Many business owners see their first small business loan as a huge hurdle. Completing the application process might sound intimidating. But it doesn’t have to be. There is a lot to learn, but it is fairly straightforward once it is broken down. Begin preparing ahead of time to have strong credit to help secure financing. This guide will highlight the ins and outs of the lending system. You’ll be able to apply with high confidence.
How to Prepare
First things first, don’t get ahead of yourself. Make sure you need the loan in the first place. Then, weight the main options.
A term loan can be a solid choice. Term loans are long-term lump sum payments that are similar to a mortgage. You can also secure a loan via small business credit cards. Some business owners also use invoice financing to raise capital. Others get loans from a family member. Give yourself time to find with the right one for you.
After making your choice, look at these three key factors. Your two credit ratings will determine the amount you can get and the interest rate. Think deeply about your “use case” too. Use case is a fancy term to describe what specific actions or things your business will use the loan for. Lenders must see it since it adds further evidence you’ll pay them back. Mastering these three fundamentals will help you fully prepare to apply for the loan.
Take Stock Of Your Credit
Credit can make or break a business. Take it seriously and use any loans you get wisely. Banks dislike giving untrustworthy people a line of credit. They’re looking to make money too. Credit ratings are a reliable way for lenders to rate a loan candidate whether people like it or not.
It really helps to nurture your two scores before you ever need bigger loans. You’ll also benefit from understanding how these numbers work. A credit-savvy business owner can become quite powerful. The main scores to watch are your personal credit score and the score of your business.
How Do Business Credit Scores Work?
The core thing to keep track of is paying off what you owe. Creditors and vendors report your payment history to the credit agencies. Pay what you owe as quickly as possible. The more you do this, the higher your score rises.
There’s one specific thing that can ruin your chances. Never mix your personal and business finances. It muddies the waters and shows a lack of planning. Get ahead of the game by setting up a business account from the beginning. Go to a local credit union or bank and they will gladly help you.
Use this for all your business transactions. This will split your personal from your business finances. Tax season will be less hectic too. Keep things simple and you’ll be grateful.
You can set up a secured card for your business to do transactions with. Use it for small payments that you have the cash for. Pay it off every month and the score of your business will grow nicely. Make all your vendor payments on time too. Timely payments are usually reported to firms like Equifax and Experian.
How Personal Credit Scores Work
Lenders want to see that you are responsible in your personal life. It will show them you have things under control. That’s all they’re looking for, an orderly person to pay them back.
Your score is based on your history of making your payments. Each time you pay a loan on time, your score will go up. Both FICO and VantageScore rely on this factor.
They give you a score between 300-850. A score over 640 is considered decent. Scores over 720 are seen as excellent. It only takes a few years to get there at most.
Avoid leaving a big monthly balance behind you. It will be like a cinder block around your credit’s ankle. Making the minimum doesn’t hurt you per say. It just makes your credit improve more slowly. To get the best terms for your business loan, don’t play that game.
You shouldn’t max out your utilization limit. This makes you seem a lot more risky. Constantly using over 80% of your possible credit can hurt your score for example. Keep the individual amounts you take out below 10% to 20%. This shows you are a safer bet for the lender.
Ways Improve Your Score The Most
You are legally entitled to a free report every year from each credit bureau. Many people spread these out so they get their report every 4 months for free. You can use sites like Credit Karma for this. Keep an eye on your progress and it almost gets fun.
Keep These 5 Things In Mind:
1. Pay off past debts. You can payback these debts. Sometimes you can even catch a break since they will be happy to get even a portion of what you owed.
2. Errors in your report. Sometimes companies make mistakes and report the wrong false things. Other times the good payments you’ve made aren’t reported. Look out for bank statement errors too. Also, look out for things you’ve fixed that are still being reported. Errors don’t go away until you’ve successfully disputed them. The same goes for late payments.
3. If you owe the government a tax lien, it hurts your score too. Make sure you agree to a plan or knock it out right away. Pay off parking tickets and liens.
4. Consider paying for more intense credit reporting. You can pay about $120 to $200 to have your credit monitored in real time. They will tell you about changes to your score. Use it to help prevent identity theft and stop your score from being ruined by someone else.
5. You can also get a home or car loan. Some people also get a store credit card to pay in full each month for cheap things like chewing gum. Paying this off will reflect on you in a good way. It doesn’t hurt to have a few lines of credit open that you’re paying off successfully. Focus on making small payments and on buying things that will make you stronger in the future. Don’t buy random things just to consume them.
Remember to pay your debts early and often. Don’t leave a balance if you can avoid it. This will help your utilization ratio and keep your balance low. This is the most important part of all, it can’t be stressed enough.
Make Your Reason Air Tight
Show the bank you’re serious by having a definite use for the money. Show them exactly how you’ll use the money. Will you buy a machine? What will you use it for? Show them your current revenue and how this investment will grow your business. Make sure you can say exactly how much things will cost. Base your claims on the facts as much as you can and they’ll look at you more seriously.
How To Show You’re Master Of Your Finances
Pay an accountant to prepare a financial statement. It’ll show you’re on top of your money. Get bank statements that go at least 2 years back. Have a cash flow statement, income statement and balance sheet prepared for when you apply for the loan. Use these to show how you are profitable if possible.
Sometimes you can still get a loan even if you’re not profitable. You must be very specific about how you’re going to fix that. Show that you are growing in revenue while keeping your costs low. The best thing to show how you’re going to scale something in your business that already works.
Knowing your numbers will really help you. Be able to explain how you make your money. Also, know what your expenses are.
For example, a restaurant with decent revenue may not be profitable yet. They could still come to the bank and ask for loan to get a soda machine. If they know its margins and cost, they have a good chance of getting a loan. They can confidently say how it will boost their bottom line.
This is also great to have for your own use as well. It can really clarify your thinking. Knowing your numbers will increase your financial literacy.
Understand That Low Interest Isn’t Always Cheaper
Some banks will offer you low APR to hide that the offer comes with high fees. These can end up costing more than a loan with higher APR and moderate fees. Look at both of these figures before you accept. Calculate the total costs of all loans.
“APR” is the averaged interest you can expect to pay over the loan’s life. It can be different than the stated interest rate since rates can fluctuate. Your APR will be more accurate at showing your true costs.
Politely question them about how they came up with their figures. Ask them if its the best they can do. Don’t be afraid to get better offers and play them off each other. Just don’t be rude because you want to build a strong working relationship with your lender.
Closing Thoughts Before Applying
Your credit, your plan and your finances will be under control once you’ve done the hard parts. This will make you worthy to apply for small business loans. Make sure you bring a few documents with you when you apply.
Bring a copies of your financial statements. It includes an income statement, cash flow statement, and your balance sheet. Take a copies of your accounts receivable and payable too. It’s wise to bring your tax returns going back a year or two as well. This gives them the fullest picture they can get about your finances.
Once you’ve applied this information, you’ll be set. Display that you know your numbers and they might be impressed. Someone who comes armed with a strong credit score and a clear purpose for the loan is a strong choice for a lender. There will nothing left to fear when you’ve came prepared