Let’s face it, launching your own business isn’t exactly a walk in the park. But once all the hard work pays off, it’s an exciting and deeply rewarding time for any business owner. Having the ability to be your own boss and build upon something you’re truly passionate about is the driving force behind many successful businesses, but even the biggest ventures have to start small. And this doesn’t always come cheap.
For those just starting out, a business loan can provide the financial leg up required to set the wheels in motion. You can put the loan towards new property for a shopfront, towards marketing or advertising costs, or towards new machinery or equipment. If you’re thinking about applying for financing, make sure to follow the eligibility checklist below:
Check your credit score
Your credit score is one of the first things banks and lenders will assess when considering your loan application. It’s a number linked to your name that lenders use to determine your level of risk when borrowing. The score is calculated based on your credit and payment history and ranges from 0-1,000 or 0-1,200, depending on the bureau you go through. Your credit score will also reflect any past defaults or outstanding debts.
A “good” credit score ranges between 622 and 725, while an “excellent” score is between 833 and 1,200. Bad financial behaviour will reduce your score, and anything sitting below 600 is considered “poor”, which can limit your ability to get a business loan.
Although your previous spending habits may be personal rather than business related, they’re interpreted as a direct reflection of your financial capability, especially when it comes to meeting your repayments. Therefore, it’s important to check your credit score before applying since any rejected applications can also lower your score.
Consider your minimum revenue
Lenders will almost always take your earnings into account when you are applying for a business loan. Banks and lenders require a minimum revenue amount in order to secure financing, but just how much will depend on the amount you’re requesting to borrow. A larger line-of-credit loan may require a minimum revenue of $150,000 – $200,000 in order to qualify, whereas a smaller equipment loan may not take your earnings into account at all.
Make sure to familiarise yourself with your lender’s minimum requirements before lodging your loan application. This will prevent you from being automatically rejected for not being within the minimum threshold.
Have a business plan prepared
Put simply, a business plan outlines how you’ll generate enough cash flow to cover ongoing expenses while keeping on top of future loan repayments. It should also show the lender exactly what you need the money for and how you plan on spending it.
You should include a description of the company and its product or service, an outline of the managerial structure, a SWOT analysis, an industry analysis and a marketing or sales strategy.
Having a solid business plan is essential for any loan application. It demonstrates to the lender that your business has a clear roadmap towards future growth, which is supported by research, product strategy and financial data. If a bank or lender feels confident in your business, they’ll be much more likely to approve your request for finance. Although it may be time consuming to put together, a business plan is invaluable.
Offer collateral if possible
Collateral is an asset or assets you pledge as security for the repayment of a loan, such as a property or vehicle. Secured loans are borrowed against collateral and can be offered at lower interest rates, saving you money over time.
However, in the event of a default, you will forfeit your assets to the bank or lender to cover your outstanding debt. Lenders tend to look more favourably on borrowers who are able to offer up some form of collateral. Collateral preferences may vary across lenders depending on their own business interests, so be sure to take this into account before offering up your assets.
You also have the option to take out an unsecured loan. This type of loan enables you to borrow without collateral; however, it will usually have stricter lending criteria and a higher interest rate.
When it comes to getting a business up and running, everyone is different. Some businesses may require a little more effort to get off the ground due to the scale of operations or the nature of the products and services being sold. When you’re just starting out, financing can be a good way of getting ahead and focusing on what matters most: making your business dreams a reality. But a business loan is also a big responsibility. Always make sure to borrow within your means, and do your research before applying.
Bessie Hassan is money expert at Finder