Cash flow is one of the most important factors in managing a business. A good cash flow can benefit a business in many ways while a poor cash flow may cause the business to suffer.

Other than personal funds or lending from friends and family, bank loans are the most common alternative to support this much-needed cash. Below are 5 steps you must consider when applying for bank loans for your business.

Understand how banks assess loan applicants

Make sure you understand how lenders evaluate your loan applications before considering applying for it. Lender’s profit is dependent upon the borrower’s ability and the timeliness in repaying loans. Knowing this, when considering getting a loan for your business, take into account factors such as your personal credit score, business financial performance, cash flow, length of your business operation and the collateral you own etc.

Decide on what kind of financing you need

Business owners should consider different types of loan when they are looking for financing. Many people are aware of term loans which usually last between 1 to 10 years. However, for temporary cash demand such as the business seasonality, there are many more flexible alternatives. One of them is an overdraft in which banks would cover these expenses, allowing your business to spend more than what you have. Then, principal repayment and interest will only account for the period that you exceeded your balance. This is unlike a term loan in which you can only repay the principal at the end of the loan tenure. Other forms of short-term loans include revolving loans and credit lines which are used to finance short-term needs.

Pick the most favorable loan conditions

Different financial institutions provide different terms, interest rates, and loan amounts. Do your research and find the most suitable one for your business needs and situation.

Determine your chances of getting approved

By going through step 1-3, you would be able to see what type of loan your business needs and how much you can and should borrow. By knowing these, you can finance your business effectively.

If your business cannot repay the full amount quickly after borrowing, a term loan might be the most relevant as it gives you time to recover the capital for the principal repayment. If the demand is temporary (seasonality) like the cost of raw materials for production, you can recover the money back shortly. Hence, an overdraft or revolving credit facility would be a better option.

Gather your documents and apply

After deciding on what type of loan your business needs and which bank to pursue, gather all the necessary documents for the application required by that certain institution and fill in the application form and get it approved. Now that you know these 5 steps, you are equipped to assess your business needs as well as its capacity to receive financing. Be sure not to skip any step!