Owning a small business is a major accomplishment and should be recognized as such. It requires motivation and dedication to undertake such as endeavor. If it were easy, more people would probably join the cause and become business owners. In reality, it is an extremely daunting decision to take the giant step required to open and operate a small business successfully. Anyone who has been brave enough to start a business knows that it requires more than just opening the doors and welcoming customers. In spite of advance planning and determined preparation, it may become necessary to seek extra financial assistance. The truth is that the majority of small business owners need outside financial support to help them run and grow their business. Applying for a small business loan may be the answer.
Understanding the Types of Loans Before Applying
It is critical for business owners to understand the pros and cons of all types of financial assistance that is available to them. It is important to determine if a loan is even necessary. Deciding which financing option is the most appropriate requires research and investigation into all types including small business loans and business credit cards. When applying for a small business loan, the business owner needs to know what to expect and to understand that personal credit use plays a major role. Lenders pay close attention to personal credit scores of the business owner. Before applying for a loan, it is important to analyze personal and business credit. Lenders carefully review this information before making a loan offer.
Importance of Personal Credit Scores
Lenders scrutinize personal credit scores when making the decision to offer a small business loan. Credit worthiness is important along with several other factors including payment history. Many business owners make mistakes with their own credit practices such as having high outstanding balances and only making minimum payments. They may underestimate the importance of credit utilization. Credit utilization should be kept under 10 percent to receive a good credit score. The way a business owner manages personal accounts plays a role when lenders make loan decisions.
Why It is Important to Not Co-mingle Personal and Business Funds
It is tempting, especially for new businesses, to mix personal assets with business funds. This is not a good practice to follow, because businesses need to establish their own credit history and not just rely on personal resources. It can be a real nightmare when it comes time to file taxes. Keeping funds completely separate protects that business owner’s private finances and eliminates a lot of confusion. Lenders want to see separate business accounts when making a loan decision.
Ways to Improve Business and Personal Credit Scores before Applying for a Loan
Review both reports and check for any errors or discrepancies. Look for any negative reports and report any errors to the credit bureau. Any dispute will not just disappear from the report until it is successfully resolved. Be sure to pay any past due debts and pay down other debts as soon as possible. Most creditors are willing to work with debtors and may be willing to erase a late payment penalty. Working to reduce credit card debt helps improve credit scores. Outstanding federal and state tax liens have a detrimental effect on credit scores. Clearing up problems with creditors helps build credit scores, which helps when applying for a small business loan. Good credit scores mean better terms and lower interest rates on all loans.
Develop a Good Business Plan Before Applying for a Business Loan
Understanding exactly what a business needs and why is the first step before making an appointment with a prospective lender. The best way to do this is to be specific and develop a budget based on funds expected from a loan. Even though it is only an estimate based on requested funds, it illustrates to the lender that the requested funds are not based on an arbitrary number, but are the result of careful research and planning. Precise numbers are not required, but should be accurate enough to back up the request for the loan amount. Pinpointing the amount needed and outlining how the loan will be repaid are critical to understand before applying for the loan.
Important Final Steps to Take When Applying for a Small Business Loan
Even though all lenders are different in their approach to offering a small business loan, most require similar documents before approving a loan. The business must make important documents available for the lender to review.
….All income statement and balance sheets that cover the past two years must be made available to the lenders.
….All accounts payable and receivable are necessary to show the lender exactly how much the business owes and is owed.
….One of two years of tax returns must be made available to the lender.
Understanding Offers for Loans
Banks or other lending institutions either accept or deny a loan application based on business financials and other pertinent information supplied by the business owner. The lender then decides the right amount for the business loan and determines the interest rate based on credit scores. The loan recipient should understand the interest rate charged on the principal amount and any other charges and fees for setting up the loan. It is also critical to understand APR or the yearly average of the total interest that will be repaid. Understand that a loan with low interest is not always the best choice because of the APR. It pays to understand both options.