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Most businesses will need an external injection of capital at some point in their development. For new entrepreneurs, startup business loans are one of the best ways to get the equipment and starting environment you need to build momentum. For businesses that encounter difficulties or shortages in the early stages of development, a business loan is one of the most reliable paths you can use to keep going.
However, before you get a business loan for any purpose, there are some things you’ll need in place.
On the Business Side
Every financial institution will have different loan requirements. However, there are some general things you’ll need to have in place for most creditors.
If you’re seeking a loan on behalf of the business, you’ll need at least some of the following:
A History of Paying Clients
The best way to qualify for a conventional business loan is to have an established history of paying clients. If you’ve been around for a while, you have consistent clients. Additionally, you should be generating a decent amount of revenue. In these cases, most banks will be happy to extend a loan to you. To take advantage of this, make sure you’re able to prove how much revenue you’ve generated over the years. Also, be ready to show off invoices from your most consistent clients.
You should also have a good business credit score. Much like a personal credit score, your business credit will depend heavily on how reliably you’ve made payments in the past. Further, it will take into account how much standing debt you have. The higher your credit score, the more likely you’ll be to qualify for a loan. What’s more, the better interest rate you’ll get.
If you don’t have much established revenue or much of a business credit score, you can still get a loan. However, you’ll need to have some kind of collateral. For example, you may be able to offer a piece of equipment, or even your office building, as collateral against the loan. This is especially valuable if you’re starting a business from scratch and need to invest in expensive machinery. As long as you have assets that equal or exceed the amount of the loan you’re seeking, you should be able to get the loan.
A Good Business Plan
If you haven’t yet started the business, you won’t have much history or a business credit score to demonstrate your reliability. Instead, most financial institutions will want to see a business plan. And if you have any clients waiting in the wings, those can help, too. Lenders need to be reassured that you’ll have the ability to pay the loan back.
New entrepreneurs especially should plan to have their legal documents together before applying for a loan. This could include financial reports from previous years, your articles of incorporation, a partnership agreement, or other forms of paperwork that demonstrate how your business operates.
On the Personal Side
If you find it difficult (or impossible) to qualify for a loan through your business, you may be able to qualify for a personal loan. You can do that with one or more of the following:
A Good Credit Score
As you might expect, the best asset to have for a personal loan is a good credit score. If your credit is in good standing, and you don’t have too much existing debt, you should be able to get a loan for several thousand dollars (or more) at a respectable rate. If your credit score isn’t in good shape, it may be a sign to take a look at your personal finances before you get wrapped up in a business. Paying down your debts, drawing up a budget, and making your payments on time can help improve your score over time.
Of course, if your credit isn’t in good standing, you may be able to qualify for a bigger loan or a more reasonable interest rate by offering some personal collateral, such as a house or a car.
Have a Plan in Place Before You Get a Business Loan
Whenever you seek a business loan, you should also have a plan in place for how you’re going to use it. How much money do you truly need to get over this hurdle? How are you going to spend the money you’re requesting? And how are you eventually going to pay it back? The more thoroughly you plan, the more likely you are to be successful.