Businesses run on money, much as they are set up to make money. The only way your business can achieve your dream is if you choose to invest time and money into it, both at the beginning and later on as it grows. This does not, however, mean that you have to come up with the full amount. Many loan facilities offer bank loans for this specific purpose. But how do you qualify for a business loan?
How to Qualify for A Business Loan
There are a number of requirements that you need to meet before any bank or lender considers you eligible for a business loan. These include the age of your business; most banks demand that it should have run for at least a year. This gives them an idea of how the well the business does, net income, and annual revenue. This will show how reliable the business may be in terms of paying back the loan. It also helps them determine the loan amount that the business can handle.
Another factor that is taken into consideration is the purpose of the business loan. Not many loan companies jump at the idea of funding a startup, and business expansion over start-up funding. However, of all these factors, the main one is your credit score. Let’s break this down into smaller detail.
Credit scores relevant for a business loan
You may be thinking that because the loan is for your business, it is your business that is in the limelight, and your credit score does not matter. However, because you are in the driver seat of this business, and the financier, it is your business discipline that is in question. This is more so when the business has not been in existence long enough to have its own credit score. So, what is the minimum credit score required to get a business loan?
As personal credit scores go, there is no defined score for getting a business loan. However, you stand a better chance of getting a nice, fat loan if your credit score is above 550, lower credit score under 500 will make your chances less. This score is derived from such details as your loan payment history, how long you have had a credit history, your borrowing capacity, tax history, as well as how you use and payback credit cards.
Where your business is mature enough to have a credit score, the same scrutiny will be done. They will analyze its credit history, its ability to pay back previous loans, how long it took to pay back, and its tax history.
How to Improve Your Credit Score?
You may find out that your credit score is way below what is required for you to be eligible for a business loan. Fret not because you can improve it in a few ways.
On the flip side, you may have no credit history, as you have never borrowed from any loan facility. This might sound very good, but sometimes, especially with banks, you stand a better chance when you have had loans and paid faithfully than when you have had none.
Getting the Business Loan
Now that you know that your credit score is good enough to get a business loan, you can go ahead and research the best loan company to get the loan from and which loan type is best for you. The following steps will help you decide what best suits your needs:
- Be clear on the purpose of the loan. It is very dangerous to have money in your account that has no specific purpose. Come up with a clear perspective of why you need the loan in the first place. This will act as a guide on the spending.
- Calculate how much you need. Knowing the purpose of the loan, you can now sit down and determine just how much is needed to achieve that goal. This will help you determine the type of loan you need and hence, which loan office will offer you the best deal.
- Be clear on your repayment ability. Before applying for the loan, even with the amount being clear, you need to evaluate your business’ capacity to pay back the amount. Consider how much profit is made in a month, for instance, and how much of it can go into paying the loan without bringing the business to its knees. If you discover that you cannot faithfully pay the installments as needed, you need to reevaluate how much you can borrow. This will help save your credit score as a business, as opposed to tainting it with unpaid loans.
- Do you have collateral to offer? This will determine whether you will secure your loan or not.
- Get into the interest details. Once all the above is clear, you can now shop and look for the best interest rates for the determined amount. Get to know the fees required from each facility and then make a conscious choice which one you want to approach.
- Finally, get your paperwork in order. These include bank statements, both personal and for the business, annual income reports, your business license, and financial reports. You should also have your personal identification.
Making your business work is not rocket science. You simply need to arm yourself with information that will help you access all the resources that you may need. We are glad to be of service!