What you need to know before seeking business financing

Business owners that are seeking financing must prepare themselves with collateral, their credit score, and a business plan if they want to obtain the funding necessary. Here are some tips to follow if you are seeking business financing:

Tip # 1 - Order your credit report
Your personal credit report will have a huge impact in your ability to obtain financing for your business. By law, you can obtain a free copy of your credit report from all 3 credit bureaus. To obtain business financing, you must have a credit score that is above 720, this is considered excellent credit. The lower your credit rating, the higher your loan amount will be. Some banks may not even approve you for the loan because your credit score is at or below 650. Pay off debt and re-gain control of your credit before you apply for business financing.

Tip # 2 - Collateral
To obtain almost any loan, you need to front some form of collateral. Collateral is just as important as your credit score. It protects the lender if you default on your loan. Depending upon your financier, you may need to front the deed to your home or another piece of equipment that you own.

Tip # 3 - Business Plan
Lenders will not provide you with a loan if you do not demonstrate a strong ability to re-pay your debts. A business plan will help them determine your debt-repayment ability because it shows them you short-term and long-term strategy. The business plan must lay-out where you expect your business to be in 5 years and how you plan to achieve this goal. If you have been in existence and you are trying to obtain a loan to upgrade, you must show proof of your business financial statements. This allows the bank to see if the statements you make in your business plan match your books.

In addition to a business plan, some lenders may take a look at your personal debt. They want to see a person that has a reasonable amount of debt compared to their incomes. This information will be provided in your credit report and the lender may ask for copies of recent bank statements to verify the information.

Tip # 4 - Proof of ownership
In order to receive business financing, you must disclose 100% ownership of your business. If you have partners or investors, (individuals that own 20% or more of the business) you will need to provide financial about them as well. Proof of ownership will be found in all the legal documentation you have filed with the IRS.

Tip # 5 - Down Payment
The second you sign the papers, you will need to make some type of down payment or investment amount. This is called the loan-to-value ratio or the LTV. This means that the loan is based on your credit score, collateral, and down payment. The value is also determined by the term of the loan and the interest rate. To understand more about down payment amounts, you must speak with a financial consultant, they can clearly explain the different loan options and how to calculate your LTV ratio.

Tip # 6 - Review
If you are denied for a loan, don't take it personally. Go back through all of the above tips and look for ways in which you can improve your application. In tough times, lenders are focused on getting paid for their investment and checking your risk factors. To lower your risk, consider obtaining a partner or a co-signer that can improve your credit rating and help you obtain the business financing you need to get started!