Are you thinking about launching a new small business or are you in the process of growing out your existing company? If you answered ‘yes’ to these questions, the chances are good that you’ve spent some time giving thought to how to get extra funds to pursue your dream.
For many small business owners and entrepreneurs, getting financing is essential for growing the company. It costs a lot of money to operate a business and have the necessary cash flow to ramp up stock and inventory, to buy new equipment, to make repairs and renovations, to hire employees, or pay for a holiday marketing push. Small business loans offer company owners and entrepreneurs a convenient way to access the funds they need to accomplish their company goals and objectives.
What you need to know about business financing
The more information you have on business financing options, the better off you are. In today’s day and age, entrepreneurs and business owners have more options available than ever before to get business funding. Some alternative business financing choices include crowdfunding, finance partners, angel investors, invoice factoring, and merchant cash advance services.
What lenders require from borrowers
Every lender has specific requirements that borrowers must meet to qualify for their financial services. Conventional small business loans remain a stalwart for traditional lending and rely heavily on the borrower’s credit score and other factors to determine their creditworthiness. Different types of lenders such as merchant cash advance and invoice factoring service providers use recent financial statements and credit card sales history from the business to decide whether they can offer a cash advance on future receipts.
For many company owners and entrepreneurs, filling out a small business loan application is a scary process. Potential borrowers must be ready to answer all of the loan officers questions, as well as have their credit reports evaluated for creditworthiness.
While not always the case, bank officers prefer to work with borrowers who show a history of responsible credit use and on-time payments to their existing creditors. Borrowers with a 700 score are ‘good.’ People with scores over 800 are ‘excellent.’ Borrowers with lower scores may still qualify for a conventional small business loan. However, they may come at a higher cost due to interest and other fees.
Improve your credit file
If you have less than perfect credit or you’re thinking to the future, here are some tips to improve your credit profile. Following these suggestions before you apply for a small business loan improves your credit approval chances.
Make all your scheduled payments on time – Lenders want to see that their clients have a proven history of making payments to their existing creditors. It makes sense! If the borrower is in the habit of fulfilling all of their current financial obligations, they can loan with more confidence that they, too, will get paid back what they are owed. Late or missed payments are red flags to lenders. In many cases, late payments are grounds to deny a loan application. If you are serious about getting a small business loan, make every effort to assure that you are meeting all of your financial obligations and making your scheduled due dates on time. By doing so, you’re also avoiding costly late and penalty fees that put additional pressure on your company finances. If you’ve missed payments before, the good news is that every ‘on time’ payment you make from that day forward helps repair your payment history.
Don’t apply for multiple credit cards or loans in a short time – When lenders see that potential borrowers have applied or requested credit cards or loans with several different companies, these actions can get viewed negatively. Without knowing the exact financial situation of the borrower, there is a lot of room for interpretation on why they are seeking credit and cash. Further, all the hard pulls on the borrower’s credit file result in a lower credit score. When there are a lot of credit inquiries, it could indicate the borrower is having troubles making ends meet, or is planning on ramping up their spending on unsecured debt. Most lenders prefer to see that potential borrowers already have a number of established credit accounts and lines that they’ve managed responsibly. These accounts could include credit cards, installment loans on a vehicle or home, a department store credit card, or a line of credit.
Check for errors on your credit report – Errors and inaccurate information on your credit report can be problematic when it comes to securing new lines of credit for your company. If you find incorrect account entries on your report, it is in your best interest to request the credit reporting agency investigate it or remove it. Typically, the listed creditor has 30 days to respond to the request to verify the information. If there is no response from the creditor in these 30 days, legally the data has to get removed. Also be on the lookout for collection accounts, tax liens, and other inaccurate data. If you see accounts that you don’t recognize, contact the creditor right away to make sure you aren’t a victim of identity theft or unauthorized charges, as this risk is persistent in today’s digital society. If the debt is found to be legitimate, the entry will stay on your credit report. In this situation, you might consider working with the creditor to pay the arrears and ask them to remove it from your file.
The simple act of verifying all your accounts and removing outdated or incorrect information can boost your credit score significantly in 90 days or less.
Prepare for the small business loan application process.
After taking time to assess your current financial situation and reviewing your credit profile, you should be better situated to make a small business loan application with confidence that lenders will want to work with you and to finance your ventures.