When it comes to getting a personal loan, what lenders are most concerned with is your ability to manage your own money responsibly. When the loan is for a home or an automobile, lenders have collateral built-in, since they technically own the home or the car until you pay it off. When it comes to securing a business loan, however, your credit score is not the only thing lenders look at.
WHY YOU NEED MORE THAN A GOOD CREDIT SCORE TO GET A LOAN FOR YOUR STARTUP
Lenders don’t loan you money out of the goodness of their own heart. When lenders loan money, they expect to get a return on their investment. In the case of personal loans, they get this return in the form of interest. If you default on the loan, they take back whatever you used to secure the loan, such as a home or a car and sell it to get their money back. If they don’t make as much from the sale as what you owe, then you have to pay the difference.
In the case of business loan, however, very little of the money you need to start a business will go into items they can resell. Some of it might and if your business goes under, then the bank or lender might be able to recoup some of their losses by selling any equipment you purchased. Chances are good however, that the sale will still only cover a small fraction of the original loan amount. Therefore, lenders need to feel confident that you will actually be able to make a success of the business you are borrowing money to start.
LENDERS NEED TO KNOW YOU HAVE A SOLID PLAN
What banks most want to see is a solid business plan. They want to know that you have thought through every potential outcome very carefully and that you have done your homework. In addition, they will also want to know how much you have already personally invested. After all, if you don’t believe in your business enough to invest in it heavily, why should they? They also want to know what other investors you have lined up or how else you plan to get startup capital. The more investors you have all putting up their own capital, the smaller the risk there is to lenders.
Unlike investors, lenders like Interstate Associates do not generally get a stake in your business. The way investors get a return on their investment is by getting a share of the company. If the company does well, so do they. Lenders, on the other hand, do not get a share of the company. They have no interest in whether your business does well or not, they only want a reasonable assurance that they will get their money back, with interest. Therefore, they don’t care about your ability to manage your own finances well, they care about your ability to manage all of the many aspects of running a business. The more comprehensive, realistic and feasible your business plan is, the more likely you are to get a loan.
GETTING A LOAN BEFORE YOU REALLY NEED ONE CAN HELP YOU GET ONE WHEN YOU REALLY DO
One mistake that many startups make is not applying for a loan early on. Too many startups wait until they need a large influx of capital and then go looking for a loan. This is a mistake. Even though your personal credit score is not all you need to get a business loan, here are elements to building a business line of credit that is similar to building your own personal lines of credit.
The first time you applied for a credit card, you were probably given a credit limit of only a few hundred dollars. Once you showed you could responsibly manage a few small lines of credit, you were probably given larger ones. The same is true of business loans. Even if you don’t need a small loan initially, it is best to apply for a small business loan early on, pay it back and establish a good business credit history. Then, you will already have a proven track record of paying business loans back when you start to need larger ones. Interstate Associates can help you get what you need to get your business up and running