You may be wondering why you should take on debt in the form of a business loan when it’s already difficult to manage your current finances. Getting the financing you need in business allows you to grow your business now, instead of waiting for the cash flow to come in later.
A business loan can also be a form of good debt, wherein you’ll be able to purchase essential tools or materials that can give your business a boost in profits. When you plan out a good strategy to make the most out of a loan, the return on investment may pay off for the loan itself several times over.
Once you’ve compared the loan options available, it’s time to check whether you are eligible to apply for financing. Make a checklist of requirements that your shortlist of lenders are asking for. If you’re still wondering whether you can be eligible for a business loan, here are the usual requirements which you might need to prepare:
- Identification: may include driver’s license or passport.
- Business registration number: This is the number you received when you registered your business.
- Documentation for Loan Amount and Use of Funds: This is a proper documentation of how much you want to loan and how you are going to use it.
- Financial Statements: These may include Balance Sheet, Income Statement, Cash Flow Statement, Statement of Retained Earnings.
- Bank Statements: Submit to the lender your latest business bank account statements in electronic form or hard copy.
- Business Plan: Banks will usually require this. It includes your business purpose, financial management, and other factors.
- Financial Management Plan: This showcases how you’ll manage your business finances, including cash flow and repayments.
- Proof of Personal Income: Secure a documentation on how much you earn every month, which can come from your business or other income streams.
- Credit Report: Get a copy of your credit report from credit reporting bodies such as Equifax. There are certain agencies that allow you to get a free credit report, so do check your country’s credit agencies to see if you can avail of one.
- Collateral for a Secured Loan: If you’re getting a secured loan, you’ll have to present ownership of a property or business asset that you can submit as collateral.
To increase your chances of getting loan approval, fine-tune these aspects in your personal and business history:
- Background Check: The first step that lenders do before going through the process of approval is to get a summary of your business. This includes background, history, company names, registration date, industry, and a few facts on what the business does. For your company name, include the full official name of business as what has been registered.
As you submit identification card copies, they will also do a background check on you to see if you are a good fit as a borrower. It also helps when you present yourself well to the lender during the interview and submission of requirements.
- Credit Score: Lenders will analyse your credit history for them to know how you handle past finances. A credit score or credit rating sums up your credit report into one number. It will show lenders how trustworthy you are as a borrower.
Before applying for a loan, make sure that you have built a good credit score. Your payment history is a big factor that makes up this number, so make sure to always pay on time and in full. Check your credit report for errors in case that it may affect your loan approval.
- Annual Turnover: It will also help you in the loan application process if you show the approximate turnover of your business. An easy way to calculate annual turnover is to divide net sales or revenue by the average total assets of your company. When lenders see that you have the cash flow to cover the loan repayments, they are more likely to approve your loan request.
The best path forward on this would be to ensure that you already have a good cash flow every month, and that you can accomplish the repayments with the consistent flow of income from your business.
- Existing Financial Obligations: Declare other types of loans or credit being used in your business. The lender will check if you have an overdraft, other business loans, or business credit cards. They may want to see how you’ll handle getting an additional loan, or that your finances and cash flow are good enough to repay the loan during a given period.
It’s best to keep your lines of credit at a minimum and lessen outstanding debt before applying for a loan. You have to show the lender that you have all finances in order and you can carry the responsibility of getting additional financing.
In a Nutshell
You’ll be able to get a business loan easily when you have built up a good credit history and established a consistent flow of income for your business. If you find it hard to follow through with the strict requirements of banks in getting a loan, there are fintech companies such as Bizzloans which only require a valid business registration, photo ID, and business bank account statements. You’ll get funding to your account in as quick as 24 hours when you get a free quote below.