Why do you need a Business Loan? Unless you have large amounts of money and it is no object, you will probably need a small business loan for the small business you’d like to open. While there are many reasons, some of the main ones are included below.
1. To start your small business
2. The expansion of your small business
3. In order to take advantage of new business opportunities such as a new building, more employees, or even new inventory and products to sell.
4. In order to have a cushion to fall back on for your cash flow.
5. Your daily expenses and the management of them.
6. More equipment or inventory that your business may need.
Much of it depends on the type of small business you are opening so there could be many other reasons that you need a small business loan. At this point, you may want to figure out the capital you will need for your small business. It is also a good idea to research what you believe that you can afford to pay back monthly.
How do you determine what you can afford? You have enough worries now that you’ve decided to open a small business. To help you figure out what you can afford as far as your small business loan goes, if you follow the tips below you’ll be well on your way to that determination.
1. Calculating your debt service coverage ration aka DSCR. Okay, so what does that mean? Let us explain. This formula will help you in determining your DSCR.
Cash flow/Loan payment=DSCR
This can be done one of two ways, either monthly or annually, the choice is yours.
Here is an example:
On average, how much cash flow does your small business have monthly? Be sure not to include any sales expense. So, assume that your business brings in about $3000 a month. For this, you’ll want to include your principle and interest. How much do you think your loan payment is a month? Let’s go with $1000 loan payment monthly. In this example, your DSCR would be at 3, which is quite good.
Keep in mind that most lenders look for a DSCR of at least 1.5 or higher. It is best to aim for a loan payment that is equal or less than your DSCR. While some lenders will look for a ratio of at least 1, it can show that your cash flow doesn’t afford them to give you a loan. The higher your DSCR, the better luck you will have.
2. Perform a small business loan analysis on your finances. Ask yourself if you are sure that this loan will help your business to grow and how will it help your growth? It’s best to do this before you commit to the loan.
3. Make yourself a note of how much you believe that your ideal payment should be. Keep referring back to this figure when you are researching for the best rates and right lenders.
How do you qualify for a small business loan? Does credit score matter? The simple answer here is that yes, your personal credit can play a large part in the type and amount of loan that you will apply for. As with other credit determining aspects of life, a lower credit score will not get you the best rates, but a higher one will, almost always. Do your research, and remember if it sounds too good to be true, it most likely is.
It’s best to have your credit score and credit report ready when you decide to research small business loan lenders. Many lenders look for a credit score of 620 and up to extend a loan to individuals. A higher credit score can get you a longer-term loan with less interest and lower rates. A good many lenders will still consider your application if your score is at least 550 and above. But don’t despair, if you do have a lower credit score, you may still qualify for a loan that is a shorter term loan and smaller lines of credit. Should you worry that it is too low, it can pay to apply for a smaller line of business credit instead.
What steps to take when you receive your credit report? Now that you’ve received your credit report, it’s time to look it over and see what it contains. You always want to double check what you see on your report. Bee on the lookout for erroneous or false charges, mistakes do happen. Some things to look for include:
Credit lines or accounts with merchants that you never opened.
Erroneous judgments or collections you don’t recognize.
Judgments, collections, or accounts that you know were satisfied/paid off but are still showing up on your report.
Any judgments or collections you had no knowledge of.
How do you fix mistakes on your credit report? Now that you have looked your credit report over you’re probably wondering how to fix any of the aforementioned items should they have shown up. It’s understandable, and many individuals get confused about their reports and worry that they can’t fix them properly.
Start by contacting your credit bureau and asking them how to fix certain things if needed, after all, they are the professionals. The next step should be for you to contact the merchants that are showing up on your report and get information if something doesn’t look right. Another good idea, if you happen to be an individual that understands their report and you know what it all means, pay off any of the debts that you can afford at that time. A lot of people will pay off the smallest debts that may show up and make arrangements for the larger amounts. Either of these ideas will help raise your credit score up and lenders can see that you are working toward fixing it when you contact them for your small business loan.
No matter how you plan to handle the debts, be sure to remain proactive and continue to work on cleaning it up if need be. This will look good to the lenders that you contact.
Miscellaneous things to consider— Upon your decision to apply for a small business loan. Below is a list of other aspects to consider in your decision to apply for a small business loan.
How long has your business been active and open? Lenders tend to frown upon a business that has only been open for a year or less, as it is considered too risky to some. But a business that has been open for two years or more is less of a risk in the lender’s eyes. If by chance your business has been open for just six months, it might be more beneficial to apply for a business credit card to get you started.
How much money is your business making monthly? Lenders usually like to see enough revenue to cover the loan cost. This can be determined either annually or broken into smaller monthly chunks. Explore all of your options before committing. Keep in mind that lenders often qualify you for a percentage of your annual sales.
What documents do you need to apply for a small business loan? It is best to remember that different lenders may need additional or different documents than you will see listed here. It can depend on the size of the loan that you are seeking the cash flow that you are receiving. Below are the basic documents that most lenders will seek from you.
Business bank statements
Profit and Loss statements
business debt schedule
Personal tax returns
Business tax returns
At long last, be sure you verify and confirm the terms of your loan offer—Make sure you ask your lender about all of the following:
Late payment fees
Check processing fees
Repayment and Prepayment Fees
Your final checklist after choosing your small business loan—Be sure to ask yourself these questions:
Am I confident I can repay this small business loan?
Am I comfortable with the amount of the loan?
Am I comfortable with the monthly payment amount of this loan?
Am I certain that I have received the best rate for me?
Have I confirmed all of the fees associated with this loan?
If you are able to answer yes to all of these questions then you are ready to move forward!