You want to start a business. Unfortunately, you don’t have enough capital of your own to begin your venture. So, like most entrepreneurial hopefuls, you consider applying for a small business loan. The hope is that your local bank or credit union will loan you the money you need to launch and manage your business until you start generating revenue. The only issue is you’re worried about your approval chances.
Borrowing money from a bank or credit union isn’t easy. Applicants need to have a solid financial history, a low risk level, and the ability to repay the loan on time. If you’re deficient in any of these areas, acquiring startup funds is challenging. Fortunately, you can take personal finance steps to increase your chances of getting approved for funding. Check out these tips below.
Reduce Your Debts
Trying to apply for a small business loan with high debt will likely result in a rejection. That’s because lenders assess your financial obligations to determine whether you can feasibly repay the loan. If you have too many debts, your monthly income is stretched thin, ultimately decreasing the likelihood of timely repayment.
Whether you have a ton of student loans, medical bills, or credit card accounts, you need to get your debt to income ratio and utilization rate down to 30% or less. You’ll find that there are plenty of suggestions on how to pay off credit card debt and other financial obligations. You can refinance, create a repayment plan, or negotiate with creditors, to name a few.
Clean Up Your Credit
Your credit history is reviewed extensively by banks, credit unions, and private lenders to determine your financial responsibility and risk level. If your credit report is riddled with negative marks and your score is low, you should clean things up before applying for a small business loan.
Start by retrieving all three of your credit reports. Review and dispute any inaccuracies in the report. Next, contact creditors to negotiate affordable repayment plans or settlement amounts. Finally, start making timely monthly payments on your accounts. Within a few months, you should see a significant difference in your history and score.
Build A Nest Egg
If you’re trying to borrow money, why do you need to have a nest egg? Some lenders like to see that you have a plan B in the event that you cannot repay your loan with your monthly income. If you have a few hundred or thousand bucks in a savings account, they know that you can still maintain the payment should something go wrong (slow sales, loss of employment, etc.).
Start setting aside a few bucks every pay cycle in a savings account. If you’d like to increase your cushion, you could always get a side gig to bring in extra cash.
Maintain A Solid Income
While you hope to generate revenue in your business sooner rather than later, it can take time. So, you can’t count on this as a means to repay your loan. Lenders want to know that you have a solid income source that enables you to cover your monthly obligation. Therefore, you don’t want to quit your day job just yet. The longer you’ve been at a place of employment, the more reliable you are viewed by lenders.
You can always increase your income sources by taking on a second job or side gig that doesn’t cost anything to get started. The more avenues you have to bring in cash, the less worried lenders become about your ability to repay the loan.
Getting a small business loan is one of the simplest ways to launch your idea without going bankrupt. Unfortunately, lenders aren’t just going to give you money based on a dream. You have to display yourself as a responsible borrower with a solid financial past, present, and future. By taking the personal finance steps listed above, you can increase your chances of getting the small business loan you need to begin your venture.
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