan needs to be up to date and thorough. Show that you have conducted plenty of research; know your customers (or potential clients), have a mission statement with goals in place and spend the time and effort in calculating estimated sales and profit projections.
Carefully consider how you’re going to pay back your loans and turn a profit by asking yourself key business planning questions, and present this information.
Although many business owners tend to rush through this part of the process in order to get their application in, don’t follow suit. A great business plan will help lenders to see that you have a roadmap for success that they can get behind, that you have a high chance of being able to pay back the loan in full, plus interest and on time.
3. Only Vaguely Know What You Want to Use the Funds For
Before applying for a business loan, spend time seriously considering if you actually need additional funding and if the extra cash will be spent on the right things. Banks and other lenders like to know that a business owner’s reasoning is sound. You’ll usually need to explain exactly what the funds will be used for and how this will impact the company in a positive way.
There are always good and bad reasons for seeking a loan. Some of the unfavorable reasons that banks won’t consider lending are to finance ongoing business losses, purchasing non-essential business assets or to pay for frivolous office upgrades.
On the other hand, some of the welcomed reasons to seek extra cash are things like covering large seasonal sale variances, financing essential equipment, advertising for business expansions, a real estate purchase or a long-term software and product development that will pay dividends in the long run.
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4. Ignore Outdated Accounting Records
Your accounting records deserve to be up to date and accurate. Otherwise, there is no point putting in an application for a loan. Like your business plan, your accounting records will give a lender a snapshot of your firm’s financial standing at the moment. If you need to secure a loan for a start-up business, present your personal financial outlook.
You will need to be able to provide lenders with items such as income statements, cash flow statements, balance sheets, profit and loss projections and anything else to demonstrate the financial health of your company.
In order to tell if you can really afford a loan or not (or to what value), lending institutions will want to analyze things like the profit margin, gross sales and the debt ratio of the business.
Pay attention to these do’s and don’ts when approaching a business loan. Organization and preparation will position you and your company for financial success.