In 2018, small businesses obtained a record-high 5,434,518,200 in 7(a) loans, which are small business loans. Current projections show that the record may be reset by year’s end. This is good news for small business owners and those looking to secure a loan for their business. Although the process can be intimidating, securing a loan is a very important step for any small business owner. To ensure the process runs smoothly, you should be prepared before seeking a lender. Any lender will need quite a bit of documentation before approving you. You’ll need to provide a solid business plan, projections, and more. This post will discuss the basics of securing a small business loan.
Before seeking a loan from a lender, you should know that any first-year business owners face major barriers. Most of the documentation that lenders ask for deals with previous business documents, which you would not have in your first year. For those who’ve been in business for a few years but are looking to expand, gather your proper paperwork. A lender will ask for previous tax returns, financial statements, and other legal documents. Any lender will ask for these documents including both personal and business financial statements, so prepare yourself to have at least the past few year’s tax returns. Additionally, you may be asked for other legal documents depending on the specific lender requirements. These include business registrations, a business’s lease, franchise agreements, and copies of contracts with other third-party financers.
Once you’ve gathered the proper documents, you’ll need to provide a detailed business plan that includes how you plan to use the loan. The more detailed your business plan is the better your chances are of securing a small business loan. A detailed plan would include a 5-year projection plan, previous cash-flow balance sheets, and profit and loss statements. As you can imagine, a lender wants to know how you plan on spending the money they loan you. If your plans lack detail, a lender might deny you because they consider that too high of a risk. While staying on the subject of high-risk, a lender may require collateral before approving your loan. Not all loan programs will require collateral, but if they do it may come in the form of a vehicle, property, or equipment that you own.
After gathering your plans and paperwork, you may want to check one more important thing before applying for a small business loan. In general, before you seek any type of loan it’s a good idea to check your credit score. A low credit score may yield you a higher interest rate or get you outright denied. Earlier it was mentioned that small businesses secured a record amount in loans last year.
However, in the same year, big banks denied nearly two-thirds of applicants, largely due to their credit scores. There are a number of ways to quickly boost your credit score which include common practices such as paying on time and constant credit monitoring. Other practices include not co-mingling funds, which means keeping personal and business accounts and credit cards separate especially if you do not have good personal credit.
Hopefully, you already have an insurance policy for your business. Illinois requires businesses with more than one employee to carry worker’s compensation. Business insurance can assist you when you need it most and can help prevent your business from going under in an emergency situation. Policies such as product liability, which covers damages done by a defective product, give small business owners some peace of mind about their product. There are affordable policies out there, you just need to find the right one for you.