Almost everyone that wants start a business needs money. Also, most of us don’t have enough money to cover all the costs of a business start-up. Therefore, the obvious answer is to borrow money from a bank or other funding agencies. But will you qualify for a business loan? And even more, what should you do to qualify?
How to qualify for a business loan
The thing is with a business loan (and any other loan for that matter) is that the loaners want their money back after a certain time. They will borrow money to lenders that they think are capable to pay it back. As a result, the lender must provide reasonable proof that the business will be viable and that he/she has enough collateral to cover the loan amount. The lenders also want to see that you are able to run a business and that you are passionate about your business idea.
It will be of great help if you can prepare for your business loan application.
Five steps to help you qualify for a small-business loan
Steve Nicastro, in NerdWallet, recently suggested that qualifying for a small-business loan is easier when you’re prepared. He proposed five steps that may help you to qualify for a business loan:
Step 1: Build credit scores to qualify for a business loan
You need a credit history in order to be awarded a credit score. According to TransUnion, your Credit score is calculated using a formula that evaluates how well or badly you pay your bills, how much debt you carry and how all of that stacks up against other borrowers. In effect, it tells you in a single number what your credit report says about your management of existing credit.
The higher your credit score, the better:
All the credit information in your credit report contributes towards the calculation of your credit score.
You can get your credit score online – just beware – they may charge a fee and ask for all your personal details
Step 2: Know the lender’s qualifications and requirements
If you know what the minimum requirements are of the lender, then you won’t waste your time apply for loans that you actually not qualify for.
For example, if you are a male and applies for a loan at the Isivande Women’s Fund (IWF), you’ll be wasting your time because they’ll only consider businesses with at least 60% female ownership. Similarly, other loan agencies require that the business must be in operation for at least two years with positive cash-flows. Even more, lenders such as venture capitalist or angel investors may only require a share in your business, if they think it will be a viable venture…
Sadly, most small start-up businesses will battle to qualify for any business loan at all…
Step 3: Gather financial and legal documents
Banks and other funding agencies typically ask for a wide range of financial and legal documents during the loan application process. These may include:
- Personal and business income tax returns
- Balance sheet and income statement
- Personal and business bank statements
- A copy of your ID card
- Commercial leases
- Business licenses
- Articles of incorporation
- A resume (CV) that shows relevant management or business experience
- Financial projections if you have a limited operating history
Step 4: Develop a strong business plan
A well-researched, well-written and well-presented business plan may help you to qualify for a business loan. Indeed, a business plan is one of the most important documents that you need for your loan application process with any bank says Rishi Mehra in the Economic Times (India). Rishi, suggests that the plan should be consider as a set of documents that you can use to sell yourself or your business in the eyes of the lender.
After all, business plans are prepared by large and small companies so that they can chart where they’re going in the future. Even more, both the planning document and the processes by which it’s created have separate values in that they each play an important role in effective management.
The business plan document serves two concrete purposes and provides an incidental benefit 1.
- It’s indispensable for getting help from others, especially financial backers.
- It provides a guide for running operations once the enterprise is started and on its way.
A well-researched and written Business Plan helps to get your business started the right way.
Step 5: Provide collateral
To qualify for a business loan, you may have to provide collateral to back the loan. Collateral is an asset, such as equipment, real estate or inventory, that can be seized and sold by the lender if you can’t make your payments. It’s basically how lenders can recover their money if your business fails.
Lending money for small businesses is a ‘busy’ affair. The profiles of the lenders are as diversified as the businesses they lend money to – from utterly conservative retail banks to somewhat out of the gutter loan sharks. And every lender wants to have a piece of your profit or collateral.
Best is to do your homework carefully before applying for a business plan. And, if you do qualify for a business loan, it means a large feather in your cap – you’ve have made an important sale – yourself and your business…
1 Lasher, William R. 2010. The Perfect Business Plan Made Simple; The best guide to writing a plan that will secure financial backing for your, The Philip Lief Group Inc.
Feature image: PEXELS
Image in text: PEXELS