As your business grows, you may be researching how to apply for a small business loan to fund your expansion. Whether you’re applying for a mortgage, a line of credit or an equipment loan, getting a small business loan can sometimes be a challenging and drawn out process. However, the more you prepare, the more smoothly the application process can go, and you may even have a better chance of being approved for a loan or business line of credit by having all your finances in order. As a business owner, it’s not just your company’s financials you have to consider, most lenders will also look at your personal banking history. Before you start considering lenders, follow these tips for managing your personal finances.
Personal credit reports matter
Like it or not, your personal credit history will be considered when applying for a small business loan or line of credit. Before you start the application process, request a copy of your credit report and review the information provided. Pay close attention to detail and look for any errors, such as the wrong address or incorrect payment dates. If you do find errors, make sure to get them corrected before you start applying for a loan or business line of credit. Additionally, your track record of making payments on time, whether on personal lines of credit, student loans, mortgages or auto loans, will make a big impact on whether or not you get approved for a small business loan and the rate you get if you do. Managing your personal finances before you apply will help you be in a better state for approval.
Determine your collateral
As defined by the Small Business Administration (SBA), collateral is an extra form of security that can be used as a source of repayment for your loan. Most lenders will require collateral when you’re getting a small business loan so they will be able to get their money back if you’re not able to repay the amount borrowed. You can use both business and personal assets to secure your loan. Typically a lender will require the amount of collateral to be greater than the amount of your loan. It’s important to note that what the bank appraises your assets to be worth may be less than what you would value them at. If you find yourself with less collateral than required, the bank may require you to have a co-signer. Determining your collateral before you apply for a small business loan can help cut down on unexpected road blocks.
Avoid big purchases before applying
Before you apply for a small business loan, try to avoid making any big purchases that would require additional debt. Lenders want to see that your current debt is manageable, and making a big purchase could increase your debt to earnings ratio which may hurt your chances of being approved for a business loan or line of credit. So, hold off on buying a new house or a new car until after you have secured the funds needed to improve your business.
Perfect your business plan
When applying for a small business loan, you may be asked to provide a copy of your business plan or detail elements of your company in a financing request. This will reassure your potential lender that you have carefully and strategically thought through the needs of running your own business. A well-planned business model also shows an element of responsibility and could help your chances of being approved for a loan.
As you move forward and apply for a small business loan, consider your ability to support additional debt, your working capital needs, as well as the cost of your planned renovation, move or equipment to decide how much you will need from your lender. A business loan calculator and working capital calculator can help you get started. From there, schedule a meeting with your lender to discuss what will be required and what solutions are available for a business loan or line of credit.
Sponsored content was created and provided by RBS Citizens Financial Group.