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4 Things You Should Know Before Applying for a Business Loan

abusinessownerApplying for business loans can be a stressful and exciting time. You are on your way to starting your business, but you need the capital to make it come true. Banks or government agencies are popular sources of funding for your startup venture. Before following this route, there are a few things to know and take into consideration:

Develop a Business Plan and Financial Statements

Before loans are granted, the lender wants to know how credible your business proposal is, and that you understand the products you’re offering and the market in which you’re operating. A typical business plan includes an executive summary, clear description of what the business intends to do, forecasts of revenue and expenses, an analysis of the market and the competition, and strategies for growth and possible exit. Having this ready, along with cash flow projections to indicate there will be a steady flow of cash to repay the loan, will start you off in the right direction.

Have a Clean Personal Record

A lender wants to know how trustworthy you are. Some questions that a lender thinks about can be: “can you make payments on time?” and, “have you ever acquired too much debt?” Essentially, it is crucial to know your credit report. Request a copy of it well before you apply for a loan, and if it is less than perfect, then fix it! It takes time to remedy these flaws and prove that you are able to be trusted once again. Personal references are a great supplement to have as well. If someone who is known and respected can provide excellent feedback on your behalf, it will only ameliorate your situation. Likewise, you should have your completed tax returns from the past few years in case the lender wants to review your personal income history.

Understand the Costs and Payment Structure

Business loans vary by lender and amount. It is important to do your research and shop around to ensure you are receiving a good interest rate and talk to other entrepreneurs to see which banks or government agencies are preferred. There can be a series of loan initiation fees due up front so it is imperative that you read through loan agreements to understand when money is due, and other rules of this kind.

Determine your Collateral Capacity

Besides being credible, trustworthy, and knowledgeable, the lender wants to know that you can pay him/her back. They want to know what collateral you can use to support the loan. Anything that is easily converted into cash and is equal in value (or greater) than what you are requesting, is acceptable. Any assets like property, equipment, or anything else of tangible value will secure the loan and mitigate the exposure to risk. Even if you are granted the loan, they will provide about 80% of what you are asking for. They expect you to fund your own investment by 10 to 30% of the total capital. Having a well thought out business plan will also mitigate the exposure to risk.

Sources:
Fleckenstein, Tom. “What to Know and Do Before Applying for a Loan for Your Business.” Web. 26 Dec. 2014. <http://www.asbdc-us.org/Resources/For_Small_Business/Before_Applying_for_a_Loan.pdf>.
Richards, Daniel. “Before You Apply for a Business Loan.” Web. 26 Dec. 2014. <http://entrepreneurs.about.com/od/financing/a/beforebizloan.htm>.

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