If your business has reached a point where it needs an infusion of funds in order to grow, you may be in the market for a business loan. A business loan can provide working capital to help a business establish itself better, or help a thriving company expand its line of products, open an additional location, move to a larger site, hire new team members or purchase additional equipment.
Here’s what you need to know about applying for a business loan:
Make sure your credit is in order
Before applying for a business loan, check your personal and business credit health.
A personal credit score ranges from 300-850. A score that is between 580-669 is considered fair, 670-739 is good, 740-799 is very good, and 800-850 is considered exceptional. You can check your personal credit report once a year at no cost from AnnualCreditReport.com. Review your report for any inaccuracies or fraudulent charges and be sure to dispute these immediately through any of the major credit bureau websites: Experian, Equifax or TransUnion.
Business credit scores are measured differently.
Experian uses Intelliscore Plus as its credit scoring model, with scores ranging between 1 and 100.
Equifax assigns each business three different scores: a payment index score, which assesses the company’s payment history with the score ranging between 0 and 100; a credit-risk score evaluating how likely it is the business will not meet on-time payments with the score ranging between 100 and 992; and a business failure score measuring how likely a business will fail, with the score ranging between 1,000 and 1,880.
Business credit scores are also measured by the Dun & Bradstreet Corporation. The D&B score range is 0 to 100 and the key factor it considers is the timeliness of payments made to previous creditors. In order to receive a D&B score, a business must file for a free DUNS number and information about the company’s borrowing habits must be provided by a minimum of four lenders or suppliers.
Finally, the FICO Small Business Scoring Service (SBSS) score ranges from 0 to 300 and considers variables, such as the business owner’s personal credit score, the company’s payment history, number of employees and the age of the business.
If your personal and/or business credit scores are low, work on improving your credit before applying for a loan by meeting your monthly payments on time and keeping credit utilization low.
Update your business plan
Be sure to have a fully crafted business plan to show a prospective lender before applying for a loan. The plan should include details about how the company intends to use the funds from the loan, the anticipated increase in revenue and plans for repaying the loan.
Consider arranging supplemental collateral
Lenders generally prefer to reduce the risk of a borrower defaulting on a loan by securing collateral for the loan. For business loans, this usually takes the form of the company’s accounts receivable, equipment or other valuable assets. The lender can seize the collateral if the business fails and the borrower cannot repay the loan.
When applying for a business loan, you can offer additional collateral to the lender, if appropriate, such as personal assets, like real estate or other valuables.
Organize your personal and business documents
You’ll need the following documents and identifying paperwork to apply for a business loan:
- Photo ID
- Accurate financial statements from the past two years
- Business license
- Any commercial leases
- Business insurance plans
- Payroll records
- Current financial obligations
- 3 months of credit union statements
- 2-3 years of personal and business tax returns
- Collateral, if required
Many people don’t realize credit unions offer business loans. A credit union will offer you personalized service, flexible qualifying criteria, and competitive interest rates that will help you keep more money in your business throughout the life of the loan.