Like many small business owners, you may occasionally find yourself short on working capital and in need of a business loan. If so, the time to start preparing to apply for a business loan is before you begin researching lenders.
Preparation starts by reviewing a copy of both your personal and business credit files.
Know Your Credit Score
Experian, Equifax, and TransUnion, the three major credit reporting agencies for consumer files, assign each person a credit score between 300 and 850.
According to an October 2020 report posted by Business Insider, the average consumer credit score across all demographics is 711.
Credit reporting agencies evaluate the following factors when assigning a credit score to consumer files:
- 35 percent for payment history on all accounts
- 30 percent for total amount owed
- 15 percent for how long you have had an established credit history
- 10 percent for how many of your accounts represent new credit
- 10 percent for your overall credit mix of account types
Your personal credit score is important if you are applying for a business loan as a sole proprietor or have not operated your business for long and do not yet have a business credit file. Some lenders choose to obtain both credit reports to get a clearer picture of your fiscal responsibility.
The higher your credit score, the more likely it is the lender will approve your loan request. Higher scores also qualify you for lower interest rates and more favorable repayment terms.
Business credit scores range from zero to 100, with most business lenders considering anything over 75 an excellent credit score. The four major business credit reporting agencies include Business Credit USA, Dun & Bradstreet, Equifax Business, and Experian Business.
Unlike consumer credit reports that begin soon after people open their first credit accounts, submitting information to business credit reporting agencies is voluntary. We highly recommend that you do so, however.
Knowing your credit score before you begin searching for a business loan gives you a better idea of how much you qualify to receive and the terms you might expect. Another benefit of obtaining a free copy of each report every year is that it gives you the chance to correct any errors.
Build Relationships with Lenders Before You Need a Business Loan
Walking into a bank or credit union you have never interacted with and expecting to come away with a large business loan is not always realistic. Establish other accounts with the prospective lender if possible, such as a checking or savings account for your business.
Once you have done that, get to know the staff of the financial institution and allow them to get to know your business. This helps you build trust with the lender well before you ever need to borrow funds.
Know How Much Money You Need to Borrow and How You Intend to Use It
In addition to requesting a business plan and several financial documents from commercial bowers, most lenders want to know why you need the money. You should come to the loan meeting prepared with a plan outlining the specific amount you need and the purpose of requesting a business loan.
For example, maybe you had to close your business for a few weeks or months due to the coronavirus pandemic. You now need funds to meet payroll and other everyday operating expenses. Include when you expect to recoup business revenue and how the new business loan payments fit into your operating budget.
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