1. Personal credit scores have a huge impact.
You’re just starting your business. You don’t have a large amount of data regarding your success rates and revenue. But what you do have is a personal credit score. Your personal credit score measures how trustworthy you are with loans. Making mortgage payments and paying bills on time helps to increase your credit score. But your score may be lowered if you fail to pay back loans. Most lenders are looking for a credit score of at least 700. If your score dips under 600, you’ll lose many loan opportunities. In addition, you’ll be subject to higher interest rates.
2. Lenders judge your ability to manage a business by your ability to manage personal finances.
This ties into the credit score point. If you’re starting a business, any lender wants to be sure their investment is profitable. They want to know that you can use their money in a constructive way. You need to show lenders that you’re responsible and on top of your personal finances. If you have a messy history of unpaid debts and late bills, lenders will take this as an indication of how you’ll run your business.
3. Building up a cash supply increases lender confidence about your stability.
You want the bank to finance your loan. With this in mind, it might seem strange to build up a cash reserve. Why bother saving up money if you’re going to the bank anyway? But lenders will want to know how you can pay back the loan in an emergency. If the business has a decreased revenue stream or fails entirely, a cash reserve shows that they’ll get some of their money back.
4. Collateral is often a must.
Most people need to offer up some kind of collateral as part of the loan. Unless you have extremely good credit and a great business track record, a lender is unlikely to give you a commercial financing loan for free. Instead, your loan will be secured debt. Should you fail to pay it back, the lender will repossess your collateral. Common assets used for collateral include expensive jewelry, vehicles, and houses. If you don’t have a lot of assets, you may not have as many loan options open to you.
5. You’ll need to use bank statements to prove you’re worth it.
No matter the industry, businesses have to deal with unplanned expenses. Lenders are aware of this. They may place limitations on your loan, only giving you a certain percentage of your annual revenue. You’ll need to have a profit and loss statement for the fiscal year. It should have been updated within the previous 60 days. This should also include a bank statement summarizing the previous two years.
6. Business tax returns may help you.
You’ll need to show the lender your bank statement, but they may want additional verification of your revenue. For that, you’ll need to show them the tax returns for your business. If you don’t have a large revenue stream yet, show them your personal tax returns.
7. Lenders prefer long-standing businesses.
In most cases, your business needs to have existed for a period of time before you can seek a loan. Lenders won’t give you money on a whim. You need to demonstrate that you have a revenue stream, an ability to manage money, and a plan for your expansion.
8. Lenders want to make money.
The point of loaning money is to make money on the interest. To do this, lenders take a risk. They assess whether you’ll be able to repay the loan with the proper interest rate. You need to consider your proposition from the point of view of a lender. What guarantees do they have that this decision will be profitable for them?
