Regardless of the size of your business, taking a loan is always a tough decision. Because if you fail to pay back, you and your business will have to face the music. The journey in the business industry is never a smooth road, and you never know what the future holds for you.
Therefore, a business loan should never be opted-in haphazardness. You should land upon the loan through a thoughtful process to make the most out of it. Here is a list of five things you need to bring into your consideration before applying for a business loan:
Personal and business credit score
No lender would risk his money by sanctioning it to a financially irresponsible person. To determine your financial background, a lender will go through your personal and business credit score.
A credit score above 700 will be an ideal one, but if your credit score ranges from 600 to 700, then the interest rate will be on the higher side. Anything less than this means you are likely to get stricter loan terms even if your loan gets approved in the first place.
There are multiple ways to get your credit report for free. Before calling up the lender, give a good look at your credit report and rectify the mistakes if any. There is no shortage of people who have been declined loans due to errors in their credit report.
If your company has not been around for long enough to generate the credit score of its own, then in such a scenario, your credit score is going to be even more crucial in the whole process.
Explore borrowing options
Some people tend to settle with the first lender they meet while some borrowers make it a point to borrow from renowned banks because they have big names, which is not an ideal way to go for a commercial loan. People who apply these methods to get the loan tend to get so many shocks in the fine print. So shop around until you find your match. The lending industry is very diverse, and you don’t need to get dishearted by a few rejections. Just keep trying and don’t compromise on the loan terms you have mapped out for yourself, more often than not, you are sure to hit upon the right lender.
It is crucial to collect as much information about a lender as possible. You can do so by making a questionnaire which might include the following questions:
- How many loans have you sanctioned related to my industry?
- How much loan do you fund on an average?
- How do you prefer receiving payments? (monthly, quarterly, or biannually?)
- Do you need a personal guarantee?
- How long it generally takes you to transfer the loan amount?
You can also add more questions to know your lender at length. In case you can’t physically go and inquire about the lenders personally, remember, online lending options are also readily available.
For most of the commercial loans, it is mandatory to attach a business plan document. It is shorter these days, but banks do need a summary of a few things related to your company. It includes things like product, teams, market, and so on.
Lenders will not rate you as a potential borrower if you lack the competency to transform your business into something exceptional. A business plan document is a way to convince your lender why you are the best in the market.
It is because, lenders are smart enough to know that their loan payments have directly to do with the growth of your business and if you lack the vision, they will not bat an eye on your proposal.
It is great to have a good credit score. But these numbers only reflect your past and present financial standing. Yes, they can help lenders to predict the future to some extent, but nothing is for sure.
You also need to have an asset that is tangible to put as collateral. The collateral depends on a few things like the size of the loan, type of the loan, and how you are going to use the borrowed money in the future.
For example, if you are applying for a handsome amount, then the market value of your collateral must come to terms with the loan amount. Remember, Banks go the extra mile to evaluate the worth of whatever you serve as collateral. Depending on the type of loan, the following assets could be your go-to collateral:
- Business assets
- Real estate (residential or commercial)
Decide how fast you need the loan
The fact that in how many days you want a business loan can play a vital role in the whole process. The less urgent the need, the better it is for you. If you know that you will have to apply for the loan in the coming months, then you should start preparing to improve your chances to get the loan on favorable terms.
To begin with, you can recover from the bad credit score in the meantime. Moreover, you will have the time to audit and review your financial statements as well.
However, if the need is urgent, then conventional banks could be an appropriate option for you as they hardly take more than a week to withdraw the loan.
The takeaway message
As mentioned above, taking a business loan can have long term aftereffects on you and your business. That’s why you can’t approach lenders with a casual approach unless you plan to fail. After all, nobody would venture to risk his money for someone who can’t prepare properly for the loan. What’s more, considering the above things will also give you the roadmap to pay back the borrowed money quickly.