Small businesses can usually borrow from commercial banks, various organizations affiliated with the Small Business Administration (SBA) or other Internet-based lending companies. The first step in the process is to determine financing needs and how the company will use the loan proceeds. The next step is to write a good business plan with business objectives, financial projections and how the business strategy is aligned with financing needs.
Consider various credit factors that can improve the chances of obtaining a loan, such as the presence of collateral, a positive cash flow potential and powerful resource management tools. Then put together documentation for a loan with various legal and financial documents. Finally, make a list of lending organizations and contact and contact them to determine who is interested in providing a loan and under what conditions, before settling for the best available agreement.
Before contacting a lender, you must carefully evaluate your financial situation and determine the goals for the loan. In particular, find out how much cash flow the company generates and in which main areas capital infusion is needed. The company may need to expand. The company can start all over again and needs financing to buy capital goods and finance working capital, such as buying necessary inventory, paying suppliers and covering other fixed operating costs.
Depending on the nature of a business and the financing requirement, lenders may demand different fees for the assumed risks. If the company operates in a cyclical sector and requires a loan to purchase capital goods, the interest is usually higher. On the other hand, a non-cyclical company, such as a food producer requesting a loan to finance inventory purchases, can expect lower financing costs.
The preparation of a business plan is one of the most important steps in the credit application. The document must describe the purpose of the business and its operation and it must contain historical financial statements and financial projections from three to five years in advance. The business plan must also describe how the company plans to increase revenue and profit in the future. A thorough plan helps both parties with the loan. Take a step back and think carefully about the most important elements for the success of the company.
While there are many tools that help you create a powerful business plan, the Business Plan tool from the SBA is a useful tool for small business owners.
Other credit factors
When preparing the credit application, consider credit factors that can increase the likelihood of obtaining a loan. Demonstrate that the company generates sufficient cash flows to cover operating costs and pay the principal and interest in the future. If there is collateral that can be pledged for the loan, it can assure a lender that there is another source for the loan repayment.
Demonstrate solid resource management in the form of effective management personnel and capacity and strong key management statistics, such as positive working capital, low debt-to-worth ratio and a proven record of debt service.
Loan documentation checklist
Lending organizations publish a documentation checklist for a small business loan application, which typically includes several documents such as bank statements, persooPudd’nhead Wilsonijke and business credit reports, income tax returns, commercial leases, business licenses, integration items, persooPudd’nhead Wilsonijke background and CV.
After completing all these steps, identify financial institutions and contact them to start interviews. A larger number of potential lenders means better chances of a successful credit application. Consider organizations affiliated with the SBA that are usually able to provide financing at lower costs due to government guarantees from the United States.