Five Things To Know Before Applying For A Startup Loan

Acquiring capital for your company with a first-time business loan is like pouring the foundation of a new house. Everything that comes afterwards is because of the choices you made at that first stage. It’s difficult to build a house on an uneven foundation, and it’ll be hard to run a thriving company built on a shaky financial foundation.

Here are five things that small business owners need to know about before acquiring a small business loan.

1. It can be difficult for startup businesses to obtain affordable financing

Budding entrepreneurs often find it more difficult to obtain financing than the owners of established businesses do. Often, aspiring business owners have to apply for a loan in order to start pursuing their dreams. Among the reasons loan applications for startup firms are rejected are: having a mediocre business plan, a poor personal credit history, and missing documents and other information that are required on the application submission itself. Here are some tips for first time business loan applicants:

  • Get your credit online: when you’re a first-time borrower, much of the lender’s decision depends on your own personal financial history. There are ways to improve your credit score and doing so can help you not only get approved for the loan you need but lower the interest rate on that loan.
  • Have a plan: Your first-time business loan application should have a clear goal. Writing a business plan is an incredibly important part of the process.
  • Know how much money you need: Pick an amount that makes sense. Be able to break down how the money will be used. Borrow more than you think you will need because inevitably there will be snafus and delays. You don’t want to have to go back to your lender a year later because you didn’t borrow enough money. It will be a reflection of poor planning.
  • Figure out which type of loan is best fit: There are numerous ways to find out which type of loan is best for your situation. Do your research.
  • Use a checklist to prepare for the application: Creating a pre-application checklist is a great way to make sure the loan process goes smoothly.
  • Remember that future loans will come as a consequence of your first loan.

2. Understand about personal guarantees

A personal guarantee is a legal contract between business owner and lender that essentially states that if the business defaults on the loan, any and all items of value, including property, vehicles, and inventory, will be seized by the lender and offered up as collateral. to recover the cost of the loan.

This can also mean your personal assets are put at risk should the business fail to pay back the loan. Often, with small business lending, the lender will require some form of collateral anyway, and a personal guarantee is almost always part of the process. This ensures that you’ll have a good incentive to grow your business, but also that you won’t walk away from defaulting on a loan without any responsibility.

The necessity of personal guarantee for SBA funding comes down to the type of loan you’re seeking. The lender also has a say in whether or not a personal guarantee is required. The SBA has its own guidelines for lending, but individual banks and financial institutions also have theirs. You’ll need to fit both criteria to even be considered, and even then, you may still need collateral in order to secure your funds.

3. Gather supporting documentation before submitting a business loan application

There are many benefits to taking out a small business loan. But the application process is not always a breeze. It requires a lot of information and documentation, and many entrepreneurs and business owners get stuck halfway through their application because they don’t have the right documents. Incomplete information and documents are the most common reasons why small business loan applications get rejected.

Once you’ve decided to apply for a small business loan, you’ll want to get through the application and approval processes as fast as possible. Preparation is key when time and money are on the line. Each lender and type of loan will have different document requirements for qualifying loan applicants. These are some industry-standard documents you will want to gather ahead of time:

  • Credit reports
  • Bank Statements
  • Income tax returns
  • Debt schedule
  • Collateral documentation
  • Financial statements
  • AR and AP reports
  • Business plan
  • Business license

4. A well written business plan is important for future success

A business plan is an essential part of the process when launching a new venture. The plan will act as a step-by-step guide for both long and short-term strategies. Business plans are often critical for convincing lenders to fund your venture.

Lenders are taking risks whenever they give a loan, and they want to be confident that you will be able to repay the money in the future. They want to really understand your company, what you do, and how you plan to use the money. A business plan is the best and easiest way to communicate this information and allows them to make an informed decision as to whether or not they should give you a large sum of money.

Startup loans are actually quite risky, compared to other small business loans. This makes having a business plan even more important. However, having a business plan does not mean other factors are unimportant for obtaining financing. Lenders will still look at your credit score, credit history, and financial statements in any loan application process.

5. SBA loan applications are different from bank loan applications

Two of the most common forms of business lending are commercial loans and US government-backed Small Business Administration (SBA) loans.

Commercial loans function in almost exactly the same way as SBA 7(a) loans, with one seismic difference: Commercial loans aren’t guaranteed by the government. This is a massive difference. Without that safety net, there is much greater risk for lenders.

A common misconception about SBA loans is that the government itself gives out the loan. That’s not the case. The fundamental difference is that the US government guarantees up to 75% of the loan amount.

There are a few qualifications to keep in mind before you submit an SBA loan application. Firstly, you’ll need a strong credit score. Almost all SBA loans require a personal credit score above 660. Thus, if you’ve got great credit and are looking for lower interest rates, you may want to apply for an SBA loan.

While bank loans can work well for many small businesses, online lenders offer convenience and speed. You can apply for financing on your phone; typically, there is less paperwork than with a traditional financial institution; and the process runs much more quickly from filling out the loan application to seeing the money in your bank account.

Also, online lenders typically offer more types of funding options. In addition to term loans, online lenders offer products such as short-term loans (eg, bridge loans for real estate purchases), invoice financing, merchant cash advances, and more. While the process is easier and the speed of funding is quicker, borrowers pay a premium in the form of higher interest rates. When the lending process is online, accessing your funds is typically done electronically.

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