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What you need to plan before you borrow
Did you know that repaying a business loan early has penalties of 5 percent or more? How about your personal credit score, is it above 720? Do you own some real estate? These are just a few questions you need to be concerned with if you are planning to borrow money for your business. Here are some other plans you need to make before you fill out the application for a loan:
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Plan # 1 - Your Business Plan
Your business plan is one of the most important things you need to have before you can borrow money. A lender must see the business plan to prove that you business is viable and they need to see how you plan to make your business profitable and re-pay their money. Include a back-up strategy if your business starts to spend more than it makes like factoring or leasing. This will help to assure the lender that their money is being used properly and that you will re-pay the money you borrow in a timely manner.
Lenders are also interested in how you plan to spend the money you borrow. Since you must demonstrate a need for the loan, they want to see WHY you need the money. If you cannot provide them with information on how you plan to spend the money, you will not be approved. Some things you can list include the following:
- Equipment
- Salaries
- Inventory
- Research
- Development of new products
Your intent to spend their money must be approved in order for your application to move onto the next step.
Plan # 2 - Credit Report and Score
In addition to providing lenders with a solid business plan, you must also grant them access to your personal credit report and score. Lenders will give money to someone that has demonstrated credit worthiness. Normally these individuals have a credit score above 720. Since new business owners do not have any past reports from the business, the only information they can provide is their personal credit report and score.
Plan # 3 - Collateral
To obtain a loan, you may also need to front some collateral. Lenders like to have real estate or other assets in their position when you sign the paperwork. The downside to fronting your home as collateral is that you can easily lose your home when it comes time to pay the bill.
Plan # 4 - Penalties
It is not un-common to borrow money and watch your business become profitable quickly. If this happens, you may decide to pay off the loan early. Some loans have no problems with early re-payment while others want to collect all their interest money so they charge high penalties for early repayment. Read over your loan paperwork and carefully consider how much you plan to borrow before you sign. Calculate how much the penalties will be if you plan to repay the money within 5 years of signing the loan, this can help you prepare now before you are hit with a big penalty.
Plan # 5 - Denied
If you don't have a home and you have poor credit, your chances of obtaining a business loan are pretty slim. What will happen if you are denied? There are some alternative options; one of the best options is to contact another person to co-sign on the loan. This individual must have an excellent credit rating and access to some real estate or other collateral. There are some alternative lending options available as well like peer-to-peer lending or merchant cash advance loans (they work similar to payday loans). If you are already in business, consider factoring as a method to obtain the financing you need to invest in new equipment or manpower.
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