Tips to Secure a Business Loan for Your Start-Up
Start-ups continue to skyrocket these days. There are around 1,183 billion-dollar newly-established businesses across the globe this year. And believe it or not, they’re currently the leading drivers of innovation and economic growth globally. They operate in various industries, but most gravitate towards technological fields, such as Fintech, artificial intelligence, AdTech, and EdTech.
However, most of these start-up owners rely on their savings for their initial funds. Despite the potential exponential business growth, one in five new businesses fails in the first year because they run out of money.
Even worse, looking for financing for a start-up is a complicated process. Most lenders need business history to prove that your company will likely succeed, but start-ups can’t provide that.
The good news is that several start-ups have figured out how to make it work. Here are some tips on securing a business loan as a newly-established company.
Prepare a Rock-Solid Business Plan
Any company needs a solid business plan. It maps out your company’s concepts and strategies, including your business’s profitability, productivity, and growth goals. Specifically, the business plan should have these eight key features:
- Executive summary;
- Business description;
- Target market;
- Strengths, weaknesses, opportunities, and threats (SWOT) analysis;
- Management team and personnel;
- Products and services;
- Marketing; and
- Financial Plan.
A complete business plan will help you get a realistic view of what you can accomplish within your market at present and in the future, and it can also help you secure a business loan. The clearer and more realistic your business plans are, the higher the chances of your loan approval.
Lenders have to make sure that your company is a good lending risk, so some of them might go through your financial statements. Be sure to prepare copies of your business statements, credit reports (both personal and business), and relevant legal documents (like contracts and business permits).
In your business plan, your company’s financial position should be highlighted. It should indicate that despite being a small and newly established company, your business can generate positive cash flow, be fiscally stable, and be financially responsible.
Build Strong Credit
As a new business, your credit reports could be the only proof of your business’s creditworthiness.
A good business credit score should be within the 80-100 based on Dun & Bradstreet PAYDEX or the 76-100 based on Intelliscore Plus from Experian. However, if your company is newly-established, you may not have a good business credit standing. As the business owner, lenders will check your personal credit instead. It’s no problem if you have a good credit score, typically anywhere between 670 to 739 FICO scores.
Also Read;- 6 Factors That Impact Your Business Credit
The problem lies when you also have poor personal credit, which may not let you be ahead of the game most of the time. If this is the case, it would be great to build your business and personal credit scores first.
Make timely and full payments for your personal credit first to improve your score. Additionally, always spend under your credit limit, prioritize paying your debts first, and keep your accounts open.
Don’t get worked up if there are negatives, like past late payments, in your report. They’ll soon get better. It takes time, dedication, and patience. Alongside other loan application requirements, you may include a letter explaining these negatives and how you’re working on them. While it’s not guaranteed that lenders would consider it, there’s no harm in trying.
Keep Positive Cash Flow
Start-up companies usually have upfront operational costs, which are normal. However, you don’t want them to hurt your cash flow, especially if you’re applying for a business loan. So be sure to manage them well.
Keeping your cash flow steady is crucial since it greatly affects your debt-service coverage ratio (DSCR). Like your credit score, DSCR is another deciding factor in your business loan application and a basic indicator of your company’s financial health.
DSCR measures a company’s debt capacity, debt-to-equity ratio, and debt-to-total assets ratio. In other words, it assesses your business’s financial capability to repay loans, make dividend payments, and take on new financing.
Keep Looking For the Right Lender and Product
Be patient and keep looking for a suitable loan product and company that suits your business’s financial needs and capabilities. There are several lenders these days that adjust to the borrowers’ demands and will tailor a loan product for them. For example, you can borrow online with CreditNinja, a legitimate online lender that offers various personal loan packages.
In addition, many smaller community banks and online lenders are more inclined to finance small and mid-size enterprises (SMEs), especially start-ups. You likely have a higher approval rate with them than other bigger lending companies.
Remember that you’ll likely have to undergo a credit check for every loan application you request. One or two inquiries have small to no impact on your FICO Scores, but multiple loan-related inquiries will have a strong effect on your credit. Thus, before applying for a loan, do your research, and opt for a lender who’ll surely assess your application.
Whether for launching a new business or injecting capital into a growing company, small business loan applications have always been daunting. However, if you’ve already envisioned your company’s present and future in a business plan, achieved a good credit standing, and kept a positive cash flow, qualifying for any financing will be a piece of cake.