Taking out a business loan to fund your business? Before applying for a business loan, here are 5 things you need to work on to get a loan at a better rate.
1. Credit Score
No business owner likes to face sky-high interest rates. However, no lender also wants to lend money to high-risk clients who are more unlikely to repay the loan. That’s why they give higher interest rates to clients deemed who have bad credit.
The better your credit score looks, the more likely you’ll get a lower rate on your loan.
Lenders look at the business owner’s personal and business credit scores and history to see whether or not they’re likely to repay. Small business owners, who don’t have business credit, must have good personal credit of at least 600 to acquire a business loan.
If your credit score and credit history are less than stellar, you can still avail loans that cater to clients with poor credit. These include merchant cash advances, invoice factoring, equipment financing, and peer-to-peer lending.
2. Cash Flow and Income
Cash flow is a good representation of your business’ health. The higher your cash flow and income, when assessed via your debt-to-income ratio, the better your chances of getting a loan.
A healthy and steady stream of cash implies that you’re capable of sustaining the loan payments. Additionally, lenders will also look at expenses to see how profitable your business is.
3. Current Amount of Debt
Simply put, businesses and borrowers with too much debt are less likely to get approved of a loan. As previously mentioned, lenders assess a business’ debt-to-income ratio to determine the percentage of their monthly debt payments against their monthly gross income. Several lenders prefer a debt-to-income ratio of 50% or lower. Lenders are also cautious about lending to borrowers who have already taken out other loans.
Ideally, you should work on your existing debts and polish your credit profile first before applying for a business loan. Try to keep a low balance on credit cards and lines of credit. Avoid racking up your credit card balance.
In addition to polishing your debt-to-income ratio before taking out a loan, you should also work on a balance sheet. This document summarizes your business’ financial health, including your assets, liabilities, and equity. If your debt is backed by assets, you’ll get approved more easily.
A collateral is a tangible asset already owned by the business owner. For a business loan to get approved, lenders may require collateral, includIng invoices, real estate, equipment, and business properties. Some lenders may even ask borrowers to pledge both business and personal assets to secure a business loan.
Lenders view loans backed by things of value as less risky. Therefore, secured loans (the ones backed by collateral) can be easier to obtain and have lower interest rates.
Don’t have collateral? The good news is not all business loans need to be secured by tangible properties. Certain business loans are unsecured, providing flexible term options and are easy to qualify for.
5. Age and Industry of Business
Startup businesses often have difficulty getting loans because traditional lenders require a minimum business age from borrowers. According to business.org, about 20% of businesses fail within their first year – so there’s no wonder why most banks and online refuse borrowers with a business age of fewer than two years.
Lenders also assess how risky your type of business is. Some industries deemed as low-risk tend to get approved easier than others.
If your business doesn’t meet their requirements, you can find a variety of alternative online lenders that provide a more relaxed approval process. They are viable options for new businesses and companies with bad credit.
Author Bio: Carmina Natividad is a passionate resident writer for Lending Connect, a business lending platform in Australia which helps connect clients to a specialist business loan provider that suits their business needs. She enjoys sharing her insights about business and finance.