Taking a small business loan indicates the expansion of your business. However, there are several things you need to consider before you go out and pitch for a business loan. Well, financial planning proves to be the main key when it comes to applying for a business loan. Secondly, the loan and its approval depend on how you present your ideas and financial forecast. So, let's dig deeper and know what the top 5 dos and don'ts you need to follow sincerely.
Types of Business Loans You Need to Consider:
Government Loans: If you are from the US, you must have heard about SBA which is short for Small Business Administration. It is a governmental body that supports small businesses and offers more favorable interest rates than banks.
Traditional Loans: These are the bank loans that are a bit harder to get, but you will get some additional advantages.
Business Credit Cards: Same as the personal credit card, you need to repay them in the given time frame to maintain the credit score and minimize the interest.
Business Credit Lines: You can use these credit runs continuously until you don’t require funds anymore or they have run out.
Long-term Loans: These are the loans that offer a larger loan amount and give you more time to repay.
1. Proper Budget with References
The first step is to create a budget that is well-functioning and realistic. Most of the time banks and loan providers counter businessmen with huge budgets that provide profit on paper and huge potential but in reality, the budget is unrealistic. So, make a clear budget with the thought that banks are not interested in your product or its hype but in making profits. While making budgets, you also need to make sure that each step of the budget has a reference. In the budget, it is also a must to mention why the customers would come to you instead of going to the competition.
2. Income and its Popular Overestimation
This is another common mistake that borrowers make when they overestimate their incomes. In reality, it is very uncommon to see the income as high as it was predicted in the budget. According to experts, it is the lack of income in the first year that makes small businesses run out and leave the market. Therefore, it is advised that once the budget is made, the income must be reduced to at least 20-25%.
3. Take Care of the Expenses
This imposes extreme difficulty for especially new businessmen as they often end up underestimating the expenses. Well, if you don’t want to refrain from making this same mistake, then you must increase the expenses by 20-25% just like you reduced it in the case of your income.
4. Prepare Extra Funds
The first year is always the most crucial and often the most difficult year for the business. So, as a business owner, you need to have enough funds in your savings to pay the bills in the first year of business. Getting a loan is very difficult, but when your business is six months old and you are not getting enough profit, it will be much more difficult to get a loan then. So, whenever you are putting up a business and applying for a loan, make sure you have enough in your savings.
5. Comparing Lenders
You must check the APRwhile borrowing money from any bank or financial institution. APR translates to Annual Percentage Rate which will be added to the amount of loan you are getting from a lender. What is the best way to make sure you are not at a loss? It is to compare the lenders because when you find two lenders that are willing to lend you the amount of need, chances are one of these will have a higher APR.
With enough patience and diligence, you can fund your business with a profitable loan to flourish it.
