Before kicking off the application process
Before you immerse yourself in the application process, explore all your options. Once you are absolutely certain that you need financing and that a term loan is your best option, you need to narrow your focus on two things: your credit and the specific intended use of your loan.
Analyze your credit
For business loans, credit is key. A business lender needs to know that they will get their money back. A credit score gives them that information. Your personal credit score and business credit score are huge determinants on whether or not your loan will get approved, as well as how favorable the terms will be. At Bond Street, our analysis looks at credit scores as well as a third indicator. We want to breakdown these ratings so you can understand how they come into play and how you can improve your rating.
Your Business Credit Score
Different companies compute this differently. The Dun and Bradstreet PAYDEX only takes your payment history into account. Experian and Equifax also look at public records, legal filing and collection agency data. The underlying theme in both is clear; to maintain a healthy business card score, pay your bills on time.
Your Personal Credit Score
While it’s advisable to keep your business and personal finances separate, small business loan lenders will still consider your personal credit score in their decision. The assumption here is, if you run your personal finances well, then you are likely to do the same with your business finances.
Once again, your payment history is vital in determining your credit score. Both the FICO score and the VantageScore will give you a better score, depending on how timely you are in paying your bills.
What are the main mistakes that lower your credit score?
One, having a poor understanding of utilization. This measures the amount of credit you have utilized vs. your credit limit. You can get this figure by dividing your balance by the credit limit and multiplying by 100 to get the percentage. Try to use less than 30% of the total credit available to you. The rule of thumb is to keep your utilization as low as you possibly can, and just as important is to run your personal accounts well above board.
Two, the second mistake is having a high outstanding balance. You are penalized for having huge amounts of debt, even when you consistently make timely payments and are not in debt.
Are there ways to improve your credit score before applying for a loan?
Yes, there are.
The first thing you have to do is access the information Credit Reference Bureaus use to score you. Thanks to the Fair Credit Reporting Act, this information is free. You can access your report on Nav or CreditSignal’s website. Other options for personal credit reports are AnnualCreditReport.com, freecreditrepot.com and Credit Karma.com.
Armed with your credit report, you can comb through the information looking for any piece of information that can help you improve your credit score.
• Check for, and correct any errors that may have lowered your credit score. These may also mean including positive financial transactions that were not captured in your report.
• Pay as much as you can on your credit card debt and also, look for any past-due debts and reach out to the lender for settlement.
• Do you have any unpaid taxes? If you do, reach out to the relevant authorities and discuss a payment plan on any tax lien. If possible, make a one-off payment and clear the debt.
Specify Your Request
Specifying your request as much as possible helps lenders assess your loan and understand what you’re asking for and why. A great way to do this is by preparing a budget showing the intended use of the money and how it will translate into revenue for your business.
Review Your Financial Statements
Financial statements easily say a lot about your business. Review these documents and find out your financial position is. The first thing you want to figure out is if your business is making money. Secondly, what are your major business expenses? And lastly. Is your business profitable?
In the event that you are not making profits, you have to figure out how to get yourself there. Understanding how to make your business profitable will strengthen your case with the small business loan lenders.
Organize Your Documents
With all your documents in order, putting your application together should be a walk in the park. Even more so if you use our simple small business loan application. While each lender has specific requirements, most will require the following:
1. Financial statements for at least two years of operation.
2. One to two years of your business’s tax returns.
3. Accounts Payable and Receivables- basically what your business owes and what it’s business is owed.
Review your offer
Your patience has paid off and you have an offer on the table. How did the lender arrive at the offer and what are the implications? The lender uses your financial statements to determine a loan size suitable for you. The offer you receive includes an APR and an interest rate -both are based on your Credit Score.
Interest Rate vs. APR
Aside from your loan amount, your offer will include your Interest Rate and your annual percentage rate (APR). The interest rate is the percentage of the principal amount of the loan that a lender charges you on the business loan.
The APR gives you a better picture. This figure gives you the yearly average amount of the total interest payable on your loan, inclusive of fees and service charges. You’re likely to pay more on a loan with low interest rates and high service fees, than on a loan with a higher interest rate and low service fees.