Getting a business loan is a big part of any successful venture. Companies often require funding to make way for more progress, expand into new markets, or simply sustain the current business model. Securing a business loan is a different process than the one required for applying for personal loans, such as an auto loan or mortgage. Here are some essential things you need to have a clear understanding of before going for a business loan.
Your Personal Credit Score
First, you need to have knowledge of your personal credit score before looking into business funding. Some people don’t realize how much their personal credit score impacts their ability to get capital for their business. If you don’t know your current credit situation, order a free credit report from the three major credit reporting agencies. Consumers are entitled to one free report from each agency per year. Check your report for potential errors or derogatory marks, such as late payments or defaults. Work with your creditor or the credit agency to remove any mistakes.
Debt-to-Income Ratio
Another thing to understand before applying for a business loan is your debt-to-income ratio. This ratio is a percentage that compares the amount of debt you have to the amount of monthly income. If the ratio is too high, then lenders will be less likely to extend credit to you. For most business loans, the ratio caps out at 50%. Anything higher than that number may disqualify you for a business loan.
Business Plan
Some lenders may also require loan applicants to submit their business plan. A business plan is simply a written document that details the scope of your venture. Business plans typically start with the company’s concept, such as a fast-casual restaurant or an online sunglasses retailer. An effective business plan also gives a lender information about your company’s potential market for customers. Banks and other loan operators can get a clearer idea of what your company’s future looks like with a business plan.
Profitability
Your company’s financial statements are also important when choosing business loans. Before talking to a lender, you should have a clear understanding of your company’s profit margins and revenue. Use your business’ profit and loss statements, accounts receivable, and accounts payable to help you get more information about the current financial state of the company. If you have a consistent source of revenue, you’ll be more likely to obtain funding.
Loan Options
Business operators and owners should also have a good knowledge of what kind of options are available for a loan. Some entrepreneurs go to organizations such as the Small Business Administration for funding, and others work with their local banks to get access to business loans. Crowdfunding is becoming a potential source for funding through the internet. Online lenders, such as Quick Loans Direct, offer businesses an easy application process and fast funding for working capital.
Collateral
Business owners may also be required to put up some type of collateral before getting loan approval. Some lenders may use personal assets, such as a car or a property, as collateral for a business loan. Another option to use as collateral is product inventory. If you have a history of consistent customers, you could also use your accounts receivable to back a business loan.
Purpose of the Funds
Banks or other lenders may also want information about why your company needs funding. If you’re applying for a loan, be prepared to give a reason for your application. With business funding, your reason may need to be approved before your loan goes through. Business loans can sometimes be risky for lenders, and they want to make sure your plans for the next phase of your company will give them a return on their investment.
Tax Status
Next, make sure you are well versed in your company’s current tax status before negotiating for any loan terms. Your taxes should be paid and your company in good standing before you start any conversations with a lender. In many cases, you’ll be asked to bring in your company’s tax filing paperwork, so the lender can get a better understanding of your financials.
Corporate Structure
The last thing to have knowledge of before getting a business loan is your company’s corporate structure. Companies that are run and operated by one person, or sole proprietorships, may have a more straightforward process during the loan application stage. Other types of corporate structures, such as partnerships, may have specific rules and regulations attached to them when it comes to sourcing their funding. Be sure to discuss your corporate structure and your loan possibilities with everyone invested in your business.
Business loans are one of the key parts of running a successful company. You can improve your chances of getting a solid loan at a competitive rate if you are well-informed about these aspects of your business.
