This is Part I of a four-part series on how you can get a loan to start or expand your small business although you have bad credit. The good news is that there are more sources for loans today than there have been in the past. This Forbes magazine article details how nontraditional lenders “have figured out how to streamline the loan process by taking a different approach to the underwriting process and how they approve potential borrowers.”
Part I of the series is about what lenders are looking at when they decide whether to give a small business a loan. Part II will be about how to improve your credit history. Part III will be about how you can get a loan from a nontraditional lender. Part IV will be about the risk of accepting a loan from a nontraditional lender.
Five Tips For Entrepreneurs Seeking A Loan
Individual banks and other lenders make individual decisions on whether your credit history is good enough to merit a loan.
Oftentimes, though, local banks and local offices of national banks are more apt to help small businesses in their community because “community banks often have a better understanding of the local market and the borrower as opposed to commercial lenders who simply rely on numbers and credit scores in their analysis,” according to Small Business Legal Blog.
Nevertheless, there are some general standards that borrowers should be aware of, reports the Small Business Administration (SBA), which issued a “Credit Factors” report to help borrowers. The report offers tips on collateral, earnings requirements, equity investment, resource management, and working capital. Its tips include:
1. MANAGE CASH PROPERLY: Make sure that you can prove you are adept at managing your company’s cash. Profits are important, but you can’t repay your loan if you don’t have the right amount of cash at the right times.
2. HAVE A CASH RESERVE: Lenders, of course, will look at whether your business can generate enough money to repay your loans, but it helps if you have a contingency source of money that you can utilize if your business fails.
3. PREPARE AN EXCELLENT BUSINESS PLAN: A business plan is particularly important if you tell the prospective lender that you project that your future revenues will be at least 20 percent higher than your past revenues. The business plan must detail why you believe that your revenues will increase and provide as much proof as possible that your projections have some validity.
4. YOUR INVESTMENTS SPUR CONFIDENCE: Lenders look at how much money you have invested in the business because it’s an indication of your ability to succeed in business and your willingness to make a commitment to it. Your personal investment is called an equity investment. Lenders are more apt to make a loan to a business with what they classify as a strong equity investment or at least a sufficient equity investment than a business with weak equity or non-existent equity.
5. PROVE YOUR MANAGERIAL SKILLS: Smart lenders will review your education and references as well as your past business accomplishments. They will also look at your debt to worth ratio, the amount of money you have to run your business (working capital), how quickly you pay debts you owe to other businesses, how quickly you collect money that is owed to you, and how quickly you sell your products and services to customers.
|