Strategies For Obtaining Small Business Loans and Financing

Small business loans can be acquired from banks, governmental organizations, or private lenders. Loans are important to improve your business when necessary. You can expand your business and employee cycle with loans once well planned. However, applying for loans to fund your business can seem arduous. But with adequate planning and strategies, it is an easy way to develop your business. First thing first…

When should you get a business loan?

Quite a number of business owners are not sure when to obtain a loan or not. It is essential to study in what instances you’ll need a loan or not. Some situations do not require you to get a loan primarily for small businesses that are seeking to expand. Obtaining a loan too early might be detrimental to your business. However, here are a few reasons you can get a business loan.

Advertising costs

When running a small business, advertisement is necessary to improve sales and enlarge the organization. They can be expensive and you may need a business loan to help.

Employment

Hiring the best hands for your business will play a large role in developing it. You may need a loan to pay their fees.

Emergency fees

All businesses are prone to unexpected and unforeseen circumstances that can require money. Taking a loan to keep your business intact may be helpful.

Poor cash flow

This can be due to little revenue being generated from the business. If you don’t have enough capital to develop your business, you can take a loan.

High cost of equipment

For small businesses, equipment might be too expensive to afford. Whether you’re trying to improve or expand your business with new equipment, a loan can be used.

Steps required to get your business loan

STEP 1: Know how much you need

The first step to take while trying to obtain a loan is to analyze how much you need and what you intend to use it for. You may need to create a detailed projection of the costs of the things you need the money for. You should also make an analysis of the profits & losses that the to-be-acquired loan will incur.

STEP 2: Have a business plan

While applying for a loan, your application must be accompanied by your business plan. A business plan is a document that contains the goals of your company and how you intend to achieve them. Although this is not necessary, most organizations lend out money to businesses that apply with a business plan. Your business plan should contain the amount you want to invest in your business, how much you need to grow your business, and how you would spend it. Your business plan also plays a huge role in how you can repay your business loan. This will enable you to determine the strengths and weaknesses of your business and how to manage them. To draft a business plan, the following steps are required.

1. Write a mission statement: Your mission statement is a summary of what your business offers, it can be products or services.
2. Give an outline of your business: Describe what your business entails which should include the history of your company, your business structure, the name of your business, your business address, and lastly notable partners in your business.
3. Give an analysis of your business goals and what you want to achieve. If you’d be submitting your business plan with your application, this is the part where you explain your short and long-term goals and how useful the funding can be for you.

STEP 3: Research Lenders

It is important to do research on the best options for you. Also, check if there are available government grants in your country before taking the loan route. When applying for loans, there are various financing alternatives. The interest rates differ and they have different requirements and terms. Make research ranging from available banks to online lenders or governmental institutions.  When researching lenders, it is important to note the following;

1. The first step is to research different kinds of banks and the loans they offer. This also includes conducting research on their interest rates as well as the advantages and disadvantages of borrowing from each bank
2. When researching lenders, have a brief outline of what you intend to use the money for. This will give you an insight into the best option for you. For example, money obtainable from loans for equipment funding is different from short-term loans or SBA loans. Knowing the type of loan you need will help you choose the most comfortable loan scheme and repayment term.
3. After this, search for lending institutions, most lending institutions publish their terms online so you have to call some. Compare their rates and interests and from this, you can choose the best institution for you.

STEP 4: Type of loan you intend to obtain

When considering applying for a loan, it is important to make decisions that will not affect your business in the long run. There are different types of loans and choosing the best financing for your business is essential.

1. A business line of credit: This is more suitable when the funding is for emergency needs. It is similar to a credit card. It allows business owners to only borrow the exact amount of money they need and pay interest on it.
2. Short-term loans: A short-term loan is a type of financing that requires you to pay the money borrowed after a fixed period of time instead of paying it in installments. Valued at a maximum of $10,000, most business owners use it to settle their short-term needs.
3. Business term loans: These are loans that require fixed repayment at schedules over a period of time.
4. Equipment financing: Unlike other loans, a down payment before receiving the loan is mandatory. The loan is for organizations when they need equipment for their operations. The size of the loan is dependent on the value of the machinery to be purchased.
5. Account receivable loans: Simply put, account receivable loans are loans that allow business owners to use their account receivables as collateral.
6. SBA loans: These are called small business administration loans and are government-backed loans. The interest rates and repayment terms are usually more flexible than other types of loans.

Here is a video analysis of types of loans and how you can get one.

STEP 5: Repayment

Before applying for a loan, you must have a mapped-out plan on how you will repay the money. A credit history might be required of you when applying for your loan. This is to analyze your financial capacity. Also, a repayment period in which you’d have to pay back the loan will be given. Lenders mostly borrow for up to five years. The shorter the term, the shorter the interest rate. For easy payment of loans, follow these steps:

1. You have to make a thorough and honest assessment of your business. Ensure that you do not borrow more than required and the amount borrowed does not exceed your generated revenue
2. It is essential to manage your cash flow after taking out a loan. Ensure that the money income exceeds the cash outflow. Only spend money when necessary and separate your personal finances from your business.
3. Whenever you have a surplus amount, ensure that you save it in your loan account. This is to help you repay the loans faster before the interest accumulates. Also, it is important to maintain a good relationship with your lender to negotiate the terms better.

STEP 6: Financial experts

Employ financial experts when applying for loans. They can give you an insight of when a loan is necessary and the type of financing options that are suitable for your business. Additionally, they can create a repayment plan for you. Financial experts help to evaluate your business’s financial status, they help to verify your loanworthiness as well as manage your cash flow.

Frequently Asked Questions

How difficult is it to obtain a business loan?

Obtaining a business loan is as easy as other forms of financing. It requires adequate preparation and convincing your lender that you can repay the loan in due time. Most applications are followed by your credit history and business plan. Once you present all your documents and it is verified that you are transparent and debt free, you’re good to go.

Are banks the best options for obtaining small business loans?

A bank might not necessarily be the best option for small business owners. This is because of the lengthy and restrictive process it is accompanied by. Bank loans are more suitable for large businesses that intend to pay lower interest over a long period of time. There are private lenders and organizations that are willing to lend to small businesses. However, this does not mean a bank cannot be the best option for you as long as they offer the best financing for you.

How important is the interest rate when considering obtaining a loan?

Interest rate is important when obtaining a loan. Although it’s just a tiny bit of the whole deal, it still determines how much you’ll have to repay at the end of the lending period. However, it is crucial to also consider other factors such as the terms of the loan, when you have to repay the loan, and what you can use it for.

How long does it take for repayment of the loan?

The time for repayment is dependent on the loan term. For example, if your loan term is two years, you have to pay before or immediately after the lapse of time. However, if you decide to pay before the end of two years, ensure that early repayment does not attract extra fees.

What is the best option for financing a business?

Obtaining a loan is not the only option to finance your business. Although it’s mostly the option chosen by small business owners because when adequately planned, you can pay your loans in installments from your monthly income. However other options can include crowdfunding, angel investors or you might prefer venture capitalists. It is important to note that these methods have their pros and cons.

Also read: 9 Ways to Get Customers to the Door of Your Business

Conclusion

Following the above strategies will help you plan how to obtain a loan from any organization as well as your repayment plan. In conclusion, navigating the landscape of small business loans and financing requires a strategic approach tailored to your unique needs. By making use of these outlined strategies, you can confidently explore various funding options, seize opportunities, and propel your business toward sustainable growth. Remember, whether you own a small business or an already established business, the proper financial support can help your business grow into what you’ve always imagined.