Essential Points to Ponder Before Seeking a Business Loan
Any lender, particularly a bank does want to know beforehand that it’s not just throwing its money away. The SBA states that a bank first checks out whether the prospective borrower is already earning revenues or has other means by way of collateral to repay its loan. Moreover, both acceptable levels of business and personal credit scores are required to convince lenders of your credibility in the market.
Your share in the business’s equity is reflected in the company balance sheet, by way of funds’ investments or earnings that have not yet been re-invested. According to the SBA, lenders generally give precedence to those businesses whose debt does not exceed four times its equity. Lenders also thoroughly check out your asset position so that they can be put up as collateral which can be sold to repay the loan if and when the need arises. The collateral value of is discounted generally.
Your overall experience in running the business counts heavily in establishing your stand as a prospective buyer also. This is because it often becomes difficult to get loans unless you are able to show some experience in your line of business or are in the process of hiring professionals who have the required experience to make a success of the show eventually.
The liability becomes absolutely binding as the borrower takes the loan on an agreement signed personally by both parties. The borrower is hooked by law to pay up even if he closes down the business. This calls for careful thinking and due consideration of all valid factors before you approach a prospective lender for a cash handout. These factors are as follows:
Personal credit score
When applying for loans with conventional lenders, you need to ensure that your personal credit score is absolutely top notch. This is because most lenders consider this first and you need to be aware of where exactly you stand before you call on them. Get your personal credit report from any of the recognized and accepted credit agencies and check thoroughly for errors, if any. If mistakes and/or omissions are found, contact the said credit bureau immediately and get it set right before you approach your prospective lender.
A higher credit score in excess of 700 stands the best chances of getting loans with attractive interest rates. In the current scenario, you may expect to shell out an average rate of 6.89 percent interest for any commercial loan under $100,000 on an average. For mid-level scores ranging between 600 and 700, a loan may be available but at higher interest rates. However, for any score below 600, getting external funding may be somewhat difficult.
Know your requirement
If for some reason you’re unable to accurately measure your immediate loan requirement volume, take the help of a financial expert or adviser to ascertain the exact requirement before approaching lenders.
You must also prepare adequately to supply any documentation that backs up your request for funding and to answer any queries that the lender may have about your business model, present financial condition and all future plans. You must also be able to clearly explain how such funds are going to be utilized. This is a vital component of the loan application process.
Be clear about your options
Lenders may either be conventional – credit unions and banks; or nontraditional – online lending platforms. The latter, even though they charge higher interest rates work much faster and disburse loans more quickly than their traditional counterparts. Additionally, the borrower has the liberty to start repaying his loan in smaller installments daily, thus reducing risks of defaulting on bigger monthly payments that usually are associated with traditional loans.
You could also scour the merchant cash advance option, which bases itself on future sales through credit cards. The greatest advantage of a merchant cash advance is that those with poor credit scores also get to avail this loan. Once your application gets approved, not only do the funds roll in faster, but your repayment plan too, gets based on your future revenue earnings.
You learn from your past experiences and mistakes. It often happens that your maiden loan application may get rejected for say, poor credit. This could be a pointer to you to improve your credit scores so that you definitely get the loan later. As a first time borrower moreover, you need to understand a lender just isn’t willing to hand over money to anyone.
They demand surety that the loan shall be repaid, screening all loan applications most carefully to eliminate risks of non-payment in future. To them, the borrower’s ability to repay; his credit history; his personal stake in the business’s equity; loan security and the businessman’s experience in running the show matter most. It’s only when these queries have been satisfactorily answered that the lender approves the loan. And this is what you need to understand beforehand very clearly.
When you apply for a loan, preparing for the process is of vital importance. If need be, get professional help if you are unsure of certain areas and check out the following mandatorily: Whether your business plan and loan application are prepared faultlessly and if any weaknesses in the application procedure have been appropriately addressed. This may take considerable time and effort but the results will surely be worthwhile in the long run.
Once you take care of these, your chances of bagging the loan, needless to say, shoot automatically. These tips are proven to be effective when it comes to acquiring small business loans.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.