According to the Federal Reserve, nearly half of all small businesses applied for financing in 2020. As a business owner, you may think and wonder how your business can be a part of that statistic. Having additional cash to burn would be nice, right?
Unfortunately, you know very well that it won’t be easy. You can’t just waltz into a lender’s office and ask for money. No, no, no. You can’t just do that. You must be prepared in order to be considered eligible to receive a loan. So, now the question is how?
Just for you, my friend, the answer to that question is in this post. Below are some things you need to have or satisfy to become eligible before charging in and demanding financing from a trusted lender. Keep on reading to learn more.
Good Credit Score
Surely, you know what is a commercial loan. If you do, you should know how risky it can be for lenders to give their money out without ensuring they can get it back. Because of that, they devised ways to know if a business can, honest to goodness, return their money. One of them is to check a borrower’s credit score.
A good credit score is a numerical representation of your business’s creditworthiness. Lenders use credit scores to evaluate the risk of lending money to your company and determine the terms of the loan and its interest rate.
If you pay bills on time, keep credit card balances low, monitor your credit report, and avoid opening too many new credit accounts, you’ll have a good credit score. Also, remember that you and your business should have an excellent rating to help raise your chances of eligibility.
Favorable Financial Statements
Good credit scores aren’t enough. Lenders also want to make sure that you can pay them back. Because of that, they would like to investigate your financial statements as well, particularly the annual ones.
Financial statements are snapshots of your business’s financial health, which can dictate your revenue, expenses, and profits. Aside from knowing if you can repay a loan, loaning entities use financial statements to determine the amount and terms of the loan.
After months of running your business, you should have drafted financial statements already. If you haven’t, keep accurate records of all financial transactions in your company. Your statements should include sales, expenses, and investments. To make it easy for you to make one, use accounting software to organize and analyze your financial data.
Valuable Collateral
Most lenders often offer two types of loans to businesses: secured and unsecured. If you’re asking for a loan that isn’t worth a lot, they’ll usually give you an unsecured loan. Nevertheless, they’ll only offer a secured loan if you want too much money or they’re not confident you can repay them. And with a secured loan, the lender may require a collateral.
Collateral is an asset or property you pledge as security for a loan. Lenders may require collateral to reduce risk and ensure they can recoup some loan amounts if you default. It must, of course, be of value and liquid (or easy to sell). Some commonly useable assets are real estate, vehicles, equipment, and inventory.
Solid Business Plan
Lenders want to see a solid business plan to assess the viability of your business and plan for using the loan funds. If you’re unfamiliar, a business plan is a comprehensive document that outlines your company’s objectives, strategies, and potential challenges.
If it’s going to be your first time writing a business plan, never forget to consider these five things:
- Funding;
- Outline;
- The market;
- Competition; and
- Marketing.
Vast Industry Experience
Industry experience refers to your knowledge, expertise, and track record in a particular field or market. When evaluating your loan application, lenders may consider your industry experience together with how long you’ve been in business and the industry. It can demonstrate your ability to manage the business and generate revenue.
Suppose you and your business are entirely new. In that case, you should gain education and training, work in related jobs or industries, network with industry professionals, and stay up to date with market trends and best practices as an alternative to industry and business experience running a company.
Conclusion
Securing a commercial loan can be a critical step in growing your business, and it demands that you be diligent in making sure you can tick off all the checkboxes to become eligible. While meeting all the eligibility requirements may seem daunting, don’t be overwhelmed; instead, focus on the steps to improve your chances of success.
If you’re ready to explore your financing options, contact lenders specializing in your industry or hire a financial expert who can help you navigate the process. With determination, persistence, and a solid plan, you can position your business for success and secure the funding you need to achieve your goals.
