There are many ways to finance a small business. Business cash advances, however, ease the small business owner of worrying about financing the business. This is a comprehensive guide on how to apply for the small business loan.
Applying for a business loan sometimes is one of the best ways of financing a business venture. However, it is important for the business owner to exploit other alternatives before settling on the loan option.
Alternately, it is important to evaluate critically both the good and the bad effects of a loan to both the business and you as the business owner. This evaluation helps you in getting a more rational ground on why the loan is important.
Credit score and the effect on success rate in a loan application
The credit score is one of the most analyzed aspects of the business before a business loan. In an ideal situation, the business credit score is singularly enough to make this analysis. However, since the business is relatively small, it is not fully an independent entity. The business credit score is jointly analyzed with your own credit score. It is, therefore, to analyze the two credit scores differently.
(a) Business credit score and its effects
There is a grey area between the business and the business owner. The business entity is often full of the owner’s private financial life. The mixing of the two is one of the reasons why many business entities fail to secure business loans. The remedy for this mix-up is by separating the two by creating different bank accounts and treating the two as different entities.
For a business to qualify for a loan, it is subjected to different parameters of establishing the credit score. The popular way includes establishing the business payment behavior over a period. Alternatively, the way the business handles documentation to have an upper hand. Some of the main documentation includes filling of taxes and the nature of everyday records.
(b) Personal credit score and its effects
While establishing the credit score of a business, your financial capacity is the extension of the business. Therefore, any aspect such as payment nature and history play an important role in approving the loan.
It however important to note that the following affect the credit score of the above credit score dimensions. High debt is one of the main factors that most small business and business owners score low in credit score. In addition, utilization percentage of more than 10% is also a reason for scoring low in credit ability and eventually not qualifying for a loan.
Two ways of increasing the credit score
Numerous tools are crucial in estimating your credit score. CreditSignal and Nav are the most objective online tools of giving you the estimates of your credit scores. After having an estimated score, the following are the two ways of improving the score.
(a) Quick fixes on both the business and personal level
Quick fixes are easy and take less time. The first thing after receiving the estimated score is to counter check all the details. It is normal to find simple errors. Correcting the errors is one-step to achieving a higher score. Alternately, contacting people and institutions that you owe money is a good and brave step to improving the credit scores. The best thing about willing reaching to these parties in the fact that both can create a good rapport that is flexible. he most effective quick fix to improving credit score is paying all the taxes. There are different payment methods but it is ideal to pay in full.
(b) Long term fixes
Although quick fixes are ideal in improving the credit score, having a concrete long-term plan in keeping your credit score high is the best decision. One of the long-term approaches to improving the credit score is reviewing your spending. Instead of getting to a debt, just to buy property, it is better to use available options such as hire purchase. Alternatively, change your approach to use of credit. If the credit is down, the higher the chances of scoring high in the credit score. There is no definite number of the credit percentage but the lower, the better.
One of the best long-term approaches to improving the credit score is being accountable to the credit monitoring entity. This accountability gives you a professional view on every step and the services are relatively cheap.
Have a clear understanding of business the financial stand
It is easier to point a need in the business. However, if the need is supported by documents, the proposal of funding is more appealing. The best way of having a clear understanding of the business financial standing is by standing all relevant documents. These documents include cash flow documents, balance sheet, and more importantly income statement.
Applying for the loan with a solid plan
Vagueness is one of the most dangerous aspects while looking for funding. Lenders and financial institutions admire concrete plan and specifics are important. This means therefore that having a more elaborate plan about the intended spending improves the chances of getting the funding compared to an unclear proposal. Instead of just proposing an infrastructure boost, it is more appealing to state specifics of the infrastructure.
It is important to have a realist plan, one that does not overpromise on the business ability. The only way one can accurately know the company’s position is by objectively going through the business financial documents.
How to interpret the financing/loan offer
After presenting the document to the relevant financial entity after following the above tips, there are high chances of success in convincing them the need for a loan. Based on the scores, the lending entity is able to prepare an offer with both interest rates and annual percentage rates. All these numbers expound the lender’s evaluation of the business.