If you plan ahead and keep these tips in mind, you’ll be able to find the financing you need to take your business to the next level.
Increase your chances of getting a business loan with these simple tips. Commercial and industrial credit is a growing component for start-ups, thanks to government and private facilities. International reports have assessed that the number of traditional bank loans to small businesses has fluctuated widely from last year to the beginning of this year.
One of the benefits of operating a successful business is the ability to take advantage of more loan opportunities to help finance your growing business. Although the Small Business Administration offers several loan options to new and growing businesses, these options are guaranteed by the government and can take longer and be more expensive than a traditional loan.
Many financial institutions offer small business loans to profitable businesses that have operated for more than three years. Here are five tips for taking advantage of a small business loan:
- Don’t let a tax preparer be too aggressive with tax planning. To get a traditional business loan from your bank, your business must be profitable. While most accountants look for ways to reduce their taxable income, if they are too aggressive and your business declares losses, you won’t be able to get traditional financing. The main source of repayment for any business loan is the cash flow from your business operations. If you do not demonstrate the ability to repay the full loan, you will not qualify.
- Don’t take out all of your company’s profits for salaries and distributions. The bank doesn’t want to be the only one investing capital in its business. If you leave some profit in the company every year, it increases your company’s net worth and shows the bank that you are as committed to growing your company as you are asking the bank to do so, if they give you financing. Also, if your business goes through a difficult time, the funds left in the company become a cushion of working capital that allows your company to continue operating during the downturns in the economy.
- Apply for the right type of loan. Many business owners apply for a line of credit because monthly payments are usually only interest with principal payable at maturity. However, these loans are only made with short-term financing needs in mind and usually need an annual cleanup in which the balance should be at zero for 30 consecutive days. An example of a short-term financing need is if you use the proceeds from the line of credit to buy inventory that has to be paid before you sell it, then you use the line of credit to finance the purchase. When inventory is sold, the money from the sale will be used to cover overhead and pay for the line of credit. If you are going to use the loan money for a long-term investment, such as buying equipment or vehicles, the right type of loan is an installment loan. Although the monthly payment is higher, because it includes the principal, the term is much longer.
- Be prepared to offer collateral that matches the type of loan you are asking for. Traditionally, the collateral for a line of credit is accounts receivable and inventory. If you have a cash business and use the line of credit to cover overhead when the business is slow, you should give another type of collateral. In these cases, banks usually ask for your house as collateral. If you apply for an installment loan, the collateral is usually the equipment or vehicle you purchase. However, if the installment loan is to make improvements to the property and you are not the owner, then the bank may also ask for a lien on your home. Collateral is the secondary source of payment, so while it’s important, the bank still depends on the cash flow of your business.
Your personal credit score is important. Reputation is important to the bank and your credit score is the best measure the bank has to decide whether to approve your loan application. Most likely, you will be asked to personally insure your loan. A person with a good credit score (over 680) whose credit report reflects on-time payments with no history of delinquency, failures, or liens, is more likely to repay the bank loan on time than a person who has a low credit score and has been delinquent on their personal debts. If a person shows a low percentage of availability based on their revolving credit, then that person seems to have overstepped their bounds and could use the cash flow of the business to increase their salary and take future profits out of the business, and thus will not be able to repay the loan to the bank.