Preparing Your Business to Qualify for Finance
But obtaining finance can be difficult if you’re a business owner. Being prepared for your application is one of the best ways to make sure that you get approved. Our tips are divided into two sections: established businesses and new businesses. Make sure to read ahead!
Always Be Wary of Requirements
The first thing you should to prepare your business for financing is to make sure that you understand the requirements of the lenders you want to work with. Business owners often overlook whether or not they’re eligible to receive financing. If you apply for a loan and get rejected, it will impact your ability to get another loan in the future.
Every loan inquiry that you make results in a mark against you credit score. The more lending you are rejected for, the less lending you’ll be eligible to receive. This is why it’s pointless to apply for a loan that you know you won’t be able to get. You should always look at the lender’s information to see what type of businesses they work with — make sure that you know what credit score they typically accept.
If they’re not willing to tell you what their requirements are, head to an online lending forum to find out. There are plenty of forums where past borrowers post the scores they had when they were approved or declined from certain lenders. It’s a great way to get a ballpark estimate on what lenders are looking for.
If you’re an established business, a lender will typically be able to make a decision based off your business data. This is great for business owners that have acted responsibly throughout their ownership. Regardless, you’ll want to make sure that you’re prepared for your application. One of the best ways to do this is to follow a few simple steps. We’ll outline some below!
Check Your Business Credit Score
If you’re an established business, you most likely have a business credit score. This is on a scale of 0-100. You should check your score before you apply for financing. Make sure to read your credit report and look for any errors. Misreporting is a common issue in the credit reporting industry – make sure everything on your report is valid.
Organize Business Plan
Having a solid business plan is one of the easiest ways to improve your chances of approval. Lenders want to know that you have a vision for your business. The most successful business owners are typically those who are the most prepared. A well thought out business plan is typically the best way to ensure you’re well prepared.
If you want to improve your chances of being approved, or if you’d like to be offered a lower interest rate, using collateral is often one of your best options. If you have business assets, such as property or equipment, you can offer this to your lenders as collateral. Keep in mind it will be seized should you default on your payments.
Lastly, you need to start getting all your documentation in order. Business lenders often want to know as much as possible about your business before they make a decision. Below is some common documentation that you should have prepared prior to your application:
- Income data (tax returns)
- Copy of ID
- Commercial licenses
- Commercial leases
- Incorporation documents
- Balance sheets
- Bank statements (personal and business)
- Proof of assets
If you’re a new business owner, you’ll probably have to rely on your personal credit score to get the financing you need for your business. If lenders don’t have any business behavior to make a decision off of, they’ll have to use your personal record to get a good idea of what type of lender you are. For this reason, new business owners should focus on improving their personal credit scores if they want to prepare their business for a financing application.
Below are three steps you should take prior to applying for finance for your business. Your lender will have to tell you if they’re pulling your credit score, so make sure to ask them if they’re checking your business or personal credit score.
Check Your Personal Report
The first step in preparing your business for a financing application is to check your report. Most people know their credit scores, but few actually look at their reports. It’s free to receive a credit report from each of the major reporting bodies – don’t get tricked into paying for one by a third-party service.
Once you obtain your report, you should begin to look at the details on the report. If you have any mistakes, you can request that these be removed. More people than you realize have mistakes on their credit reports. Even if you don’t have mistakes, you can use a credit repair company to help you improve your credit.
Pay Down Credit Card Debt
One of the biggest components of any credit score is the amount of debt that you currently have outstanding. This is calculated as a ratio of usage on your credit card limits. The more of your limits that you’re using, the lower your credit score will be. If you want to see a quick improvement in your score, you should pay down your debt. You’ll see your score increase the next time your credit company reports your balance.
Have Business Plan Ready
Even if you are a new business owner, lenders will want to know that you’re taking your business seriously. You’ll want to make sure you have a business plan, even if you don’t have a business credit score.
Never underestimate the power of preparation. It’s important to make sure that you give your business the best chance of being approved for the loan or credit you need. If you take the necessary steps to ensure you’re ready for the process, you’ll find your financing options improve dramatically.
If you want any more information about financing your business, make sure to check out some of the other content on our site – we have a wealth of great resources available.
William Anderson has been working with small business owners for the past 10 years. He got his start at an investment bank, but felt that he was too detached from where real people were making decisions that affected local economies. As a result, he took his experience and his MBA degree to work helping local small businesses.