Indeed, it can be a very challenging struggle for your small business loan application to be accepted. You will have to prepare numerous paperwork and supporting documents to the financial institution. This is something most of the business owners put off. Moreover, only 26% of the applications are approved by the big banks. So how can you make the odds work in your favor?
In this article, we will walk you through some tips on how you can improve your chances of getting a small business loan.
Fix your Credit History
Your personal credit history will have a big influence on the success of your application on SME loans. You might think that personal and business finances are separate. However, banks and institutions like Capitall will also check at your credit history to determine the potential risk involved. This can provide evidence that you are reliable and you can pay the loan on time. On the other hand, they can also see you as a red flag that will kill your chances even from the beginning.
Experts agree that your credit score is determined by your credit utilization rate, payment history, history of credit use, number of accounts, and current mix. If you are concerned that your credit score is not as healthy as how you like it to be, then you must start making steps on how to improve it.
Paying on time is one of the most influential factors. You can try setting up automated payments to make sure that you will never miss a payment. If you can, then pay down existing borrowing so you can improve your utilization rate at Capitall. These steps will boost your overall score and it can maximize your chances of acceptance.
Negotiate if you can
If you are a qualified borrower with good business credit history, then secure sme loans with commitments that you are comfortable with. Gather loan offers from multiple lenders so you can compare the options that you have.
As you review your offers, one thing to consider is the loan-to-value ratio. When the value is high you will need to submit only less collateral for the loan. According to experts, the loan-to-value ratios range from 50 to 98 percent. For example, if you need a loan for $80,000 and you have an asset value at $100,000, you’d prefer a loan-to-value ratio of 80%.
Identify what you can use as a Collateral
In banking, there are two types of collateral. These are assets that you still have a loan against and the assets that you own. If you still have a loan on an asset, for example, a mortgage for a house, then the bank will recoup the loan by refinancing with the lending company and acquiring the title.
One viable asset that you can use as collateral must have a title of ownership. Banks will only lend this to you if they can have a title back. The most common form of collateral is homes and cards. However, you can also use the motorcycle, watercraft, or many pieces of equipment that have a title of ownership.
Prepare your Documents
Depending on the lending company, you will have different criteria to apply for a loan. However, in any given situation, you must expect a lot of information and documentation. Traditional moneylenders will have to check everything about you and your business. These include your articles of incorporation, tax returns, debt-to-equity ratio, and others.
On the other hand, alternative lenders would usually ask for less information. On a minimum, they will still want to see your profit, tax returns, licenses, and bank statements.
Indeed, banks are conservative about valuing a borrower’s assets for collateral. If the borrower is in default, the lender will take the assets, find a buyer, and sell it.
If you are not sure how much your assets are worth, it will be best to find an independent appraiser to provide you with an idea of how the bank values your property.
It is also essential to keep detailed records of your assets on the balance sheet. Whenever the bank reviews your business documents, they will want to see that you are paying careful attention to all the important factors.
Understand the Risks Involved
Taking a loan with the use of assets as collateral will present the risk of losing the asset in case you default on the loan payment. As such, it is very important to discuss the risk of using certain assets as collateral with a financial advisor.
Be realistic with the needs of your company and how will you use the funds. Hiring the services of a financial advisor will help you analyze the risk involved plus the odds of the loan being successful.
Oftentimes, limited liability is formed to protect the business owner from these risks. However, a default will still affect the business owner. This is true if he or she is the only shareholder.