Getting a small business loan is easy when you are prepared. Five main steps are required: (1) Build your credit score, (2) choose a lender, (3) gather your financial and legal documents, (4) prepare a business plan and (5) get assessed by your chosen moneylender.
What Are Small Business Loans?
Small business loans can do wonders for a small business looking for an injection of capital. It serves as a valuable tool for continual business growth and expansion. Often times, in order for a business to take full advantage of a market opportunity, they would be required to make an upfront investment. In return for the expended capital, they qualify for the opportunity to get back significant a return on investment. The returns would cover the capital expanded while also giving a profit surplus.
The price of fast business loans is of course the interest that is charged by the moneylender to your business for the loan. Moneylenders charge this interest due to:
- The opportunity cost of having lent you the agreed sum
- To account for the time value of money (loss of dollar value due to inflation)
- Compensation for the risk undertaken in extending the loan
Raising Capital Through Debt or Equity
You have two choices when raising capital for your business, either through debt or equity. Small business loans incur your business debt, which is a financial obligation to repay the principal sum plus interest. Often times, business owners fear debt and attempt to avoid it at all costs.
These same business owners turn to equity to help raise capital. In layman terms, raising capital through equity involves selling a part of your business to third parties. This means that your new partners will now own a part of your business. The advantage offered here is that the risks are borne by your investors. Though on the flip side, they are entitled to a share of all future profits.
Having covered the importance of a business loan, we will now turn our attention to the steps needed to qualify for one.
Build Your Credit Score
Your credit score is based on the calculated probability of your ability to repay personal debts. Factors affecting your score include:
- Your payment history
- Existing credit card and other personal debts
- Length of time you have been in debt
- Types of credit you have used thus far
- Recent credit inquiries
From a small business standpoint, the credit score looks at whether your business will be able to manage new debt. As such, you can build your credit score by:
- Paying bills on time
- Paying your creditors on time
- Keeping a clean public record
- Having separate personal and business credit accounts
Choosing A Lender
You have numerous options when deciding who to borrow money for your business from. This can range from banks to private moneylenders. However, the most important thing to note is to only borrow from a licensed moneylending entity. If the lender is not authorized for moneylender operations, then they likely have practices that are not approved by the authorities. These practices may be harmful and unfair to you.
On the flip side, you should also take note of the lender’s requirements for extending a quick business loans. Each lender may have his or her own side of criteria when judging your suitability as a borrower. Furthermore, some lenders are flexible in that they are willing to overlook your underperformance in one area if you excel in another.
Generally speaking, your business would need to meet the minimum criteria for credit scores and annual revenue. Moreover you will face difficulties securing a loan if you have experienced a recent bankruptcy or other delinquencies.
Gather Your Financial & Legal Documents
Banks and licensed moneylenders will typically ask for a wide range of financial & legal documents for verification. These include:
- Your personal and business income tax statements
- Business’s balance sheet and income statement
- Bank statements
- Personal identification
- Business license
- Articles of incorporation
- Resume demonstrating your business’s financial management
- Financial projections for loan repayment.
Lenders have different requirements for documentations. For smaller business loans, less documents may be requested, thus giving you a quicker and hassle free process.
Prepare Your Business Plan
A crucial factor in determining the success of your loan application is the repayment plan that you present to the moneylender. Before determining a suitable interest rate, lenders will want to know why you need the money, how you intend to use it and how soon can they expect repayment.
A well thought of business plan detailing out milestones and contingencies will help to convince lenders. In particular, you will need to include current and projected financials, while also covering the forecasted liquidity over the entire duration period.
You may choose to arrange your business plan as follows:
- Company description
- Your product or service description
- An introduction to the management team
- Analysis of the industry
- Operations plan
- Marketing and sales strategy
- SWOT analysis
- Repayment plan
Get Assessed by Your Chosen Moneylender
Finally, your moneylender will take all the information you have given and make an assessment as to whether they would extend a loan to your business. In this aspect, it is all about your business’s risk profile in relation to the requested loan. Lenders will generally look out for 4 areas:
- The collateral or security offered to lenders – used in the case you can’t repay the loan.
- You cash flow management – used to judge ability to make regular loan repayments
- Your business’ financials – determines if the debt can be paid back in full
It should also be noted that it is not gross income that lenders look at but rather the actual cash attained from your entire operation. After all, you may be rich in assets but have poor liquidity. In such a situation, you would not be able to pay back in the loan in time.
Trust Tradition Credit for Your Business Loan
Tradition Credit is a licensed moneylender in Singapore with more than two decades of experience in the industry. We offer a comprehensive suite of financing solutions that are secure and fast. All loans are transparent with no hidden fees or penalties for early repayment. Trust our business loans to help your venture reach the next stage of its growth.