Start-up costs can be expensive, and most entrepreneurs will need some form of financing to get their business off the ground. A business loan can be a great way to get the funding you need, but you should know a few things before applying.
Check Your Credit Score
Your credit score is the first thing a lender will look at when applying for a loan. A high credit score shows that you’re a responsible borrower and makes it more likely that you’ll be approved for a loan. On the other hand, if your credit score is low, you may still be able to get a loan, but you may have to pay a higher interest rate.
FICO is the most common credit score used by lenders, and you can get your FICO score for free from several sources such as Credit Karma or myFICO.
The average credit score in the United States is 710, and many claim to be a good credit score, but this varies state by state. For example, Minnesota has an average credit score of 739, which is considered good for borrowers in the state, but excellent in many states in the country.
Moreover, your credit score rating can depend on the kind of loan you’re getting. For example, FHA loans only require you to get a credit score of 500, which is way below the average in the country. However, you might have to pay a lot more in downpayment.
Know-How Much You Need
The first step in getting a business loan is to figure out how much money you need. Lenders will want to see that you have a clear idea of what you’ll use the loan for, so it’s essential to have a detailed plan.
You should also have a realistic estimate of how much money you’ll need. It’s often better to ask for a little less than you think you’ll need, as it shows that you’re not over-borrowing.
Lenders will also want to see that you have some skin in the game. For example, they’ll be more likely to approve your loan if you’re willing to put some of your own money into the business.
Understand the Types of Loans Available
There are many different business loans available, and each has its terms and conditions. The most common type of loan is a term loan, a lump sum of cash you repay over a set period.
Another popular type of loan is an SBA loan. It’s pretty standard for starting small businesses to get government-backed loans. These loans tend to have lower interest rates and longer repayment terms than other types.
You should also be aware of lines of credit, which are essentially a type of revolving loan. With a line of credit, you can borrow up to a certain amount and repay it over time. This can be a good option if you need flexibility in using the loan.
Shop Around for the Best Rate
Once you know how much you need to borrow and what type of loan you’re looking for, it’s time to start shopping for the best rate.
Interest rates on business loans vary depending on the lender, the type of loan, and your credit score. Therefore, comparing offers from multiple lenders is essential to ensure you’re getting the best rate possible.
You can use an online loan calculator to compare offers from different lenders. Be sure to look at the total cost of the loan, not just the interest rate.
Some lenders offer special rates for women-owned businesses or businesses in underserved communities. If you qualify for one of these programs, you may be able to get a lower interest rate on your loan.
Know About Bankruptcy
Lastly, you must know about bankruptcy. Too many entrepreneurs get a loan without knowing about bankruptcy.
Essentially, bankruptcy can help you get out of debt if your business is failing. However, it can also ruin your credit score and make it difficult to get a loan in the future. It’s good to avoid it when you can but use it when everything goes wrong. It’ll protect the essential assets you need to live.
There’s a lot more to bankruptcy than just what was stated above. If you want more information, it’s good to contact a professional. Consider various consultations with bankruptcy attorneys so that you know more about this option. It’s also good to have their numbers with you just in case you find your business in a desperate position in the future. They can save you from such problems.
Bankruptcy isn’t the end of everything, and it can be a great option when the time arrives. But avoid it the best way you can.
Getting a business loan can be essential to starting or growing your business. However, it’s important to understand these essentials before getting one. The knowledge will ensure you get the best possible loan for your business.