You should know that you need a sizable amount of money to start a business. Some people choose to bootstrap or find a partner, while others pitch to angel investors. But one method that many consider is business loans from banks.
Most banks are generous with the amount that they may lend to a borrower, but their standards can be pretty high. They want to make sure that they are giving money to quality and trustworthy borrowers, which is why they set specific criteria. And these may be the same criteria that home mortgage lenders are using.
Below are some factors that have a direct influence on a bank’s decision to lend you money. Some of them can be easy to fulfill, though, while others may require significant adjustments from your end:
Your Credit Rating
This factor is a default. A lot of banks only approve business loan applications if the applicant has a high credit rating. Understand that credit rating is often used as a basis of a person’s ability to pay back and being financially responsible. If you have a negative rating, chances are your application will not be approved. The good news is that bad credit ratings can be fixed. That is through paying your debts and other financial obligations on time and choosing credit and payment terms that are easy to comply with.
Your Business’ Stability and Reputation
In the world of business, the name is everything. And if you have an established name, you may have a much easier time having your loan application approved. That is because banks have the impression that you are making products that people buy. On top of that, being an established business may mean that you have a lot of collateral. If the bank disapproves of you, you may be working with the wrong financial institution. Consider finding a bank that caters to small businesses and start-ups.
Your Cash Flow
Say that you’re already an established business, and you have applied for a loan. You may feel confident about getting that money, but take a moment to look at your business. Your negative cash flow will be viewed as a red flag by a lending company. The bank may realize that you are borrowing and spending more than taking in profit. However, cash flow problems can be easily addressed by dealing with your debts and selling more (which will heavily depend on your sales, marketing, and operations department).
Applying for a business loan at a bank is still like a pitch. They have a set of requirements that you need to fulfill, and you will also have to make an appearance to explain your business. When you are not completely prepared, the bank will not get a picture of your business’ financial health. Thus, they will have a hard time determining your repaying capacity.
Prepare and come back
There may be an occasion where the bank will not approve your application. But do not lose hope. You always have a second chance. This time, come back prepared.