3 Keys To Securing Business Loans
Survival in turbulent economies or downswings in the sector in which you operate is often contingent on the ease with which you can secure small business loans. However, a small business loan, in any amount, is not something that is easily secured. This article outlines some of the most important criteria banks consider when lending to small businesses:
The Path Of Least Resistance
When you're considering the institutions to which you want to apply for a loan, you may want to take into account the overall market capitalization of the institution. In other words, how big is this bank?
Large corporate banks might be less inclined to work with you if the loan amount in question is small compared to the size of their normal loans. You also want to approach banks you have worked with in the past, if possible, or banks with whom you're already a customer. A history of previous business can really help when you're asking for large sums of money.
Finally, you want to ensure that all necessary documentation and paperwork is included, and properly filled out in the loan application. Errors in paperwork are one of the most common reasons for loan denial.
Legitimate Business Needs
If you're looking to take out a loan for your business, make sure you have illustrated legitimate, business-related allocations for the funds. Banks want to lend their money to individuals who plan on re-lending it themselves, or who plan to use the money for some kind of pyramid-sales business.
Speculation on risky investments like penny-stocks or overseas currencies is also highly frowned upon and virtually never approved except for the most consistent and profitable finance professionals. In the end, you need to demonstrate sound, logical intentions for the proceeds if granted them.
Understanding What Banks Look For
While your personal FICO credit score is certainly a factor in securing business loans, the bank considers other criteria that is just as important as one's credit score, if not more so.
Banks look for candidates with solid income-to-debt ratios. This is sometimes referred to as a debt service coverage ratio, and gives banks an idea of just how much disposable income your business currently generates and whether that figure is sufficient to repay the loan in question.
Lending institutions also like to know that borrowers are aware of the extenuating risks that pertain to their specific industry. Including a report that discusses the risks facing the business, both in the local market and in the context of the entire industry, shows banks that you have performed the necessary due diligence.
Overall, securing a business loan is all about being prepared, conveying a legitimate need for the funds, demonstrating your financial stability, and illustrating an understanding of the risks that pertain to your business.
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