How to Prepare for The Loan Application Process:
If you’ve applied for a personal loan before, you know that it's crucial to thoroughly research your financing options and fully prepare for the application process.
Before you take the plunge and apply for a small business loan, there are several things you need to do to prepare, including:
1. Check Your Credit Report
Your personal credit score will play a vital role in whether or not you get approved for a small business loan. Therefore, it only makes sense to check it prior to applying for financing. That way, you won’t waste your time applying for loan programs that you won’t qualify for due to credit issues.
If you have bad credit, you should try to improve it prior to applying so you can qualify for the best first-time business loan rates possible. To do so, pay your bills on time, keep your credit utilization low, and dispute any errors or inaccuracies. Once you have a strong credit history, lenders will be more likely to consider your application.
2. Determine Your Ideal Loan Amount
Think about why you need a small business loan — maybe you’d like to purchase equipment, expand operations, or cover payroll during the off-season.
Once you decide on how you plan to use the loan, you can determine how much money you want to borrow. Remember, you shouldn’t borrow more money than you can afford to repay because you could put your financial health at risk.
3. Gather Your Documentation
There are certain documents that a lender will ask you to provide when you apply for a small business loan. While every lender is different, most require a business plan, personal and business tax returns, business bank statements, a balance sheet, income statements, and business licenses. We suggest gathering these documents and storing them in one place so you can access them easily.
How to Apply for a Small Business Loan:
After you prepare to apply for a business loan, follow these necessary steps:
1. Research Lenders
First, research lenders that offer first time business loans, in addition to the types of loans they offer. Next, read reviews and Better Business Bureau (BBB) rankings to make sure you choose a reputable lender with a positive track record. You should also check out each lender’s first-time business loan requirements prior to applying.
2. Choose a Business Lender
Select a business lender based on the amount of money you need to borrow, the purpose of your loan, and your credit. Also, consider any fees or prepayment penalties so that you don’t end up with surprise expenses.
3. Complete the Loan Application Form
Some lenders will allow you to complete the entire business loan application online. However, others will ask that you visit a local branch to do so. When you fill out the application form, make sure your information is accurate to avoid delays in approval and funding.
If you’d like additional assistance, ask a mentor or trusted colleague to help you with your application. Or, if you’re applying for a Small Business Administration (SBA) loan, contact your local branch with any questions you have.
4. Wait for a Decision
Fortunately, many lenders offer quick decisions via email. Depending on the lender you choose, you may get approved right away, the next business day, or in a week. This is especially beneficial if you have immediate cash flow needs.
5. Accept the Offer
Upon approval, read the fine print of your loan agreement. You should review the following components before deciding:
- Interest rate (notably if it comes with a fixed or variable interest rate)
- Loan amount
- Loan term
- Prepayment discounts or penalties
- When you'll be eligible for another loan from the lender
If the offer is satisfactory and you don’t have any questions, sign on the dotted line and accept the loan. Most lenders will send your funds to you via direct deposit.
How to Repay Your Business Loan:
Your lender as well as the type of business loan you take out will determine the repayment process. However, in all situations, it’s crucial that you budget for your loan payments, in addition to business credit card bills and other ongoing expenses. If you don’t adhere to your budget, you may find yourself in a compound of debt.
With a short-term loan, for example, you’ll likely have to repay the money you borrow via fixed monthly payments over a term ranging from a few months to a few years.
If you opt for a business line of credit, you’ll be able to withdraw as much or as little money as you’d like up to a set limit. You’ll then pay back the money you borrow plus interest during the repayment period.
While repaying a loan early can save you thousands of dollars in interest charges, it’s not always a good move. Before you decide on this repayment plan, make sure your lender doesn’t charge early repayment penalties.
On the other hand, if you’re struggling financially and unable to make your payments on time, consult your lender. In many cases, they can help you restructure your loan term.
Find out what your repayment options are and whether you can make partial payments, or they can extend your due date. If some time goes by and your credit score has improved, consider refinancing. By doing so, you may be able to lower your payments and save a great deal of money in loan interest rates.
Conclusion: First Time Business Loans Don't Have to Be Stressful
A first time business loan can be a powerful financial tool for your business. Unless you have the cash to cover all your expenses upfront, it may be just what you need to steer organization toward unparalleled success.
However, just make sure you use it for purposes that will help you grow your business. Once you apply for and accept a business loan for the first time, you’ll find it much easier to obtain financing in the future.
If you’re ready to learn more about small business loan options, click the link below to get your free quote from Fora Financial.
Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.