Reach New Business Heights by Securing a Small Business Loan
How many times has it happened that you want to buy a new machine or rent out a new premises but your financial situation limits you? The key to a successful business is to satisfy the demands of your target consumers while at the same time accomplishing your business goals. But a scarcity of finances does not let you soar to the heights you imagine. Do not worry, follow the below mentioned steps and you can secure a small business loan sooner than you think.
Understand different types of small business loans:
Before you make any advances to secure a loan, you need to comprehend the different types of loans available and decide which one is best meant for you.
Traditional Bank Loans
These are the loans that we are accustomed to think about. You go to your bank, ask for the amount you need and get the cash if you meet the bank’s requirements. You then pay monthly interest payments to the bank and once the loan expires, you pay back the principal amount.
Traditional bank loans are optimal for financing new projects, new machinery and premises. Since it is a bank, the chances of defaulters are close to none. However, the major drawback with such type of business loans is that banks are hesitant to give small loans especially if you are a small business. And even if they do, the requirements for loan eligibility are very strict.
Some governments offer loan programs to help new startups. Even though, it is called a government-backed loan, you are not actually borrowing from the government. You are still borrowing from the bank but the government will guarantee a proportion of your loan, making it not only easier to qualify but also benefit from lower interest rates. The reason why governments do this is to encourage banks to lend money to small businesses.
However, not all governments provide this facility so you need to make sure that your government does.
Lines of Credit
Sometimes you may require a small loan to cover your operating expenses. For this purpose, it is better to benefit from lines of credit. The latter is similar to having a credit card: you are provided a limit to how much you can borrow and you pay interest only all the money borrowed, not the entire amount of the line of credit. However, the interest rates are usually much higher than traditional bank loans.
Think about the reason why you want to borrow
You need to find a specific reason as to why you need to borrow cash. This will then help you to decide how much money you require and what kind of loan is best suited to your needs. It is recommended to make a business plan and keep referring to it so you do not forget your core objectives
How much money do you require?
For this step, you need to make a comprehensive budget so that you get the right amount for your specific project. If you are considering a loan in order to buy new machines, then you can simply search on the price of that respective machine and calculate a range. If you want to borrow money in order to hire labor, then look at what your competitors are paying to their staff. No matter what reason, you need to make a proper budget.
Research the market to find the average interest rate
The aim of this step is to get an idea of what kind of interest rate you can expect. This step is important because it will decide whether you will be able to afford the loan or not. Price-comparison websites are a good starting point to find the latest interest rates sweeping in the market. NerdWallet, MoneySupermarket and InfoChoice are some good options. Keep in mind that these websites will no bet completely accurate. The goal is to have a rough estimate.
Can you afford the loan?
Since now you have a rough idea about the interest rate that you can expect, you can decide how much can you afford. There are many free loan calculators available online, Shopify is a good option. Say if you borrow $10,000 for five years at 10% interest rate, your monthly payments will be $210.36. Whether you will be able to afford $210.36 each month depends upon your forecasts. One useful tip is to be realistic in your forecasts.
Know the eligibility criteria
The eligibility criteria are different for each bank but usually banks will ask for the following:
- A good personal credit score and strong business credit
- Business track showing financial stability
- Business plan
- Some kind of collateral
Make your pitch
The last step is to gather all of your documents and make a pitch to the bank(s). Keep in mind that you not only show your passion about running your business but also be realistic about the risks and responsibilities. When you make your pitch, be sure to present your pitch as a good business opportunity so there are more chances that your application will get approved.
In this tutorial you have explored the different types of small business loans that are available to you and the way through which you can secure the loan that is best suited to you.