Between debt and equity funding for small businesses, the focus here will be debt funding. Qualifying for a small business loan may seem intimidating, as there are many things that could go wrong, but many entrepreneurs do so and go on to have a successful career as a business owner. The most important factors to consider are a clear plan to repay a loan and other costs and anticipating the cost of regular operations and growth/expansion. Here we will go over some details of credit history, collateral, and business plan considerations.
Personal Credit History
The owner’s credit history matters when applying for a loan. As the one at the helm of a business, lenders consider the owner’s record of repaying personal debt a reliable indicator of how he will treat his operating obligations. The ability to keep credit under control and repaying borrowed money to the satisfaction of creditors brightens prospects of qualifying for a small business loan. You’re going to want to apply with at least what is considered a good credit score, which according to Lift Credit Score, is around 670-739, which a percentage of twenty-two people have. Anything higher than that and you should be golden.
Presenting valuable collateral makes the borrower seem less risky in a lender’s eyes. Note that the collateral must have substantial market value and liquidity should a business owner default on the loan. In a worst-case scenario, collateral is seized and sold by the lender to recapture at least some of the unpaid principal. As such, lenders consider the price and ease of sale when it comes to evaluating loan collateral.
Make sure to have a business plan ready to go, as borrowers and lenders alike have to ask if a business plan is:
- has generated sales in the past
- specifies the use of loan funds
- specifies loan repayment plan, with buffer to account for economic uncertainty
- specifies strategies for growth without outsized risk
- These are just some of the variables used to judge if someone qualifies for a small business loan.
Personal credit and background is a factor in qualifying for some loans. Presence of collateral can help reduce how risky you are perceived to be and secure your business at a lower rate. And last of all, be cautious in steering from the presented business plan for loan duration if unexpected market conditions impact business operations and/or growth forecasts. Lenders do not like surprises or wildcards. Their ROI is fixed to as much as interest rate, and repayment terms allow, but their risk is the much larger principal they are handing to a borrower.
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