If you have a small business or thinking to start a small business, you might be trying to raise funds for your business. There are various ways to fund your business, for instance, getting help from friends and family, getting a business partner, starting a crowdfunding campaign, finding angel investors etc. If all of these methods fail, you can still fund your business through a loan. If you are trying to find a lender or get a bank loan, here are some proven methods to get a loan for your business.
- Provide a valid reason for the loan
No one is giving you loan without any valid reasons. The lender, whether it is an intuition like a bank or an independent lender, want to know why you want a loan and where you are going to spend the money. The lenders want to know whether your business idea is profitable or not, whether you can pay back or not. They also want to be sure that they are paid back even if your business crashes.
Things like registering your business, setting up the office, stocking up an inventory will establish your credibility and increases your chances of getting the loan. Even if your business is a start up, having existing business model will build trust with the lender.
Whether you are approaching a private lender or finical institute, you must be sure about how much loan you want and how and where you are going to use the money.
- Learn the basic process to apply for the loan
Banks and lenders have their own criteria to assess whether you are eligible for the loan. In order to secure a loan, you have to fulfil the following criteria.
- Credit score: The lenders will always check your credit score. If you have duly paid your loan in the past, this will establish your credibility. They will also check your financial history such as how much you earn, how much you spend etc.
- Collateral: Most of the banks and lenders want collateral so that they can recover the loan in case of default. The collateral can be gold, land, buildings, inventory etc.
- Cash flow: In order to get fast approval for the loan, your business must be already functional. If your business is already running, the lender will check how much money your business is making. Since the lender does not want to take risk by investing on a project that is not making money. They will not only assess how much the business is earning, they will also look into how you are managing your earnings.
- Age of your business: The age of your business is also an important consideration for getting a loan. If your business has been just set up, the investors may not take interest in financing the business. If your business has been operational since sometime, you are likely to get approved.
- Niche: The business niche also an important factor in determining the loan approval. Some niches get approval, where as some niches get rejected. The investors will assess whether your niche is lucrative or not.
- What type of loan you need
When you are applying for a loan, you should always determine the type of loan you want. There are various types of loan.
Bank loans: Bank loans are good for the established businesses. You can get short term loan, medium term loan or long term loan. If you have strong credit score, approval rate for the bank loan is very high.
Micro finance: If you are looking for small loans for short term, micro financing is the best option. As opposed to business loan, you can also get personal loan from micro finance and invest that money in your business.
Lending marketplaces: There are a lot of lending marketplaces where you can find Peer to Peer Financing for your business You can try programs like Lending Club to get a peer to per loan. As opposed to one investor, peer to peer lending will help you raise finding from many lenders.
- Choose the lender wisely
While choosing a lender, you should consider the interest rate, payback schedule, and the loan term. Easy Monthly Instalments is the best way to pay the loan. Make sure, you are able to pay the instalments in time.
- Gather your documents
Irrespective of the type of loans and the type of lenders, you should start collecting necessary documents. You should have a copy of business registration certificate, credit report, business and personal financial statements, business plan, legal documents etc.