By Chris Martin, president and CEO of The Provident Bank
Though businesses may be hearing that credit is hard to come by, for many qualified borrowers, financing is available. The key is to be prepared and have all of your financial ducks in a row. Here are eight tips borrowers should consider before applying for a business loan:
1. Sound credit
In many ways, your credit history and score matter more than they did prior to the credit crunch. Get copies of your credit report from the three credit reporting agencies and correct any mistakes that appear. Your score is an indicator of your level of risk, so the higher your number, the better the chance you will be able to make your loan payments and on time. The median credit score in the U.S. is about 720. If you have this score or higher, you’re in good shape.
Before applying for a loan, be prepared to produce paperwork documenting your income and assets. At a minimum, you must provide your pay stubs for the past 30 days and W-2 forms for the past two years. Lenders will want to see bank, retirement-account and investment statements for the past 60 days. Collect your debt information, including information on car loans, student loans and all credit cards. Keep in mind, the owner’s finances will be reviewed as part of the process as well.
3. Comprehensive business plan
Some potential borrowers make the mistake in thinking that a long business plan increases the chances of receiving a loan. In reality, the length of a business plan is not as important as one that is comprehensive and technically sound. How well does the plan articulate your business goals and projections? Are there realistic expectations for cash flow and earnings? Be specific – the more detail you provide, the better understanding a lender will have of your business needs.
Give a realistic depiction about your company’s sales, profits and cash flow going forward. You should be able to demonstrate that your business can be financially sound, even when sales are down, and that it can adapt in the changing market. While lenders love to hear good news, they also need to hear that borrowers have contingency plans for a worst case scenario and can react appropriately.
5. Real business needs
Borrowers’ needs vary greatly. However, a loan should not provide a cushion for times of uncertainty – it should only provide for the real needs of your business. For example, if you need financing for an expansion, equipment or working capital, financing options are available to meet those needs. Make sure you determine a precise amount needed to start or expand your business.
6. Collateral capacity
Depending on the loan, lenders may want to know what collateral you have to support it. Assets such as real estate, equipment and other investments could be used to repay the loan in the event of a default.
If you want to obtain or increase your credit, the most important thing to do is maintain credibility with your lender. Show that your business can remain financially sound, even when sales are down. Talk with your lender about how you are responding to the changing marketplace and tell them your next steps.
8. Timely payments
To qualify for the best rates, be sure to make payments on time – even if it’s the minimum. You could receive an increase in your interest rate if your payment arrives even one day after the due date.
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