Finding a small business loan is often a necessity during the growth of your business, but it can be difficult to find a loan your eligible for. Learn, how lenders use these 6 basic factors to determine your eligibility for loan. Apply this knowledge, in finding the right lender and applying for the right loan.
Every lender has its own set of parameters for determining whether or not you qualify for their loan products. Understanding these eligibility requirements will help you determine which loans are best for your businesses situation.
Business loan qualifications vary by loan type and lender but, in general, the longer you’ve been in business, the higher your credit score is and the more collateral you have, the easier it will be to qualify for a loan. Loan qualifications are primarily based on time in business, credit score and business revenues.
How Long You’ve Been in Business
It’s tough to get funding for a startup unless you’re rolling over your retirement money. Business lenders that lend to startup businesses typically only provide small amounts of funding with high interest rates. The best option for startup owners is to get a startup business loan or use personal assets like your retirement account.
Established businesses have more financing options available to them. If you run an established, profitable, business and have good personal credit, you will be a good candidate for a low interest or long term bank loan, which are typically the least expensive forms of business financing.
Your Credit Score
Your personal credit is evaluated by most lenders, as one of the most important factors for qualifying for a small business loan. If you have a credit score of 720 or higher, it’s easier to qualify for most loans. Knowing your credit score will help determine which loan options you may be eligible for.
Having less than perfect credit doesn’t make it impossible to find a business loan, but it does make it harder. Instead of a traditional bank, borrowers with lower credit scores will need to seek out costlier alternatives.
Your Repayment Ability
In order to get a loan, you must be able to prove to the lender that you have adequate repayment ability and can afford your loan payments before the lender is willing to issue a business loan. One way that lenders evaluate your repayment ability is by calculating your business turnover and business returns filed to the government.
It’s important that you know your total business revenues for the last two or three years. If you’re starting a new business, you will need to project these numbers based on expected performance. This information will help the lender calculate your repayment ability. Thus, make sure you have enough income inflow to show before you start applying for loans.
What Collateral You Have to Offer
Collateral is important for a traditional loan, and the more you have, the higher your chances are at getting funded. Determine if you have equipment, real estate or other assets that can be used as collateral to secure the loan. Lenders typically ask for collateral of your business assets, to safe guard them from any risk of non-payment of loans.
Information About a Personal Guarantee
Most business loans, whether from a bank or an alternative lender, require a personal guarantee. This is a promise to pay the loan out of your own pocket if the business fails to make payments. In the event of a default, the lender will usually first foreclose on your collateral and then collect the remainder of the loan balance, if any, by enforcing the personal guarantee.
How Quickly You Need the Funds
How quickly you need financing can limit your choices. If your financial needs are not immediate, you are prepared for the extensive application process and meet the qualification criteria. A traditional loan is likely your best option. While these loans can take between 45 to 120 or more days for funding, they offer better rates and terms than other loan options.
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On the other hand, if you need a fast loan or an easier business loan, you would do better to seek out an online or alternative lender. However, be prepared to pay more in terms of interest rates in exchange for speed and convenience.
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