Although small and medium-sized enterprises have higher interest rates for financing from online loans than from banks, compared to time and labor costs, business loans are still a good choice. Let us look into the process and requirements for getting small business loans.
SMEs must be able to correctly prove the destination of the new credit funds (cash, investment, expansion, modernization, etc.) or explain their use through documentation; Many times, people arrive at the bank with poorly made budgets, messy or incomplete papers, which reduce their chances of getting business loans.
What to consider while applying for a small business Loan?
It is a factor closely linked to points 1 and 2. Although it is “indebted to the neck”, before applying for the new loan, the SME must know the true balance of payments of its company, the payment status of its contracts and your budget
With this financial radiography, it will be possible to assess whether the consolidation of the debt that is already in force is a feasible alternative.
Certainly, consolidating debt into a single large credit can reduce the pressure for a while, but it does not solve the root problem.
It is important to note that repairing entails an increase in debt since the creditor normally requests slightly higher rates and incurs new collection costs for the longer term granted to the debtor.
The clarity in the business.
Also, the bank should be clear about the source of income that will allow paying the credit, that is, that there is clarity about the source of payment. The bank needs to know how the flows fit the business cycles. The SME must have this clear when applying for a new loan for the expansion or creation of a new business.
That is why the company must have the appropriate and well-made documents (quotes, economic feasibility reports, projections of results, etc.)
Many SMEs request a loan before they have done a thorough market study. These entrepreneurs get carried away by “fashions” or intuition. Making a financial commitment just for this is complicated. This market study should understand the inherent risks of your business, as well as the external market situation and trends.
The entrepreneur should devote more time to research and evaluate if there is a niche or opportunity.
Find out about the bank’s interest rate.
There are countless times when SMEs ask the bank to apply the same interest rate used by the Central Bank because it saw in the news that it fell.
It is a reference rate for interbank operations, not for loans. Every bank is free to use it as a reference or not for its debt services offered to individuals or companies.
Therefore, before making a formal loan application, the SME must know the rates with which its bank is working.
Besides, the fact that there are low rates does not mean that it is a good time to request a loan, especially if the country is in a situation of low economic growth.
The owner of the SME wants to buy new technology or machinery that would work wonders for the business. Certainly, renovating equipment and modernizing the company’s internal processes are always welcome to improve competitiveness.
However, the SME must first assess whether it is taking advantage of all the goods and services it already has before getting involved in a new loan; this includes reviewing the return on investment (ROI) of all the investments you have made to date.
When it responds to impulses, the SME does not make a sufficient capital contribution for the purchase of this investment and seeks to finance everything through credit. Normally, this is evidence of the poor financial organization of the company.
What do you need to apply?
After completing your due diligence, the next step is to put your plan and documents together to apply for a small business loan.
Here is a quick summary that you should prepare before applying:
- Business Credit Report: If you have a good credit history for your business, you can increase your chances of getting approval. However, if your business credit is poor, or if you have not yet established a credit history, you may have difficulty obtaining a loan.
- Business plan: Share some details about your business, how you plan to use these funds, and how to make it profitable.
- Collateral: Even if a business is well-established, lenders may require collateral to protect themselves from default. Think about what tangible business assets you can use to get a loan.
- Financial statements: This may include your balance sheet, income statement and cash flow statement. It shows your business status to lenders. ” Lenders want to ensure [you have] enough cash flow to pay for any new debt payments,” said Patrick O’Keefe, CEO of Grow Michigan, a fund set up by a group of banks to help Michigan Small business.
- Tax returns: You usually need to submit personal and business tax returns within the last three years. These can let lenders know if your company has a good track record.
Where to get small business expansion loans
Small business lenders are not lacking, so it is important to understand your options and the advantages and disadvantages of each option.
SBA Loans: The Small Business Administration can secure commercial loans. SBA loans offer reasonable interest rates and long-term repayment terms, making it easier for you to find a loan that fits your budget. But the approval process can take 60 to 90 days, and the requirements can be strict. You may also need to provide collateral.
Commercial banks: Many traditional banks have commercial lenders that provide loans and other services to business owners. If you have been in business for a while, you have likely established a relationship with a bank.
“If you are happy with your current bank,” Fleming said, “we usually advise them to go with them.”
Commercial banks usually provide competitive interest rates and various other commercial services. However, you usually need a strong personal or business credit record to get approval. You usually also need to provide collateral to secure the loan.
Credit unions: If you need a smaller loan, it may be worth contacting your local credit union. Credit unions usually offer lower interest rates and fees than traditional banks, and credit unions can approve your loan faster. But not all credit unions provide commercial services, so putting everything under the same roof can be more difficult. You usually also need to be a member of a credit union to apply for a loan.
Every company, large or small, needs extra money in specific periods in its life cycle. One of the alternatives you have is to go to the banks to request new funds.
There are many good reasons for a small or medium business (SME) to request a business credit or request the extension of your credit line.
However, before making the request, it is good for the SME owner to evaluate the status of various aspects of his business, since the financial institution will request documentation and proof that the company is working well, such as:
- Accounting and tax statement
- Annual results
- Business flows
- Growth projections
- Market situation
Getting a business loan as a small enterprise can be highly detrimental to your success. It is not just important to figure out how to apply and get it; it is also equally important to figure out if you need it.