Odds in Your Favour: 6 Tips for Securing a Small Business Loan

The prospect of allocating funds wisely can initially seem challenging, but with a strategic approach, you can tip the odds in your favour. Unlike personal loans, business loans cater to specific objectives, necessitating a clear plan for optimal fund utilisation and return on investment. Before starting the application process, understanding each lender's unique criteria is crucial. Look at these six actionable tips to enhance your chances of loan approval.

Decide the Type of Business Loan You Need

Deciding on the type of Micro, Small, and Medium Enterprise (MSME) business loan aligns with your unique needs and goals. Thus, start by defining your fund's purpose.

For instance, working capital loans suit short-term expenses like payroll and inventory, and commercial real estate loans facilitate property acquisition or renovation, providing substantial amounts with extended terms. For specific ventures like launching a restaurant or acquiring a franchise, specialised loans cater to the industry's unique demands. Equipment loans, on the other hand, cover the entire cost of essential business assets such as computers or machinery.

Hence, assessing your funding frequency is crucial. Term loans, offering a lump sum upfront, are ideal for significant purchases or expansions. In contrast, business lines of credit provide ongoing, flexible financing for day-to-day expenses.

Consider the amount you need to borrow, keeping in mind that lower initial amounts for first-time loans are advisable. This approach allows for manageable payments, contributing to building a positive business credit history for future borrowing.

Factor in the urgency of funds. Online lenders provide quick-turnaround options, ensuring funds for emergency expenses, albeit with higher rates. Tailor your choice to fit your business's specific needs and timeline.

Determine Eligibility

Choosing the right type of MSME business loan is a pivotal decision in the loan approval process. Lenders have specific criteria, often outlined on their websites. Key factors include your credit score, typically needing a score of 750 or higher for the best rates. Building a solid business credit score is also crucial.

Consider the time your business has been operating; online business loans often require six months to one year, while traditional banks may require a minimum of two years. Annual revenue is a significant factor, with lenders often setting minimums according to your business. For lower revenues, alternatives like business credit cards or microloans might be suitable.

Collateral, such as real estate or equipment, can reduce risk for secured loans. Some lenders may also require a personal guarantee, allowing them to seize personal assets if repayment falters. Understanding repayment terms is vital; lenders may limit loans to 30% of your annual revenue, and repayment frequencies can vary.

Compare Lenders

For a small business loan, comparing lenders is very important. For instance, traditional banks are known for competitive interest rates but often stringent criteria. Government lenders extend low-cost funding solutions, especially for businesses in rural areas.

Consider online lenders, like Lendingkart, leveraging digital underwriting for swift decisions, even for applicants with less-than-perfect credit. While online lenders boast rapid approval, it's essential to weigh their interest rates, which may not match the competitiveness of traditional banks. Lastly, microlenders provide microloans that are ideal for startups and businesses with limited credit history, offering flexibility, low interest rates, and minimal fees.

Gather Documents

When applying for an MSME business loan, assembling the right documents makes the process smoother. Some of the common documents include:

➢ Business Plan: Craft a robust business plan outlining your mission, goals, and strategies.

➢ Business Licences: Ensure your business licences comply with state regulations.

➢ Financial Documents: Provide comprehensive financial documents, including bank statements, income statements, and balance sheets.

➢ Personal Financial Statements: Submit personal financial statements for you and your business partners.

➢ Tax Returns: Furnish both personal and business tax returns, showcasing your net profit.

➢ Legal Documents: Depending on your business entity, be prepared to submit Articles of Incorporation, bylaws, or an operating agreement reinforcing the legal foundation of your business.

➢ Building Lease: If applicable, have your building lease documents handy, including monthly payments.

Choose the Best Loan

When selecting the optimal small business loan, focus on these key factors:

➢ Interest Rates: Differentiate between fixed and variable rates. Evaluate the overall interest paid throughout the loan term.

➢ Fees: Assess additional costs like origination fees, late charges, and prepayment penalties. Factor them into the total loan cost.

➢ Terms: Understand the repayment duration and whether repayments commence immediately or after a grace period.

➢ Funding Speed: Determine the speed at which funds will reach your business account. Consider urgency against potential delays in funding time.

Learn From Mistakes

Each rejection is a valuable learning opportunity. Instead of viewing it as a setback, consider it as feedback to refine and strengthen your loan application strategy. Investigate the specific factors leading to the rejection, whether it be inadequate documentation, a lower credit score, or insufficient business planning. Armed with this knowledge, tailor your subsequent loan applications to address these deficiencies directly. By adopting this proactive approach, you not only demonstrate resilience but also significantly increase the likelihood of approval. Learning from rejection not only streamlines the loan acquisition process but also positions you as a well-informed and adaptable business owner.

Small business loans play a pivotal role in the success of many enterprises today. Timely financing has been a key driver of success for numerous businesses. For those navigating the terrain of business loans, the tips shared in this guide serve as a valuable starting point. By incorporating these insights, businesses can pave the way for successful financial endeavours.

Frequently Asked Questions

Q1. How to obtain a business loan without collateral?
Explore unsecured business loans or lines of credit, emphasising a strong business plan and financial stability.

Q2. What credit score is required for a business loan?
A good credit score typically starts at 750, but requirements vary. Maintaining a higher score enhances the chances of loan approval and lower interest rates.

Q3. How to secure a business loan with bad credit?
Consider alternative lenders, showcase a robust business plan, offer collateral, or explore co-signers to improve loan approval prospects.