What You Need to Do Before Applying for a Business Loan

Applying for a small business loan can be a scary proposition, especially when you don’t know what you should be doing. With proper planning, however, you can figure out your best financial options upfront and find the best lender for your business needs. 

Thanks to tech tools and the internet. It’s now easier than ever for entrepreneurs to dispel fears before going into debt. For instance, online lenders provide a business loan calculator to help borrowers determine interest costs and monthly repayments upfront. Plus, a simple pre-approval helps pre-qualify the desired loan amount. Thus, you can jump in with confidence.

5 Things to Do Before Applying for a Business Loan

1. Check your credit score

Lenders use your personal or business credit to determine how responsible you are with debt, the loan amount you can qualify for, and the terms at which you should be approved. 

You may not qualify for a small business loan if you’ve got a poor credit score, and if you qualify, you’ll pay high-interest rates, which increases the cost of borrowing. The lowest interest rates are reserved for those with a solid credit profile and a high FICO score of 700+. 

So check your credit score to know where you stand. Consider seeking a business loan from online lenders if you’ve poor credit.

2. Determine your costs

Can you afford the loan? Determine your costs to see whether you can afford to repay the loan comfortably without starving your startup. Most lenders include a business loan calculator on their website to help you estimate your monthly repayments and the total interest you’ll pay during the term of the loan. 

Check whether the loan comes with other costs like closing fees, funding fees, and documentation fees. When using a business loan calculator to estimate your costs, make sure that your monthly repayments don’t exceed 80% of your net business revenues.

3. Comparison-shop lenders

Once you’ve figured out your costs, the next step is to research lenders. Depending on your credit score, determine whether you’ll obtain a small business loan from a bank or online lender. Get funding from reputable accredited lenders. Check with your state’s Attorney general office whether your preferred lenders are registered and the Better Business Bureau for lenders with A to A+ scores.

Then, compare lenders based on their payment schedules, interest rates, ease of application, and approval period. Lenders with an easy application process and faster approval timeline come in handy when you need funds faster.

4. Get a pre-approval

Once you’ve found a lender, you need to know whether the lender can provide the amount you seek. Most lenders will only approve you for a loan equal to 12% of your annual business revenues. Most lenders allow you to make a free pre-application, while others may charge a pre-approval fee. 

Other lenders may not offer loans for the specific purpose for which you need the money. So make sure you get pre-approved for the type of loan you seek and know whether you qualify for the amount you need. If a lender doesn’t offer what you need, keep searching.

5. Gather your business documents

Lenders will need a way to prove that you run a legal business. To that end, be armed with your business documents like business license and permits, and personal identification documents. 

Again, have on hand all the financial statements like income statements, balance sheets, cash flow statements, and tax returns forms, at least for the past few months or years. Any documents showing your future business prospects will also be helpful. 

Lenders use these business documents to determine whether there is enough cash flow in your business to repay the loan.

How to make sure you don’t get in oo much debt

It’s possible to burn your figures in debt and collapse your business. To avoid that, borrow only what you can afford. Use a business loan calculator to estimate your borrowing costs and make sure that your business can support monthly repayments for the loan without fail. The rule of thumb is to ensure that your monthly payment doesn’t exceed 80% of your net business revenue.

High-interest rates can also sink your small startup into debt due to the high cost of borrowing. If you have a poor credit score, you can greatly reduce the amount of debt you carry by taking steps to improve your credit score before applying for a business loan.

How to ensure the loan has a good ROI

The sure-fire way is to invest your business loan wisely so that it generates more value in the business than the cost of the loan. An average ROI of 5% to 12% is considered good. So project your expected ROI well before applying for a loan to make sure you’ll come out ahead. 

Again, make sure you lock in low-interest rates to lower borrowing costs. As long as you can afford the monthly payment and the expected value exceeds the borrowing cost, you’re good to go.

Apply for business loans with confidence

The bottom line is, you should always use a business loan calculator to determine your borrowing costs and monthly repayments. That way, you’ll make sure you borrow what you can afford, avoid getting into too much debt, and ensure the loan has a good ROI. Combine that with the other steps above, and you’ll come out ahead.