6 Best Practices for Getting a First-time Business Loan

It costs money to run a business and meet short-term and long-term goals. So funding a business is among the most crucial decisions that you’ll have to make. Your choice of financial sources and targets can affect the way you structure and operate the business.

One source of financing to consider is a loan. But let’s face it- getting the right loan can be a challenging task. You need to know the proper funding, ensure you meet the requirements, and do the paperwork.

But worry no more- this article will help you do your homework and get the right product that fits your business needs.

1. Shop around to Compare Offers and Rates

Be sure to narrow your choices down to the best loan option that will help you meet your needs. Keep in mind that you may qualify for some types of loans and miss out on others.

While the financial industry is awash with many varieties of first-time business loans, the most common ones include traditional bank loans: This option is suitable if you’re highly qualified and are looking to finance several purposes. The loan amounts vary, and rates are typically low. You’ll also have around 5 to 10 years to repay the loan.

While they’re easier to get, you’ll still need good credit, a few years in operation, and robust financials. But some lenders can accommodate newcomers, so don’t lose hope.

Are you looking to get a loan from traditional banks? You may have to wait for several months for your approval to go through. So if your project is urgent, online platforms and other lenders may come through for you.

2. Do not Rush into a Loan if it will Cripple your Business

You want to be sure that you’re taking an amount to repay comfortably over the loan’s life. So before approaching any lender for funding, remember to check your business cash flows and other financials.

In fact, most lenders will want to look into your daily operations to see if you can repay their loan. Cash flow indicates the relationship between your main cash expenditures and primary cash sources. This information allows the lender to understand your market demand, business cycles, management competence, and other significant shifts in your business over time.

As a general thumb of rule, ensure your revenue is at least 1.25 times all expenses (including the repayment). This puts you in an excellent position to explore your options.

Are you going for a secured loan? You’ll need to provide business collateral like a piece of equipment or land. The collateral may convince your lender to loan you more amounts at lower interest rates. But ensure you’ve played your cards well here. Who wants their business property seized due to failure to repay their loans?

You may also need to have a personal guarantee even if the loan is not secured. This implies that if your business fails to repay the loan, the lender may come after personal assets like a car or land. So exercise due diligence.

3. Read Reviews of Potential Lenders

Before buying that hot smartphone online, you’ll first research and read genuine reviews about it, right? Don’t forget to do the same when planning to take a loan.

Smart loan decisions and success rely on getting everything right from the word go. One way is to learn every detail first-hand from people that borrowed a loan from the lender. That way, you can obtain term transparency and know the actual cost of that loan.

Is there anything in their terms that may hurt your business? Are the salesmen being honest in quoting the time frame? Will they keep asking for more documentation? Genuine reviews may help you unearth the answers to all these.

Also, you’ll get to know whether or not your potential lender will approve the loan as soon as possible. Furthermore, online reviews can help you unearth those finer details that the lender may have failed to mention.

4. Have a Specific Amount in Mind

No two businesses can ever be equal, as financial needs change from one to another. That means there is no such thing as a one-size-fits-all funding option either.

So you need to do your homework and weigh several factors when deciding on the right amount to help you meet your goals. Some of these players include your niche, industry, local market, geographic location, and how you’ll put the cash into use.

Be sure the loan can enable you to achieve your target or meet your expenses: stocking your shop, getting supplies and equipment, footing the utility bills, paying rent, etc. Ask for too much, and lenders may shy away from you. Ask for too little, and your business may fail to take off or achieve targets due to some unmet needs.

According to Forbes, many small businesses fail to request enough financing, leading to issues with insufficient working capital. On the other hand, overestimating your request can lead to some lenders questioning your credibility and assumptions.

So ensure you’ve supported your budget with water-tight financial projections (think cash flow and profit & loss statements). That way, you’ll be able to convince the lender that you did your research homework well and the budget is reasonable.No lender will fumble with their finances, so they always want to ensure their choices are smart when offering loans.

You can also visit some local vendors to help you with project quotes and estimates when projecting equipment and supplies costs. Most lenders will love seeing such layers of specificities in your plan- it shows them that you did your research. Also, you’ll avoid overestimating or underestimating your loan request.

5. Know What the Loan will be Used For

How will you use the money? You don’t want to waste your loan due to the wrong reasons. Good reasons include financing a piece of equipment, developing software, or purchasing inventory. Conversely, wrong reasons include funding non-essential office assets, continuous losses, or office buildouts.

Lenders will also want to know the purpose of borrowing that loan. In most cases, your financial need will fall under the following categories that determine the most suitable loan option:

  1. Managing daily expenses: there will come moments in your business life when you’ll need a safety net. Think unexpected costs like repairs and the need to pay salaries on time. A business line of credit will be the most suitable option that will offer you that useful net. It’s flexible enough to allow you to tap into the funding as needed to foot these expenses.
  2. Growing your business: taking your business to the next level may require significant amounts of money. That’s where options like traditional term loans can come to your rescue. Why? They usually come with maximum limits that are typically higher. You can get specific loan products that will help you address your exact needs. For instance, a lender may agree to fund a customer’s equipment purchases, opening a new location, or strategic inventory purchases.

6. Know the Expected Return on Investment

Apart from determining the reason for that loan, be sure to estimate its Return on Investment (ROI). You don’t want a scenario where the interest expense is more than the potential for extra profit.

The Return on Investment (ROI) is an excellent indicator of profitability. In other words, ROI helps you determine whether or not your purchase, investment, or expense is profitable.

An example will demonstrate this point:

Suppose you sell discount hair products, and an opportunity of purchasing stock at a 50% discount presents itself. The inventory costs $100,000, and the supplier needs payment in cash up-front.

You calculate that the stock can fetch you a profit of $200,000 if you resell it at $300,000. So you decide to go for a lender that will provide you a quick loan of $100,000 and agree to repay $116,000 in fixed repayments over the agreed period. So the cost of this funding is $16,000.

Therefore, the net profit shall be $184,000 (300,000 -100,000-16,000). The analysis shows that you’re on the right track.

Wrapping Up

Before taking any loan, ensure you’ve shopped around and compared the various offers and rates. Then be sure it will help you meet or even surpass your goals. Assess all your business cash flows and financials to ensure that the loan will not cripple your business. You don’t want to lose your assets or damage relationships with guarantors due to failure to repay the funding. Thorough research on your potential lenders is another crucial thing- don’t rely solely on what they’re telling you about their services and products. Remember to get first-hand information from previous clients’ online reviews. Also, know the exact amount you’re borrowing and the reason you’re going for that loan.

Are you looking for a loan? Consider Moby Capital. We are an industry leader in offering a business line of credit, merchant cash advance, and invoice factoring. To move forward today, contact us by email at info@mobycap.com. As a BBB-accredited business, we have experience serving all industries and welcome the opportunity to work with your organization.

It costs money to run a business and meet short-term and long-term goals. So funding a business is among the most crucial decisions that you’ll have to make. Your choice of financial sources and targets can affect the way you structure and operate the business.

One source of financing to consider is a loan. But let’s face it- getting the right loan can be a challenging task. You need to know the proper funding, ensure you meet the requirements, and do the paperwork.

But worry no more- this article will help you do your homework and get the right product that fits your business needs.

1. Shop around to Compare Offers and Rates

Be sure to narrow your choices down to the best loan option that will help you meet your needs. Keep in mind that you may qualify for some types of loans and miss out on others.

While the financial industry is awash with many varieties of first-time business loans, the most common ones include traditional bank loans: This option is suitable if you’re highly qualified and are looking to finance several purposes. The loan amounts vary, and rates are typically low. You’ll also have around 5 to 10 years to repay the loan.

While they’re easier to get, you’ll still need good credit, a few years in operation, and robust financials. But some lenders can accommodate newcomers, so don’t lose hope.

Are you looking to get a loan from traditional banks? You may have to wait for several months for your approval to go through. So if your project is urgent, online platforms and other lenders may come through for you.

2. Do not Rush into a Loan if it will Cripple your Business

You want to be sure that you’re taking an amount to repay comfortably over the loan’s life. So before approaching any lender for funding, remember to check your business cash flows and other financials.

In fact, most lenders will want to look into your daily operations to see if you can repay their loan. Cash flow indicates the relationship between your main cash expenditures and primary cash sources. This information allows the lender to understand your market demand, business cycles, management competence, and other significant shifts in your business over time.

As a general thumb of rule, ensure your revenue is at least 1.25 times all expenses (including the repayment). This puts you in an excellent position to explore your options.

Are you going for a secured loan? You’ll need to provide business collateral like a piece of equipment or land. The collateral may convince your lender to loan you more amounts at lower interest rates. But ensure you’ve played your cards well here. Who wants their business property seized due to failure to repay their loans?

You may also need to have a personal guarantee even if the loan is not secured. This implies that if your business fails to repay the loan, the lender may come after personal assets like a car or land. So exercise due diligence.

3. Read Reviews of Potential Lenders

Before buying that hot smartphone online, you’ll first research and read genuine reviews about it, right? Don’t forget to do the same when planning to take a loan.

Smart loan decisions and success rely on getting everything right from the word go. One way is to learn every detail first-hand from people that borrowed a loan from the lender. That way, you can obtain term transparency and know the actual cost of that loan.

Is there anything in their terms that may hurt your business? Are the salesmen being honest in quoting the time frame? Will they keep asking for more documentation? Genuine reviews may help you unearth the answers to all these.

Also, you’ll get to know whether or not your potential lender will approve the loan as soon as possible. Furthermore, online reviews can help you unearth those finer details that the lender may have failed to mention.

4. Have a Specific Amount in Mind

No two businesses can ever be equal, as financial needs change from one to another. That means there is no such thing as a one-size-fits-all funding option either.

So you need to do your homework and weigh several factors when deciding on the right amount to help you meet your goals. Some of these players include your niche, industry, local market, geographic location, and how you’ll put the cash into use.

Be sure the loan can enable you to achieve your target or meet your expenses: stocking your shop, getting supplies and equipment, footing the utility bills, paying rent, etc. Ask for too much, and lenders may shy away from you. Ask for too little, and your business may fail to take off or achieve targets due to some unmet needs.

According to Forbes, many small businesses fail to request enough financing, leading to issues with insufficient working capital. On the other hand, overestimating your request can lead to some lenders questioning your credibility and assumptions.

So ensure you’ve supported your budget with water-tight financial projections (think cash flow and profit & loss statements). That way, you’ll be able to convince the lender that you did your research homework well and the budget is reasonable.No lender will fumble with their finances, so they always want to ensure their choices are smart when offering loans.

You can also visit some local vendors to help you with project quotes and estimates when projecting equipment and supplies costs. Most lenders will love seeing such layers of specificities in your plan- it shows them that you did your research. Also, you’ll avoid overestimating or underestimating your loan request.

5. Know What the Loan will be Used For

How will you use the money? You don’t want to waste your loan due to the wrong reasons. Good reasons include financing a piece of equipment, developing software, or purchasing inventory. Conversely, wrong reasons include funding non-essential office assets, continuous losses, or office buildouts.

Lenders will also want to know the purpose of borrowing that loan. In most cases, your financial need will fall under the following categories that determine the most suitable loan option:

  1. Managing daily expenses: there will come moments in your business life when you’ll need a safety net. Think unexpected costs like repairs and the need to pay salaries on time. A business line of credit will be the most suitable option that will offer you that useful net. It’s flexible enough to allow you to tap into the funding as needed to foot these expenses.
  2. Growing your business: taking your business to the next level may require significant amounts of money. That’s where options like traditional term loans can come to your rescue. Why? They usually come with maximum limits that are typically higher. You can get specific loan products that will help you address your exact needs. For instance, a lender may agree to fund a customer’s equipment purchases, opening a new location, or strategic inventory purchases.

6. Know the Expected Return on Investment

Apart from determining the reason for that loan, be sure to estimate its Return on Investment (ROI). You don’t want a scenario where the interest expense is more than the potential for extra profit.

The Return on Investment (ROI) is an excellent indicator of profitability. In other words, ROI helps you determine whether or not your purchase, investment, or expense is profitable.

An example will demonstrate this point:

Suppose you sell discount hair products, and an opportunity of purchasing stock at a 50% discount presents itself. The inventory costs $100,000, and the supplier needs payment in cash up-front.

You calculate that the stock can fetch you a profit of $200,000 if you resell it at $300,000. So you decide to go for a lender that will provide you a quick loan of $100,000 and agree to repay $116,000 in fixed repayments over the agreed period. So the cost of this funding is $16,000.

Therefore, the net profit shall be $184,000 (300,000 -100,000-16,000). The analysis shows that you’re on the right track.

Wrapping Up

Before taking any loan, ensure you’ve shopped around and compared the various offers and rates. Then be sure it will help you meet or even surpass your goals. Assess all your business cash flows and financials to ensure that the loan will not cripple your business. You don’t want to lose your assets or damage relationships with guarantors due to failure to repay the funding. Thorough research on your potential lenders is another crucial thing- don’t rely solely on what they’re telling you about their services and products. Remember to get first-hand information from previous clients’ online reviews. Also, know the exact amount you’re borrowing and the reason you’re going for that loan.

Are you looking for a loan? Consider Moby Capital. We are an industry leader in offering a business line of credit, merchant cash advance, and invoice factoring. To move forward today, contact us by email at info@mobycap.com. As a BBB-accredited business, we have experience serving all industries and welcome the opportunity to work with your organization.

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