Securing a Loan: Business Loan Requirements
Expanding a business requires a loan if no cash is available. A business loan is intended for business and it involves creating a plan to repay debts with interest added. You have many options to raise money for a loan; there are asset-based financing, bank loans, business cash advances, cash flow loans, invoice financing, mezzanine financing, and microloans.
Consider these 4 kinds of business loans that are suitable for your need:
- Capital Working Loans
These business loans are short-term designed to bring extra cash into the business for growth & expansion, and for handling current day-to-day expenses to be used for advertising, payroll, purchases of inventory or renovations. It also includes the cost of emergencies plus settling debts.
- Small Business Administration Loans (SBA)
They are loans that are backed up by the government for small businesses from private sector lenders. SBA loans are secured for you can acquire working capital by using as collateral your company or personal assets.
- Accounts Receivable Factoring
Also called receivable financing, they are used to convert sales on credit terms for immediate cash flow. For instance, you might sell your existing, uncollected invoices to a third party for an advance payment. Called the factor, the third party provides you with the full or partial amount and then turns around and collects on the sale from your customer.
- Friends & Family Loan
Borrow from family or friends. As a business practice, always have a written document of the loan putting everything in writing with its specific interest rate and repayment plan.
Requirements for Loans
Business loan requirements are complicated but your ability to secure the amount depends upon your ability to present yourself and your business idea to the lending institution. Traditional lenders are strict when lending business loans and this happens when borrowers lack successful proven track record of business. To obtain financing, be prepared to meet number of small business loan requirements.
- Business Plan
A written business plan is a “must” to describe the nature of the business, your market targets, the reason for the loan and info about competitors. In your marketing plan, lists all the expenses you’re likely to incur as documents like a balance sheet, income statement and projected cash flow.
Some form of collateral is needed for security of the loan. Your personal circumstances and policies of the lending institution may require the value of collateral to be as high as 100% of the outstanding loan balance. Forms of collateral for business financing can be a business property such as building, equipment, car or personal assets such as securities like stocks and bonds.
- Acceptable Credit
Even if you have collateral, you still need acceptable credit for a loan approval. According to the Small Business Development Center of West Georgia State U, banks want a score of 700 or higher to limit the threat of borrowers default.
- Previous Experience
The lender will want to view a minimum of three years of your experience in the business operations similar to your new venture. Your past business succeeding together with our skill in managing money are important security measures that banks need to determine the likelihood of your business venture. If you have no prior business, demonstrate that you have attained a high level of expertise in your field.
- Your Own Money
Although you will be borrowing money for your business and personal loan, you’ll still need to use some of your own money. This is a proof to the lender that you’re serious to your new venture and also a way to reduce the amount of the loan. Before the application process, you need to provide at least 10 to 20% of your total required amount of the start-up.
Some more inquiries are made on your:
- #1 Good Personal Credit – As the business owner, your personal credit will be investigated since on the general market, you are primarily the face of your business. Your character, record of repaying debts and credit history are reflections of the business itself.
- #2 Good Business Credit – Once a business has been in operation for a year or more, it will have independent credit score with its legally incorporated name and tax ID number. A personal credit score consists of all debts and other obligations accompanying the business together with the payment’s complete record. Small business owners need good credit to be considered for a business loan.
- #3 Large Asset Base – Most personal and business loans are secured against an asset. Assets in a corporation might include all office equipment & machinery, as well as the real estate owns and operated by the business. Any kind of intellectual property or company’s stock down is part of loan assets as it is given fair value in the market. Some online lenders do not always ask for collateral. Personal assets are accepted but not preferred.
- #4 Solid Business Plan – A business plan is reflective of the business’ estimated profitability in the coming years. Although no plans are required for personal loans must make detailed plans in the loan application that predicts the rate of return on investment for the capital provided. If you lack the expertise to create this type of plan, consider hiring a financial adviser to your board as this person can be integral to achieve success down the line.
- #5 Industry Experience – Most lenders prefer that board members of the company applying have knowledge and experience building a profitable business model. If a business owner is a neophyte in an industry, he can add experience team members as advisers for they can play a key role in problem-solving while the owner is getting a feel of the industry.
Carefully weigh all business loan requirements before taking a loan and at the same time, search for alternative loan options, as using local investors to raise capital. Finally, be sure you have all the right reasons to apply for a loan. To expand company simply for the sake of expanding is not always the best idea. Never be afraid to take a step back and ask for professional guidance.