Whether you have a great idea and want to start a new business, or you have an established business and you foresee an opportunity for growth, taking out a bank loan might be your best answer for that much needed capital to get things rolling. However, taking out a loan can be a major commitment for you and your business; it can put you in debt and thus your business at risk. However, much like anything, there are its advantages and disadvantages, but if you weigh your options, taking out a loan might a worthwhile risk to take. Here are 5 things to consider before taking out a bank loan for your business.
One of the first things to consider before making such an obligation to a lender is to review your credit. This is the very first thing a bank will assess in deliberating whether to give you a loan or not. Generally, they will review all the credit scores of all the principles of the company or the person with the biggest stake. Most of the time, if any of the owners have a low credit score, the higher the chances of getting rejected for a loan. There are a number of ways to check your credit score online that are free and convenient. Most credit reports show errors that can be rectified by sending the credit bureau proper documentation to correct the inaccuracy in question.
Another thing to consider when applying for a loan is your projected income. This doesn’t necessarily mean your current income, but your forecasts should clearly and quantifiably be able to show your ability to pay back the loan in a timely manner. This can be done by showing personal income statements, balance sheets of revenue from prior years and tax documentation. You must also show the bank your current ledger, but as long as you can prove that your business is good for the money, the lender typically won’t see your most recent quarter’s earnings as the deal breaker.
You must also show that you have tangible collateral to back up your ability to pay back the loan, in the worst-case scenario that you might default. Depending on the size of the loan you need, the amount of collateral you can guarantee will be a huge factor in getting approved by the lender. Collateral can include assets, property, and accounts receivables. When considering taking out a loan, it’s best to make a list of all the collateral of that you and your partners can guarantee against the loan.
And one very important thing to consider before taking out a loan is whether or not to hire a financial broker or advisor. Many brokerage and advisory firms, like Selby Associates, can do the legwork for you and better assess the financial standing of your company, so that you can find the best loan package for your business’s specific needs. This can also increase your likelihood of being approved by a lender with better interest rates that are more favorable to your company in the long run.
Lastly, one of the biggest factors a lender will take into a consideration is the amount and purpose for the loan. If you are just starting your company, the bank might see this as a bigger risk, opposed to approving a loan for something specific, like equipment for an already established business. In some cases, a loan might be too big for your business and thus a mitigating factor for the bank to turn down your application. When making your projections, it’s best to have the most realistic assessment of the amount and purpose for your loan. That way the lender can best weigh the risk, offering you a better chance of getting approved and on your way to success