Obtaining a loan is not a simple task, even for mobile app development for your business. Depending on various factors present in your situation, a lengthy vetting process might take place. Knowing what to expect ahead of time is very useful when it comes to lenders’ business plan requirements.
Understanding the Options
Before you probe into what lenders are looking for, it’s vital to discuss the options you have at your disposal. Each of them is different and has a unique set of requirements. There are a lot of varying niche lending options out there.
The below three categories are what most small business owners deal with when it comes to basic loans:
Banks and Credit Unions
The first method that most businesses would consider is a bank or credit union. The traditional route gets you to go into a physical building and meet someone face to face. Small business owners prefer personal contact and communication; it is convenient to pursue a loan with a bank or credit union.
The biggest problem with using a credit union or bank is that they have rigorous requirements. If you don’t check all the boxes, then you won’t be approved. It makes it an unrealistic option for business owners who are aware of their weaknesses.
It is the second option that small businesses have. Online lending has become more popular over the past few years and is considered secure and legitimate.
The biggest challenge comes in finding the best small business loans. There are many online lenders out there, and more are joining the industry year by year. You need to cautiously go through your options and work with only reputable lenders offering good terms.
Hard Money Lenders
Many small business owners work with hard money lenders only because of the convenience and potential for customization. It can be a person, a business partnership, or a small company lending their own money to businesses and entrepreneurs to receive a certain return in the form of interest.
The best thing about hard money lenders is that they have their own rules and would look for deficiencies if they are comfortable in the long run. In other words, your bad credit score won’t scare a hard money lender if you have the collateral to back your deal. The biggest challenge of working with these lenders is expecting a higher interest rate in return for their flexibility.
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Factors That Lenders Consider as Business Plan Requirements
Irrespective of whether you pursue a loan from a credit union or bank, online lender, or hard money lender, some factors come into play. Make sure you are well prepared in each of them:
Detailed Business Plan
It is one of the first things you will be asked for. If you do not have it, then develop one. At the bare minimum, you need to include the following items:
- An Executive Summary that sets your stage for the business and why you must be considered for a loan.
- A Description of your business, how you start it, what value it provides to the customers, and the direction you are heading into.
- The company’s short-term and long-term goals.
- The list of all the people in management and leadership positions, with quick blurbs on current roles and relevant experience.
- In-depth descriptions of each of the products and services.
- Your Business’ financial projections over the next year, three years, and five years.
- A detailed marketing strategy about how you will continue to grow.
The more detailed your business plan requirements, the better. It prevents some of the time-consuming back and forth that happens when there unanswered questions in play.
Very few lenders, except a few money lenders, will lend you money if they don’t know where will it go. Merely telling a bank that you need $100,000 doesn’t work. Saying that you need $100,000 for inventory is not enough either. They must exactly know what inventory you are investing in, where the inventory will be stored, who you are purchasing from, what sort of sales numbers you expect, etc.
You have a very little chance to successfully procure a small business plan if you do not explain the “game plan” clearly and thoroughly. A lender can always come and say that they want you to do something differently, but a lack of knowledge always results in a denied loan application.
It may not matter to a hard money lender, but creditworthiness has a significant bearing in most small business lending situations. If you are having poor credit, then you need to raise your score to open up your options. There are many things to do, but it begins with being responsible.
“Paying on time is one of the key routes of establishing creditworthiness,” says business credit expert Marco Carbajo. “It builds healthy relationships between you and your suppliers resulting in better terms and stronger purchasing power. The payment history accounts for 35% of the FICO scores and is a crucial factor in the making of your business credit ratings.”
It’s always a good idea to stop co-mingling business and personal finances if you have the habit of doing so. It scares away lenders and makes you appear risky and unorganized.
Responsible and safe are the two words you want your small business to epitomize when looking for loans. If your credit score reflects the above characteristics, then your chances of getting a competitive loan increase.
Every lender considers collateral when evaluating a loan application, but collateral is everything for a hard money lender. If you don’t have collateral to back up your loan, you will struggle to get much of an offer.
Most of the time, you have to provide detailed collateral documentation. It includes independent assessments of value and papers that prove ownership. Collateral is anything that you are okay to lose if you cannot repay the lender in cash. It includes real estate, inventory, equipment, or anything else having value.
You can also mark things off-limits. If there isn’t anything you are willing to offer as collateral, that’s fine. As long as you are having enough collateral to cover your debts, you can safeguard your assets.
Owner History and Experience
The last primary consideration would be your history and business experience. It could be a subjective measurement, but it does come into play. Have you proven your ability to run a business successfully, or is your past filled with poor decisions and failures? Most lenders would want to know how much of your own money you have in your business (if you ask for a $200,000 loan with just $5,000 of your own money in it, something isn’t right).
If you do not have the history and experience of what the lenders are looking for, you may overcome a deficiency in this area by having a loan guarantor sign-on.
“A family member having a solid personal financial statement and an excellent credit history could be a prospect for personally guaranteeing the loan and strengthen the loan application,” says Bruce Hurta, small business lending expert. “It could be as they are older, more experienced, wiser, and have the chance to accumulate more personal wealth.”
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Conclusion of Business Plan Requirements
Just because you have got the loan product does not mean that you have to accept it. It’s only an offer, nothing more or nothing less. Once you have all of your offers together, sit down and evaluate your options (even if you have one loan offer, you always have the option to deny it).
Which loan is offering you the lowest rate? Which loan has got the best repayment terms? Do you need that much money? The more questions you ask yourself, you will get the better idea of which loan makes more sense.
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