Having access to capital is critical for the growth of any business. It applies to new startups and established ventures too. There are many ways of getting the needed funds for growth and availing a small business loan is one of them. 

Traditional and alternative lenders offer small business loans. Traditional lenders are rigid and strict on credit scores, years of business operation, etc. On the contrary, alternative lenders are flexible with fewer restrictions to access business loans. 

According to Statista, big banks and alternative lenders had 14% and 25% approval rates for small business loans. In short, alternative lenders’ flexible terms on business loans make them preferable. 

Despite the available loan sources, most small businesses fail due to a lack of cash flow or funds. So, to increase your chances of business loan approval, you should prepare well for the loan application. 

This article provides tips on preparing your startup for a loan. 

• Learn About Business Loan Options

Lenders only loan money to trustworthy borrowers. Although they will advise you on the best suitable loan, you should do your research. It is vital to learn the basics of various business loans, their differences, and interest rates. A thorough understanding of small business loans can empower entrepreneurs to make informed financial decisions. By comparing loan options, interest rates, and repayment terms, business owners can secure the most suitable business loan for their specific needs and goals.

A startup may need a different business loan than an established venture. Startup business loans should be flexible and faster to process. It makes it easy to handle everyday challenges and opportunities. 

You don’t want to wait longer for a traditional lender and let opportunities pass. Or wish to address inventory emergencies only to be told the loan issued is tied to specific use and not inventory. Hence, small businesses can enjoy convenient small business loans from alternative lenders. 

Most popular business loans worth considering fall into these categories: 

• Term loan. A term loan offers a lump amount of cash payable back with a floating interest until all the borrowed funds are cleared. It can be short-term or long-term. 

Short-term loans are payable in full, the whole sum, at a specified date within a shorter 

duration. It does not use fixed monthly payments. They are suitable for short-term 

needs. You can use it to boost inventory, fund accounts payable, or clear pending projects with quick returns. 

Long-term loans are suitable for refinancing, expansion, working capital, etc. 

Commercial lenders will need a good credit score and solid business to offer a better interest rate. However, you can still get it with a bad credit score through a reliable, compelling business plan. 

• Line of credit. A line of credit gives you access to a revolving pool of funds. You only pay for the sum amount you’ve used. It is an excellent way of accessing capital on demand, but they attract high compounding interest rates. 

• Alternative loans. Most of the above loans are financed by big banks. You’ll need a good credit score and many years of operation to qualify. Alternative loans from lenders like Purpose Financial let you access credit even within the first few months of operation. Some also get you loans regardless of a bad credit score. 

You now have a general idea as to what type of loan you may need. 

• Build a Good Credit Score

A credit score checks your business’s credibility and ability to pay back loans. Most lenders check personal and business credit history before approving a business loan. In short, you need to prove that you can repay your loan on time. 

A few months-old ventures may find it challenging to secure a loan from a standard commercial bank. But not all lenders define your eligibility based on credit score. Other lenders use different factors than credit scores. 

They can use industry experience, time in business, reputation amongst the community, etc. In fact, alternative lenders can be highly flexible and accommodating with their terms. You can still get access to loans even with a bad credit score. 

A credit score is vital to securing funding. But, you shouldn’t lose hope if you have a low credit score. Some lenders understand that a business is more than just a credit score. 

• Get Your Documents Right 

Every aspect of your business operation needs proper documentation for proof. Your expenses, revenues, debt, and assets must be clearly and accurately documented. So, you don’t need to wait until loan application time to organize yourself. 

Start embracing accounting and bookkeeping practices now. It will make the loan application process more smooth.

If you’re on a tight budget to incur additional costs on bookkeeping, use free tools. You can use ZipBooks, Wave, Portfolio Visualizer, Mint, etc. They’ll help track and organize every financial aspect of your operations, including taxes. 

• Compute the Loan Amount You Can Afford 

Go ahead and calculate your deficit to know the exact amount you need. It will save you from unnecessary interest and penalties when you get excessive funding. 

Besides, getting less funding will prompt you for another loan. It can leave you stranded with unfinished projects. You can avoid both extreme scenarios by calculating the most accurate estimate. 

Also, ensure you know the cost of the debt upfront and if you can afford it. Check out your cash flow and the amount you are seeking. Do the numbers add up? If not, go for what you can afford to avoid severe penalties. 

• Look for Collateral 

Most lenders may need collateral to be safe if you default on your loan obligation. A collateral could be an asset of significant value relative to the amount of loan issued. It could be a house, jewelry, etc. 

However, following the above tips can help you avoid defaulting. Besides, some alternative lenders only need to know your revenues and the duration of the business. But, you need to have collateral just in case your lender chooses to request it. 

• Select the Best Lender

Before choosing your preferred lender, you may also need a solid business plan. Not all lenders need a business plan, but having one can come in handy in specific scenarios. 

Here are some of the factors to consider when choosing your lender: 

• Shorter loan processing time
• Reliable customer support
• Flexible payments, etc. 

Take Away 

Most companies fold up due to limited cash or capital. In addition, the loan approval rates for business loans are low from big banks. 

Hence, you should follow these tips to prepare for a startup loan. However, you can skip some tips if you engage with an alternative lender. 

Most alternative lenders only need to know your annual revenues and the duration you’ve been operating. They even have provisions for business loans with a low credit score. You can prepare your startup for a small business loan using these tips.