How to get a loan to finance your business

Getting a loan to finance your business can be the start of something great. Believe it or not, most successful businesses started off with a loan one way or another! On the other hand, it can also prove to be not only a difficult task but also a big mistake if you didn’t think things through. Here’s how you can get a loan for your business – and how you can know whether it’s a good idea or not.

Before the loan – your image and purpose

Business loans are notably different from, say, car or housing loans. Why? Well, for business loans, the bank will want to feel as if they’re lending to someone who will make good use of the money as opposed to jumping into the world of business without forethought.

Hence, before asking for a business loan, you’ll want to make sure that your business idea is a sound one and that you have a good model to follow. It’s not just about your ability to pay it back – the more lucrative and thought-out your business sounds to other people, the higher your chances of getting that loan.

Likewise, you or your partners should have some experience with running a business or, at the very least, managing one in some capacity. Sure, it’s not a necessity, but it’ll help a ton – the whole point is to come off as someone who knows what they’re doing and won’t just run themselves into debt they can’t pay.

Also, keep in mind that not all financial institutions will be equally ready to give out a business loan. Many forms of business financing are smaller than your average loan – if you’re looking for a small loan to, say, start a carpet cleaning business, your best bet might be working with a smaller bank or an institution that specializes in handing out business loans. Getting a loan from your own bank rather than borrowing from a different one can have a multitude of benefits, but it’s not a necessity – if other banks have more attractive rates, don’t hesitate to get in talks with them.

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Getting your paperwork in order

On top of just having an idea that sounds good and presenting yourself and your business partners as level-headed people, you’ll need the right paperwork to back you up.

For starters, you should have a detailed business plan of what you’ll be doing and how it’ll get you the money to make regular payments to the bank. If necessary, do private consultations before talking to the bank to work on this plan and ensure it’s really as sound as you think – more than anything else sans credit score, this will likely play a huge role in the bank’s decision.

You’ll also need signed guarantees, income projections, your credit score and detailed written-down experience of any businesses you’ve ran successfully or not-so-successfully.

As you can see, getting a business loan is no walk in the park, but it’s doable with the right preparation. Moreover, if you have the right business idea, you’ll pay the bank back in no time and it should be smooth sailing from there on.

How to read your credit score

For many, a credit score is a number to be feared. This isn’t entirely unreasonable – a credit score will directly impact your ability to get a loan and will go as far as to make some bold claims about you as a person. Did you recently receive your credit score but are unsure of the what and the why? Read on for some explanation.

Breaking down your credit score

On the outside, a credit score seems like little more than a three-digit number. Rest assured, though, that the data for the number was meticulously gathered and that the value was carefully created to give others a perfect idea of how responsible you are with money. Object all you want, but most institutions will consider your credit score as the be-all end-all when deciding on loan eligibility.

When it comes to credit scores, the bigger the better – the higher the number, the more financially responsible you’ll come off. As such, credit scores that exceed 700 or even 800 are given to the best of the best – those of us who have made sure not to miss any payment ever and have successfully avoided any collections. If you have a credit score of 700 or above, you’ll be eligible for most loans that fit your income and general means.

Once credit score reaches 650, things start getting ugly. Generally speaking, anything above 650 still makes you look like a good borrower (although it’s implied you missed out on a couple of payments in your time). 600 and under tends to mean that banks will see you as someone who has no business borrowing money, as the number hints towards mortgage payments that were neglected for a long time, maxed out credit or other naughty-naughty things people do with their money – most loans you can hope to get with such a low credit score will come from shark-esque institutions aiming to take everything you have. It’s worth noting that there are several institutions giving out credit scores with some having a bottom cap of 300 or even 100, but the above still stands true.

But why is my credit score what it is?

Understanding your credit score might be difficult at first – you are rarely given any tools that clue you in on the why of it all. Therefore, working with your accountant or a similar entity is a good idea – he or she should know everything that your credit score is comprised of and will go over each individual factor with you.

To know why your credit score is what it is, you’ll need to gather personal credit reports, business credit reports, history of collections, credit card info and so forth. There’s a good chance you acted irresponsible with a credit card in the past and have forgotten about it in the meantime – this will play a big role in your credit score, so make sure to get a listing of anything you might have done when you weren’t as fiscally conscious.

Improving your credit score isn’t easy (some might even call it impossible), but that doesn’t mean you shouldn’t start making positive improvements regarding how you handle your finances – get a listing of everything you did wrong that now reflects in your credit score and work from there.

How to get a credit report on a business

If you’re looking to get a loan or any type of financing for your business, one of the first things the would-be lender will look at is your business credit report. These reports differ from personal ones in that they are collected by multiple independent bodies, and the information gathered might not be accurate or complete. Confused? Read on for help with getting your accounts in order.

Who’s behind my business credit report, anyway?

In the U.S., there are many different institutions in charge of gathering credit reports for business. They’re not exactly ran by the government as is the case with personal credit reports, meaning that the data they collect is optional to have – that is to say, they won’t send you the report on their own accord but will instead charge you for it on an as-needed basis.

Yes, paying for a credit report for your own business doesn’t sound all that great, but it’s a necessary step towards getting the financing you need. Moreover, there are over half a dozen bureaus collecting these reports – you’ll need to find out which bureau is preferred by the bank you’re in talks with and get your credit report from them. While reports from every institution are generally accepted, most banks will tend to favor one or two of their own choosing.

Since you’re paying for the report, you’d expect it to be all-inclusive and have all the necessary and correct information. Not the case – most often, the job they do will be incomplete (or even downright inaccurate) since they gather info by themselves. Check your business report closely and look out for any inaccuracies – you’ll have to supply them with additional information in order to get a correct and complete report, which brings us to…

Working with an accountant

As a business owner, you should always aim to have a solid relationship with your accountant no matter the line of work you’re in. Sometimes, smaller businesses won’t pay too much attention to supplying their accountant with all the information possible – if you’re a rug cleaner, you might feel that number-crunching and report-gathering is better left for larger businesses with many more employees and bigger earnings.

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Of course, you’d be wrong in thinking that – even the smallest business needs to supply its accountant with ample data on a regular basis. When it’s time to get your business credit report (most often to get that much-needed loan in order to reach the next level), you’ll be thankful that you gathered your info carefully over the months and years.

If you’re unsure of the kind of info your accountant needs for credit bureaus, go ahead and ask – a little forethought will save you a lot of effort later on, as trying to gather all the necessary information going back for what could be years is definitely a chore (not to mention that your accountant might charge you extra for assistance). While not as menacing as filing taxes, collecting data for business credit reports should be done with equal amounts of diligence to avoid those pesky hiccups on your way to expanding your business.

Why your credit score is important

Most of us don’t even realize that such a thing as a credit score exists until we’re trying to get a much-needed loan. By then, it’s too late and the number is all but carved in stone.

What is this credit score we speak of? It’s a single three-digit number that acts as a major tell into how you handle your finances. The lower it is, the less likely you are to get a loan (and likelier to get one that doesn’t fit your terms). Here’s why our credit score makes for one of the big numbers in our lives.

How banks and similar institutions view your credit score

Your credit score is formed based on virtually every formal payment you ever did. The data collected for it can go back decades, making it a fearsome number even for those of us who now take good care of our finances.

In general, credit scores are most often looked at by institutions that loan money – you’ll need to present your credit score for any loan you might be after, from quick cash to mortgage. These institutions won’t really care that your actions in the past aren’t indicative of your current understanding of finance: the words “I’m more responsible now” will hardly have any effect.

It’s not just about whether you can get a loan or not. As unfair as it might seem – especially if you’ve made great strides in how you handle your finances – those with higher credit scores enjoy lower interest rates and generally better borrowing terms. The lower your score is, the more you’ll be paying on a monthly basis, making your payments more difficult to complete on time and therefore threatening to lower your credit score further. It ain’t pretty, but financial dealings rarely are.

What you can do about your credit score

Unfortunately, there isn’t a whole lot you can do to improve your credit score. The number doesn’t favor recent dealings over older ones – paying everything on time during the next five years could be canceled out by five years of neglecting payments when you were a teenager. The age-old saying that it takes many good deeds to build a reputation but a single bad one to ruin it is very much applicable when it comes to credit scores.

That being said, there’s no need to make your score any lower, and positive practices will certainly help improve it (as miniscule as the improvement might seem) – you might have an urgent need for a loan in the future, and taking care of your finances now will greatly improve the borrowing terms later on. Make an effort to never miss any payments – bills, mortgages, loans and anything else that isn’t delivered ‘under the table’. Also, keep an eye out for credit card debt – never max out a credit card, as it won’t do any good for your credit score.

Conversely, a credit card is one of the few tools that can actually help improve your credit score. Having a credit card with good credit that’s managed responsibly will raise your score – if you don’t own one and need a higher credit score, obtaining and using it should give the number a noticeable boost (provided you don’t get too shop-happy, that is).