Business loans provide entrepreneurs with funding that must be repaid. Lenders evaluate multiple factors when considering loan approval: personal and business credit ratings, revenue generation, collateral requirements and any existing debt obligations.
Business owners must prepare for the application process by becoming acquainted with what lenders may request of them and by knowing how they can increase the odds of approval for their venture.
Financial Statements
If your business needs financing, it is imperative that all financial statements are up-to-date and prepared with care. This includes balance sheets, income statements, cash flow statements and statements of shareholders’ equity – providing lenders with an accurate representation of your company’s health and creditworthiness.
Investors or creditors assessing your company will look for strong sales forecasts and the ability to quickly source working capital when needed. They also require information on how the funds will be utilized – for strategic R&D or to enhance sales using more effective marketing.
Preparing financial statements will enable your company to qualify for loans with favorable terms, including reduced interest rates or co-signers to reduce risk for lenders. Therefore, creating these four forms of statements is integral to the success of your business – ultimately it will remove confusion surrounding finance by making it simpler and clearer to navigate.
Cash Flow
Your business’s financial health relies heavily on your ability to pay suppliers, employees and lenders on time. If you struggle to meet financial obligations on time, lenders could reject your loan application. Cash flow also impacts investment opportunities as well as covering short-term expenses.
Lenders prefer businesses with established histories. They’re more willing to extend credit to established firms than startups since one out of two startups fail in the first year and only 20% make it past year five.
To be eligible for a government business loan, it’s necessary to be an established company with an ambitious business plan and strong projections over five years. Lenders often prefer small business term loans which provide upfront cash but must be paid back over an agreed term; other financing solutions could be explored such as lines of credit or equipment financing.
Collateral
Many lenders require collateral assets as security in case borrowers do not repay. Collateral can include tangible assets like real estate or equipment as well as intangible ones like accounts receivable; which assets exactly are pledged will depend on both lender and loan type.
Most small business loans require collateral as security; however, there are unsecured options such as credit cards that do not require such assets as collateral. Unsecured business loans may have higher interest rates.
No matter why your business needs financing solutions – working capital, equipment or otherwise – finding the ideal financing option is vital to its success. Loan types accomplish different purposes while lenders have different approval requirements and terms; it is therefore wise to find a provider who meets your goals while understanding their qualifications and limitations to make an informed decision about which loan may best serve your enterprise. If denied one loan option, explore alternative funding solutions.
Personal Credit
Cash flow and collateral are not the only factors lenders consider when reviewing an application; debt load and personal credit also play a part. Lenders want to ensure your business can meet loan payments while leaving enough profit and savings behind for profits and savings – personal guarantees may even be required of business owners in certain industries, like adult entertainment or gambling, that may pose more of a risk than others.
Many business owners face difficulty qualifying for traditional bank loans due to poor credit, making alternative financing solutions essential. It is key for business owners to keep personal and business credit separate in order to make the best use of any financing opportunities that arise; when lenders check either, higher scores can help secure better rates and terms while lower scores could incur more in interest or derail growth plans of their companies.