Welcome to your first time loan search. We know the choices can be overwhelming, and we want to make things clear and easy. Securing the right loan for any business can directly impact your growth potential. And, when it’s a startup we are talking about, past performance data is nonexistent. This can make even the simplest of questions like, “How much Do you Need?” more difficult to answer than you anticipated. Not to worry, there is a way to arrive at your destination and achieve success. With a clearly defined research and preparation strategy, the best loan option will materialize and pave the way for the upward development of your business.
How Can You Create A Trustworthy Profile Lenders Can Believe In?
The requirements for bank loans are typically restrictive; few new businesses ever get approved. It is an unfortunate truth that 50% of all startups fail within the first five years. Ironically, that fact often points at the inability of the new company to secure adequate financing. Keeping this backward loop in motion, banks are then especially wary of green-lighting funds for entrepreneurs due to the dire statistics. Online lenders are more apt to approve loans for first timers, but the rates can be prohibitive without the benefit of the earned trust. That’s because they’ll have no confidence in your ability to pay the loan back. Following a mapped out plan for winning a lenders trust is the only way through this make it or break it issue.
The Three Basic Steps:
1. Build and Improve Your Credit Score
Yes, that all-important number played a significant role in every major purchase you’ve made till now. It’s those three digits between 300 and 850 that tell the story of your responsibility traits and financial ethics. Even if you are not the sole owner of your new business, it’s a telling view of your reliability.
How Can You Build Credit?
• Make Timely, Full Payments – 35% of a credit score consists of payment history. Make sure you pay on time and in full for all your credit accounts.
• Keep Your Credit Utilization Low – You should not be using more than 30% of your available credit limits at any given time
• Don’t Close Old Accounts – Your credit history is an evolving number that automatically builds itself up. Don’t limit the length of your credit history by closing an account that has a long-standing relationship with you. • Monitor Your Credit Report For Errors – Did you know that one in four consumers find inconsistencies in their report that damage their score? Watch out for errors and verify your score represents you correctly.
2. Know How Much You Need
Just like any new experience, it’s difficult to know how to gauge needs for a startup. But without a specific accounting for the proposed sum and a realistic payment schedule, lenders will have difficulty honoring your loan request. There are other scenarios besides initial startup costs where first-time loans may be requested. You may have been running your company with years of experience behind you, but are looking to launch an expansion. Or, a business with a solid history may wish to acquire a new location or upgrade with new equipment and opportunities. These are all legitimate reasons for a first-time loan appeal.
Clearly mapping out what area of business your funds will be needed for is the first step. Careful planning for payback terms your business can realistically afford is even more crucial to focus on, though. Lenders understand that as a new business, you may not know all the exact allotments, as you have not yet experienced the day to day expenses. But if your projected payback plan seems unreliable, both you and your lender will have an insurmountable problem. There are tools to help you calculate and determine what you’ll be able to afford. It’s called the Debt Service Coverage Ratio, or DSCR. This ratio is what a lender will use to determine your available cash flow for credible loan repayment. On your end, calculating your DSCR will make you more comfortable with the terms of your funding.
Calculating your Debt Service Coverage Ratio: It’s really a simple calculation that can be determined per month or year: Cash Flow/Loan payment = DSCR
Begin by averaging your cash flow per month – how much in sales minus expenses does your business bring in? Next, determine what your proposed monthly loan payment will be (with principal and interest included.) For example, If your cash flow is $2,000, and your loan payment $800, then you have a DSCR ratio of 2.5. This is considered a healthy ratio. Your ratio should be greater than 1, or the lender will have no guarantee of how you will be able to keep the repayment terms.
3. Gather and Prepare
Get ready for your closeup! Lenders will want to go over all the numbers with a fine tooth comb, so arranging all the documents they may ask for will save you a lot of valuable time and angst. The most important preparation for a first-time loan is a properly aligned and thorough Business Plan. Because there are no performance records to point to, this document will be the most scrutinized one during your loan assessment.
A carefully structured Business Plan will prove how ready you are to take on the loan, and how you will utilize the capital for your future goals. It will show how you expect to deliver your goods or services, who your target market is, and how you will achieve your revenue projections.
A Complete Business Plan Should Have:
• Company description and overview.
• Explanation of services and/or products
• Organizational outline.
• Competitor and market statistics.
• Marketing and sales platform.
• Financial goals and strategies.
If you have Collateral documentation to leverage against, this can greatly swing the pendulum in your favor. Some lenders require it as a prerequisite for any first-time loan approval. It is a crucial decision to offer collateral, as the loan has a greater chance of being secured when a lender has this cushion. Carefully consider it though, before you offer a title or deed document. The lender will definitely seize your collateral as a way to recover their losses in the unfortunate event you can’t keep the terms of your loan.
Other Important Documents:
It’s always best to be over prepared in your search for a first-time loan. You may not end up needing all of this information, especially if you have carefully arranged Business Plan and collateral documentation. It depends on the type of loan you are looking for and the length of the terms. But, as always, the more information – the better.
• Bank statements – personal and business accounts (you are your business!)
• Income tax returns.
• A resume that shows your experience and leadership qualities
• Articles of Incorporation.
• Balance sheets and income statements.
• Any other documents that show financial projections, your reliability, or your financial history and background.