Obtaining a small business loan for the first time can be a scary proposition, especially when you don’t know where to go and the exact steps to take. Having some knowledge of the application process and the required qualification criteria can help you break the ice, prepare accordingly and find the right lender to secure the capital you need to grow your business.
The good thing is, things have changed a lot. Unlike in the past where traditional lenders dominated the lending scene, online lenders have emerged to welcome new borrowers and offer first-time small business loans at favorable terms.
Six tips on how to get your first-time small business loan
Nail your credit score
Every loan conversation begins with your credit profile. That’s because lenders rely on your credit history and FICO score to build your risk file and gauge your responsibility and ability to repay their money. Your credit profile also determines the loan amount you can qualify for and the terms at which your loan is approved.
Having a poor credit score or no credit is a bane. Lenders will either reject you or approve you at unfavorable terms, which increases the cost of borrowing. But if you have a solid credit history and a good to excellent FICO score, you can get a small business loan at the best terms available.
So, begin by checking your credit score to know where you stand. You’ll need that number when shopping for lenders because different lenders impose a minimum credit requirement on borrowers.
If you have poor credit, taking some steps to improve it can help you find the perfect lender and qualify for a better rate. Best practices include disputing any errors on your credit report, paying bills on time, getting a secured credit card, and keeping your credit utilization low.
You want to make sure that you obtain your first loan from reputable, trustworthy lenders. To sift the scammers from genuine lenders, do your research well to understand the background and reputation of the lenders you’re considering.
Only obtain small business loans from registered lenders. You can easily establish a lender’s registration status by checking with the state’s Attorney general office. Again, visit the Better Business Bureau to establish the reputation of the lender. You won’t be disappointed working with lenders who have good accolades on the BBB website.
Genuine lenders also have secure websites, and social media accounts, and functional customer service that you can use for social proof. Runaway from lenders who entice you with teaser rates and deceptive offers. If the deal sounds too good to be true, it’s probably a scam. Don’t hesitate to ditch lenders who ask you to cover loan fees out of pocket.
Don’t go with the first lender you come by. Different lenders will have varying loan terms for the same credit score. Comparison-shopping lenders will help you ensure that you get the best loan offer and a fair deal in your current credit standing.
Banks and credit unions may be out of the question if you have poor or no credit, lack a trading history, don’t have substantial business revenues, or if you need funding faster. Your best bet is to go with online lenders.
To narrow your list of lenders and get the perfect one, compare lenders based on their interest rates, fees, approval periods, loan terms, and ease of application. Go with lenders who have fewer or no fees, have reasonable interest rates, and offer flexible repayment terms.
Of course, you’ll need faster funding, so choose a lender with an easy application process and a shorter approval period.
Determine your costs
Borrowing more than you can afford hurts your business more than it grows it. Before going into your first business debt, you need to make sure your business’s current cash flow can comfortably cover monthly repayments.
Reputable lenders offer business loan calculators on their websites that you can use to estimate total interest rates and monthly repayments upfront so that you can determine the loan’s affordability before submitting your application.
After crunching the numbers, ensure that your monthly installments are below 80% of your monthly net revenues.
Can you qualify for the amount you need? That’s where a prequalification process comes in. Once you’ve found a lender and determined the loan’s affordability, the next step is to submit a pre-approval to see whether the lender can offer you the amount you need for the specific purpose you need it. Mostly, submitting a prequalification form is free, but some lenders may impose non-refundable fees.
If a lender can’t offer you the amount you need or restricts you from using the money for the purpose you need it, you may need to look elsewhere to avoid trouble. Since you already have a list of lenders you are considering, move to the next best option in your comparison list.
Get your business documents ready
Gather all the required documents for the loan application. First, you’ll need to prove to lenders that you operate a legal business. So be armed with your business permits, license, and personal identification documents.
The second thing lenders will want to know is your business’s current financial standing to determine your ability to repay the loan. Have in hand all the necessary financial documents like balance sheets, income statements, cash flow statements, and tax returns for the past few months or years.
Also, throw in your most current business plan showing your business prospects and how you plan to use the loan proceeds to achieve your goals.
Obtain your first small business loan with confidence.
There you’ve it! The above are the steps you should take towards applying for your first business loan. You stand a better chance of approval working with a reputable online lender.
Unlike banks, fintech lenders have less stringent requirements, simple applications, and offer faster funding. For instance, Camino Financial offers small business loans in five simple steps. Visit the link at the intro to browse loan offerings.