The first time you seek a business loan, the lender will be evaluating two things: your personal financial history and your business concept. Both of these must be strong in order for you to receive your funding. Many business owners think their personal credit will not matter when it comes time to apply for a business loan. However, without established success in owning a business, this will be the only measure the bank can use to determine your likeliness to repay a debt.
Personal Credit Considerations
A business loan lender will evaluate your personal credit the same as any personal loan lender. If you have a record of taking large loans and repaying the debts on time, you will be more likely to do so as a business owner. It is also important to show you have a fairly sizable asset base, particularly in relation to your other debt. This shows a lender you will be able to manage additional debt that comes with owning a business wisely. Finally, your record should be clear of any bankruptcies, defaults or foreclosures. Even old events can haunt you on a business application due to the size of the loan you are applying for.
Capital and Personal Financing
Business lenders will rarely, if ever, extend 100 percent financing. First, this provides them with little security against default. Second, it creates a situation where you, the business owner, have no stake in the success of the business. Typically, a lender will require at least 10 percent down. In order to receive better financing terms, you should consider placing a larger sum down on the loan. A 20 percent down payment is considered the most desirable sum for a lender to receive up front. If you do not have the cash to do this, raise capital through investors prior to seeking a loan.
Your business plan is a statement about how and why you will make enough profit to repay your loan. It is the single factor a lender relies on in order to make an educated guess about whether your business is worth investing in at all. To convince a lender you are worth the risk, be sure to provide measurable statistics showing not just that you have a great idea but that the idea will be valuable to the market. Show how you have analyzed costs, marketing strategies, competitors and barriers to market entry. Only by showing your attention to detail can you demonstrate the thoughtfulness of your business idea.
Small Business Administration Assistance
A lender may tell you it feels you almost qualify for a loan, but you are lacking the credibility you need to secure your funding. In this case, the lender has the option of requesting you have the loan guaranteed by the Small Business Administration. This works to your advantage. An SBA loan is often more affordable than a private loan, but the option is extended to only a narrow class of businesses that need an extra boost to get the funding to open their doors.