Small business loans, also referred to as debt financing, is a good way to finance your business if you don't have enough cash. Unlike equity financing where you give up a stake of your company in return for cash, debt financing lets you keep control of your company. You must promise that you'll pay back the principal and interest rates in time.
How Good is Your Credit Score?
Obtaining small business loans will be one of your most toughest tasks when starting out. That's why it's imperative that you first have a clean credit report. The amount of loan you get will depend on how good your credit score is. If you don't a good credit score, be prepared to explain why to your banker. Check your credit history, and be sure you don't have any discrepancies. Occasionally, the bank may mess up your records unintentionally. Make sure this is not the case, or the bank will limit your loan size. You can check your credit report from the three well-known credit companies: Equifax, TransUnion, Experian for a small amount (usually around $10). Remember, make sure you have a clean credit report before you apply for a business loan from a lender. It will make the entire process a whole lot smoother.
What Lenders Want
Your lender will want to see if you can repay your loans. They want to see evidence of future achievement. They'll check your management experience, expertise, prior successes, your references, and personal resume to determine your credibility. They'll scan through your financial statements to study your past figures, and determine future projections. They love to see guaranteed revenues, such as any contracts with customers you have in place. To increase your chances of getting small business loans future, you should have at least a personal owership of 25% equity in your business. This indicates to the lenders that you're a serious small business owner.
Don't Borrow Too Much
We don't encourage you to go too much into debt financing. It will hurt your credit score if you use too much of it, and can impair your company from reinvesting its retained earnings because it has to repay the loans. You will have to dive into your own pockets to pay back the high interest rates if a downturn erupts in the future. Limit long-term debt financing as much as you can. A good debt-to-equity ratio should be between 1:1 and 1:2.
The Different Options
To learn more about the different small business loans, visit the following links. Banks: Commercial banks are good sources of capital. SBA Loans: A second option if you can't get commercial bank loans. Friends, Family, & Acquaintances: If you don't need that much capital, it's the easiest. Interest rates are always low. For Women: A good SBA program for women.
Posted on February 18