All small businesses need financing from time to time for expansion, meeting unexpected expenses, and other purposes. But, getting that finance can present a challenge. Banks and other lending institutions typically take four main factors into consideration when processing your loan request. These four main factors or four pillars can influence how you get the business loan you need, the source of the loan, interest rates you’re offered, and any other procedures involved.
The time you have been in business, the monthly revenue your enterprise generates, its credit scores and the collateral you offer are the four pillars that you need to understand carefully. Accordingly, you can prepare the necessary financial documents and a viable business plan to present to your prospective creditors when shopping for a loan product. Here’s everything you need to know:
Time in Business
Typically, traditional business loan providers prefer to lend to firms that have been in operation for a minimum of two years and might also offer lower rates of interest. However, if you’ve been working for less than that, your enterprise is considered a start-up. In that case, you can approach alternative lending institutions. These finance sources are open to lending you funds even if you have been in business for just three to six months. If the monthly revenues you display are high enough, they could offer you the business credit you need. Of course, you’ll need to prepare to pay a higher Annual Percentage Rate or APR. That’s because lenders consider your company as high risk. Take care that the interest rates don’t cut into your earnings and make it difficult for you to remain operational.
High Credit Scores
A credit score of say, 700 and above indicates that you’re good for the loan you take, and you pay back on time. When potential loan providers check your credit scores, they are assured that their investment is safe. Accordingly, before applying for a small business loan with a traditional finance provider, contact one of the three credit reporting companies and ask for a free copy of your credit report. You could also get an online copy at www.annualcreditreport.com. Study it in detail and if you notice any errors, get them corrected.
If you have a credit score of over 700, you can expect to buy a loan product at lower rates of interest from a traditional loan provider. Credit scores of 600 to 700 can also qualify you for a loan from a bank, SBA or other such lenders, though, you’ll have to pay a higher rate of interest. But, if you have a credit score of less than 600, you could choose to approach alternative or innovative loan providers. A good personal credit score can also help you buy business loans at cheaper rates. If you can show that you have a 20 percent or higher stake in the enterprise and your credit score is 720, you can qualify for any loan product you need. Your monthly business revenue also affects your chances of getting loans.
Companies with very low credit scores can opt to apply for financing by way of an Automated Clearing House (ACH) or Merchant Cash Advance (MCA). However, these loan products come at very high rates of APR that can go up to 80%. Do remember, that the interest rates remain the same irrespective of the credit score you have. At the same time, the processing time is between 24 to 72 hours with easy repayment facilities.
Prospective creditors are very interested in the monthly revenue your business draws in. If you have an income of $8,000 to $15,000 a month, that may not be adequate for you to qualify for a traditional loan. But, revenues of $20,000 and above prove that your company is securely established, capable of honoring its dues and paying back any new loans it takes.
Loan providers also take into account the debts you already owe such as the interest you pay on the short-term loans you’ve made, payments towards the principal, sinking funds, and pensions. If you regularly set aside funds towards the payment of long-term loans and possible significant expenses, they are also factored in. These obligations are weighed against your monthly earnings exclusive of the operational expenses you incur. If you earn more than you must pay every month, you qualify for a loan whereas if your firm breaks even or makes less, it indicates that you may not be able to honor any new loans you take.
In this scenario, you might have to rely on one of the other three pillars such as an excellent credit score and duration in business to convince your lenders. Providing collateral can also qualify you for the loan products you need.
When you provide collateral for a business loan you’re requesting, you assure the lender that their investment is safe. In case you’re unable to pack back the loan amount, they can always liquidate the asset to recover their dues. Collateral also makes you accountable. You can offer the property you company owns as security. These assets can include the cash balances in your business bank account or merchant processing account, equipment, real estate, and vehicles. You could also put up your personal assets as assurance. If you own the house you live in, or a 401k plan, you can use them as a guarantee for the loan.
Prospective lenders might also ask you to provide a personal guarantee for the loan. In other words, should the enterprise fail, you will need to honor the loan out of your assets. While traditional lending institutions are willing to extend credit against collateral, innovative lenders might choose to place a lien on an asset you or your company owns.
Using any of these four pillars or a combination of two or more, you can scout the lending marketplace for the business loan you need. While you may be able to access the funding you need, you might have to work out the other terms and conditions with your lenders.