In this time of economic recovery, it is becoming increasingly easy to secure a small business loan. Term loans are often used to purchase fixed assets such as production equipment, which is needed to increase revenue but would otherwise be unaffordable. A term loan is for a specific amount and paid over a specified period of 1-5 years. Offered by both traditional and alternative banks, there are three things that lenders look for: credit rating, time spent in business and collateral. Let’s break down how each one can help you secure the financing you need to grow.
You may be used to credit score being placed between 300 and 850, with 700 or above generally considered good. However, as a business owner you should separate this personal score and secure yourself a business credit rating. This is usually measured between 0 and 100.
It varies among lenders, but around the 80 mark or above is generally considered good. This means that the chances of you missing payment or being unable to afford your loan is low. This information is public, so make sure you know your business credit score and try to keep it as close to 100 as possible. The closer you are, the better chance you have of being accepted for a term loan.
If your credit score isn’t looking too great, you can still get a loan by convincingly stating your business experience when preparing your loan proposal. Are you experienced in the area you wish to expand into? The same question will be asked of other managers you employ. Does your whole company understand the market place and know what it takes to succeed? If you can convince the lender you have the right experience to succeed, you will be seen as a low risk borrower.
For term loans, collateral is everything. A lender cannot rely on you generating enough cash to repay the whole loan. Think of collateral like a guarantee. If you have assets worth more than the cost of your business term loan, then a lender will know that they can sell these assets in order to pay it off. Therefore, you do not have to rely so much on your credit rating or experience.
When looking for a term loan, first ensure that you have a good credit rating. If you have this, you will be seen as low risk. This should be combined with strong business experience and finally backed up by collateral to give you the best chance of securing the finance you need.