It is not possible for a person operating a small business to fund it entirely by himself/herself. A person starting a new venture is more likely to apply for a loan rather than invest all of his/her savings in one go. A person can apply to banks or some other financial institutions for a business loan. It is up to the bank whether they will grant the loan or not. Normally, banks are a little reluctant to grant business loans to start-ups. A person or a business applying for a loan needs to win the trust of the lenders. This is because lenders like to lend to people who they can trust and who have good credentials.
The procedure to apply for a loan for business involves the following steps:
A person should decide beforehand for what reason he/she is applying for the loan. He/she may avail the loan to finance a piece of equipment, for software development or to invest in real estate. On the other hand, a bank or lending institution may refuse a loan if someone wants to use it for financing ongoing losses or it he/she wants to obtain non-essential business assets.
A person should carry out necessary research and find out how much money he/she needs for his/her business. A person applying for business loan without adequate preparation may ask for an insufficient amount that can lead to further problems. On the other hand, asking for a disproportionate sum of money may also make the lender suspicious and result in the application getting rejected.
Lenders consider factors like a person’s credit score, debt to income ratio, report on industry risk and cash flow before granting a business loan . Thus a person looking to borrow money needs to keep these factors in mind and sort out their credit history before applying. A lender also looks for how long the business has been running and whether it has a proper record of incoming accounts receivables.
A person can approach a commercial bank, a non-bank lender, region specific lenders or micro and alternative lenders for a loan for business. A person generally has higher chance of getting his/her business loan approved from smaller banks than at large, national banks. If he/she is looking to start a new business, it would be prudent for him/her to avail microfinance loans.
Apart from the loan application, a person also requires to impress the lenders with a full-proof business plan. A good business plan includes the financial statements for the past few years and also will include details of the collateral or the asset that a person will use to get the loan. An analysis of the market that his/her business will cater to should also be included in the business plan.
Finally, making a good presentation to the lenders can go a long way in making your loan application getting accepted.