The business landscape has changed significantly, owing to the disruptions triggered by the COVID-19 pandemic. It’s becoming increasingly difficult to start and run a brick and mortar business due to the epidemic’s lifestyle changes. However, that does not mean it is impossible. With the right business idea and model, one is always sure to carve a successful business out of a simple idea.
First, financing is crucial if one is to assemble the right products and service provider to fulfill a given business idea. Given the uncertainty fuelled by the pandemic, there are things one must keep in mind while looking for a small business loan amid the current crisis.
Below are some of the things you should expect while asking for a business loan from any financial institution or credit provider and acquiring life insurance for business purposes with information borrowed from CFAinsure.com.
Secured business loans require entrepreneurs to provide collateral in hard assets to back up business loans. Collateral can come in the form of fixed assets or accounts receivable. Such assets are often used as security to cover against any risks that might arise on one defaulting on loan payments.
While big businesses can pledge account receivables or machinery that can be auctioned in loan default, small business owners are often forced to pledge personal assets, which can include house equity.
A good number of financial institutions accept life insurance as collateral for SBA loans. Therefore getting the right coverage is a sure way of increasing the chances of securing a business loan.
A Business Plan
For new businesses, a lending institution may require the borrower to furnish them with the business plan. In this case, the lender will study the business plan to see if it is viable and can generate returns capable of catering to the business loan one is asking. Banks require startups to file a standard summary of the company detailing the product, the target market, the team, and expected financials.
For an established business looking for financing for expansion plans, a lender may require one to provide financial details as part of the loan processing process. The financial details must detail current and past loans as well as debts incurred and all credit accounts. The details are often used to ascertain the business’s financial health and its ability to take in additional debt.
Some Lenders require business loan borrowers to file complete financial statements, preferably those audited and reviewed by reputable accounting firms. The balance sheet would have to list all the business assets, liabilities, capital, and the latest balance sheet.
Life Insurance Information for SBA
Financial institutions would often ask new businesses to take life insurance cover for key founders, prior to processing a given business loan. By taking life insurance coverage, a business would essentially be safeguarding its future on one of the key founders’ demise.
Business life insurance policies are designed to ensure businesses continue to operate even on one of the founders’ demise. For instance, the death benefit paid on one of the founders’ death can be used to settle any loans that the business had taken. Likewise, the death benefit can be used to buy out stakes belonging to the deceased partner, thus ensuring business continuity.
According to this website, to secure an SBA loan, it is important to secure a life insurance policy. This is one-way banks, or other financial institutions rest assured they are protected against business continuity risk.
The two main types of life insurance coverage that one can take include Whole life insurance that provides coverage for the insured’s entire life. Likewise, there are term life insurance policies that provide coverage for a given period.
Term life is the most affordable and recommended life insurance coverage for securing SBA Loans.
Preparing the Best Business Loan Application: Steps
Below are some of the steps to take into consideration while preparing for a business loan application.
Step 1: Organize Finances
Regardless of how old business is, it is important to organize all the relevant financial information while applying for a business loan. In this case, ensure financial statements are in order and accurate, indicating what the business, sales are, debts, as well as assets, among other things.
How organized business is on this front would influence a great deal of how a lender perceives it. The U.S Small Business Administration has a checklist that should provide clear guidance on organizing finances for a business loan application.
Step 2: Decide Local bank or Online Application
In the past, businesses had to get in touch with local lenders to get financing. In today’s world, an online business loan is very much possible. While a loan from a local bank would always be cheaper with better terms, an online business loan could guarantee a faster time to fund. Similarly, online business loans come with easier applications and readily available even for people with bad credit.
Step 3: Think Like a Lender
While seeking a business loan, it is important to think like a lender if an application is to be successful. A lender would likely turn down a loan amount that is 12 times a business annual revenue. The loan purpose should also be taken into consideration. Likewise, it is important to factor the credit score as it is one of the things that lenders look at.
A lender would also look at the business annual revenue, the higher the revenue, the higher the chances of an application going through.
Step 4: Stick to Best Practices
It is important to reach out to a lender before starting the application process. This will clear the air on what is required for a successful application. While applying, it is important to be truthful and accurate with every information. Be thorough and don’t delay on providing the required information
While getting approved for a small business loan can be difficult, it is still very much possible in the current business environment. With the right collateral or life insurance coverage policy, a lender is always sure to approve a small business loan as long as the underlying business plan is viable.
Likewise, it is important to note that getting approved for a small business loan takes time and research as there will always be a lender in the market ready to take risks.