Many business leaders need financing of some sort sooner or later in the life of their company. This is a normal part of growing a business and making it profitable. However, that doesn’t mean the loan application process is something to blindly dive into. There are certain questions entrepreneurs need to ask themselves and their lenders before moving forward with a loan application.
Why do I need a small business loan?
The most important question to answer is “Why?” Your answer should include specific points of action that you’ll take with the money. Not all funding purposes are sound enough to justify a loan, explained Forbes contributor Aileron, a company that offers small business management consulting, in a 2014 article.
For example, seeking funds to cover ongoing losses isn’t a good strategy – you’ll likely need to solve the problem before obtaining a loan.
Some examples of sound reasons to apply for a loan include:
- Expanding your business to support growth.
- Adopting new equipment to improve operations.
- Stocking up on inventory in preparation for a large order.
How much do I need?
Once you’ve determined the purpose of the funding, you can begin to calculate how much you really need. It’s important to narrow down this figure to one you can clearly justify using real data and research.
When lenders review loan applications, they do their own calculations to determine how effective the amount will be for the intended purpose. If your lender determines that you requested for $5,000 less than you need, it will raise the question of why you aren’t asking for your full requirement and may reflect poorly on your company, Entrepreneur writer Lisa Girard wrote in a 2013 article.
On the other hand, asking for more than you need can make you look greedy or like you’re hiding an intended purpose – two impressions you don’t want to make.
To determine how much you really need, dive deep into your intended purpose. Will the loan close a cash-flow gap? Determine how much you need to pay your suppliers and how much you’ll bring in from your customers. Will the funds be used to buy or lease equipment? Calculate the full cost of acquiring that machinery as precisely as you can.
Do I qualify for the loan?
This question is critical to answer honestly before applying for a loan. If you apply for funding for which you don’t qualify, you probably won’t receive a loan. When this happens, there will be a record of a failed attempt at obtaining a loan and will give the impression to future lenders that you’re high risk.
Before applying for any loan, research the funder’s requirements. Do they require five years in business? Don’t apply if you’ve only been operational for two years; instead, find another lender who is willing to offer financing to businesses like yours.
At National Funding, companies that have been in business for at least a year, have $100,000 in annual gross sales and can show us their past three months’ bank statements can qualify for a small business loan. Does this sound like you? Reach out for a no-obligation conversation today.