Generally, in a growing business, there will be a need for financial crutches at some point of time for probably enhancing or for meeting few important commitments in the business.However, it is very important to learn how to go about applying for a loan without falling into a spiral of bad debt,which can harm your cash flow series. Hence, here are few important points to be considered before applying for a business loan.
Understand Your Credit Score
Your credit score plays a vital role when applying for a loan with a traditional lender. Hence, before approaching any bank, you should know your scores. You have to request a personal credit report and verify if there are any errors. For instance, you might have made the payment on time, but been wrongly entered as late. If you find any such error, contact the credit agency and resolve the issue immediately.You will be eligible for loan based on the credit scores mentioned below:
- Above 70 – 100% chances of getting a business loan with attractive interest too
- Between 60 to 70 chances of getting a loan with a higher interest rate.
- Below 60- It may be difficult,but not necessarily impossible to get approved for a loan.
You must know your needs. In case you have no idea about the exact cash requirement for your business, consult a financial adviser or a chartered accountant before approaching any bank. Once you get prepared, you need to carry the required papers and documents to discuss with the lender about your finances, projects, and future plans. Also, you have to explain the proper usage of the loan like how the cash gets distributed with respect to purchase of materials setting up a new location or to pay extra staff.
Be Aware of the Process
There are chances of first loan getting rejected, but you will get some experience. You will rather come to know the reason for the loan being rejected; it could have been due to poor credit score. So, obviously you can take time to improve your credit score and then later approach bank for seeking loan.
Repayment of Loan
It is very important to determine whether you can afford a business loan. If so,you should start working on accurate cash-flow forecast. You have to be thorough with the receipts and payments of your business. Calculating a monthly cash flow and multiplying it by the number of years will get you a yearly cash flow and thus use the annual balance payments on your future loan.
Getting Qualified for a Bank Loan
There’s no doubt that financial institutions are cheaper for growing businesses.But it is equally difficult to get your hands on. Following are the important papers that have to be submitted to the bank to avail business loan.
- At least3 years of tax returns
- Papers or related docs that show that you are profitable
- Papers, which show good personal and business credit
Thus, you have to bear in mind to consider the above points before applying for a business loan.