In current competitive lending industry, you might be thinking of making a business loan application. But before you do all the hard work and collect documentation for loan application, rebound and ask yourself these questions:
- Can you really pay for to apply for a loan?
- Can you afford the loan repayments?
- Do you have all the needed documents to apply for a loan?
- Do you know your personal and business credit score?
- Are you personal and business finances in order?
- How the loan application process works?
- How much do you need and how much it will cost?
- Will you get the flexible repayment period for the loan?
- Is there going to be a pre-payment penalty?
- Is there any restriction on usage of loan money?
- Does my business have enough cash flow for repayments?
- What are the possible penalties for non-payment
Asking these questions will help out in understanding the loan application process from the lender’s perspective.
Most business lenders make use of different analysis tools to conclude whether your business is able to secure a loan or repay it. Among many tools, Debt Service Coverage Ratio (DSCR) is one which lender use to compare the business cash flow (for loan repayment) and the borrowed loan amount per year together with interest.
Commonly, banks and other traditional lenders are willing to help small businesses that are established and have a proven financial track record. If your business is doing well financially, and earning handsomely to cover the additional debt, it’s more likely to get approved for a loan.
And, if you’re a startup or have been in operation for a while with a prospect to grow, you need a winning business plan along with the essential documentation and thorough explanation of how your business will repay the loan.
While evaluating a business loan application, lenders scrutinize more than your business’ finances. They will also analyze you personally, the business owner, personal credit and finances for a loan. The analysis will include your monthly personal debts as well as your mortgage payments, insurance, property taxes, etc.
Credit Score Analysis
Lenders focus on more personal credit score to make a decision whether your business is worth the risk or not. So, make sure you have a history of paying bills timely. If your personal credit isn’t good, take time and get your credit fixed before applying for a loan. You can also go for other more flexible loan options.
Don’t Forget to Ponder, “What If?”
Despite the fact that you have best intentions and solid planning to repay the loan, you still have to think — what happens when you can’t repay the loan?
Think smart and ensure you have a backup plan in place in the event your business doesn’t able to achieve what’s expected. A usual backup plan can include collateral or personal guarantee that lenders can claim in case you default on loan payments.
Assuming personal responsibility for a business debt do comes with a lot of risk, so noodle around before making a decision. If every aspect of your business plan would have to work out in order for you to repay the loan, then maybe it’s not the right time to apply for one.
After you find answers to the questions above, you’re ready to make a decision whether you should apply for a business loan or not.