“Must Haves” of Credit for Business Loans
The #1 reason banks say no to small business loans is credit, both poor credit and lack of credit. Business loans are the riskiest of any loan, lenders are much more strict with their requirements . Don't be surprised if your personal credit history is scrutinized, as well. Payment History This refers to the financial history of the borrower; By looking at the credit history, particularly as it is stated in the credit score. Factors that will affect your credit score include: The fewer the problems, the higher the credit score.
Capacity refers to the ability of the business to generate revenues to pay back the loan. Since a new business has no history of profits, it is riskiest for a bank to consider. If you are buying a business, capacity is easier to determine, and a business that can show a positive cash flow for a steady period of time has a good chance of getting a business loan.
Collateral to Secure the Loan Collateral is the cash and assets a business owner pledges to secure a loan.Typically, store and restaurant equipment are not considered collateral. In addition to having good credit, a proven ability to make money, and business assets, banks will often require an owner to pledge their own personal assets as security for the loan. If an owner didn't have to put up any personal assets, they might walk away from the business failure and let the bank take what it can from the assets.
Having collateral at risk makes the business owner more likely to work to keep the business going, as banks reason it.The right mix. As you can see, when it comes to credit, the old saying that banks only loan money to people who don't need it, is true. To get a business loan, you will need to:
1. Have an excellent credit rating, both personal and business
2. Prove your business will generate revenues to pay the bank loan
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3. Show that the business assets have value in case they need to be sold to pay off the bank.
4. Pledge your assets in case the business fails or get a co-signer who has assets to pledge.
5. In some cases, it might be easier to take your own money and start your business.
Final Thoughts
Getting a business loan isn't easy, but understanding these must-haves can increase your chances of success. Evaluate your credit, demonstrate your business’s capacity to repay, and be ready to secure the loan with valuable assets.
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