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A long-term loan can help your business get back to running its operations following a halt due to some unsolicited hurdle. Speaking of this, if you are a business owner who does not mind the cost of vast expenses stretch up to a more extended period, this is one financing option which can be the perfect choice for you.
The interest rate varies as it depends on several factors. To begin with, it is largely decided as per the lender’s policy, followed by the amount of money involved in addition to the creditworthiness of the borrower.
The best ones with the most impeccable credit histories may attract an interest rate below 5 percent from a traditional lender, i.e., a bank.
Small-scale businesses or businesses with poor history may be given loan at an interest rate of over 30 percent or even more.
Now, the question is who qualifies for the loan?
Well, the requirements may as well vary between lender to lender. However, generally speaking, most lenders require a legitimate business expense to report that will be taken care of using the loan. Additionally, the borrower should and must own if not all, but 20 percent of the business.
Other than this, one major prerequisite that most lenders ask is that the business should be operating for two years or more, but not any less than this. The longer you have been in business, the more odds get in your favor as it shows the lender that you have been a hit as a business since quite a long time.
However, we do not recommend rushing into it right away. Borrowing a loan is no easy task and requires some real knowledge to get through the whole process! Before you put yourself into it, make sure to have ample research done to avoid any miscalculations or legal problems later.
In this blog post, we have tried our best to present a go-to guide for you before taking up the big decision of borrowing a long term business or commercial loan.
Steps Before You Take a Long Term Business Loan
#1. A Business Plan
First and foremost, if there is anything that will make your chances high to bag a loan is a rock-solid business plan. Be at your creative best and ensure that the project exudes passion as a business owner has in a venture. It is safe to term this plan as a golden opportunity to impress the lender.
Therefore, it is of paramount importance that you first sit and craft a compelling business plan beforehand for a lender to be fully convinced. How strongly you present your business, and its operations are what will translate your credibility in the eyes of the lender. It should encompass mission, vision, and how it is expected to run to meet all the mentioned goals and aims.
A concrete business plan means the business is likely to be successful by all means in a lender’s view. Hence, there won’t be any reluctance or hesitance on the lender’s part, and you are all good to go for the loan!
#2. Clearly, State the Reasons Behind Seeking a Loan
Yes, we know this sounds pretty obvious, but often an applicant ends up looking a bit vague in their applications. Ambiguity in a loan application is the biggest turn off for the lenders.
Conventional lenders like a bank tend to know where the loan would be spent by the applicant. They see it as a flag whether or not they should sanction a loan. The more specific you are with your answer here, the better it is.
For instance, you are seeking a loan to purchase a piece of equipment; then it is an equipment loan you would be asked to apply for. Similarly, if you want the business to keep functioning normally until the debtor pays you, you would be advised to opt for a short-term loan. It is why being specific here should be your topmost priority!
Therefore, it is essential to quote the reason so that it is easier for the bank to decide which loan will be most suitable. Moreover, they will have the insight to see whether the amount applied for will fulfill the needs.
#3. Check Your Credit Score
It has become increasingly mandatory for the banks to ensure an applicant’s eligibility when they apply for a loan. Therefore, it is recommended the applicant himself checks upon his credit score and reports before applying.
To put things in perspective, an applicant having a credit score of 700 or above will be easily granted a loan. As for someone with a credit score below 680, it might be a little bit difficult to bag a loan. However, it still isn’t that bad as one can even have a revenue-based loan with such a credit score.
Speaking of credit score, you will not only be asked about your business’s credit score but also your personal credit score. In such a case, many entrepreneurs wonder as to why this is a requirement. Well, this is to assess your ability regarding handling your finances. In a lender’s eye, if you can tackle your personal finances, then you are most likely to deal with the business ones too.
The better your score is, the more chances you have to get the loan. A score below 600 can land you in big trouble. If this is how it is, then you better pull up your socks and begin working on increasing your score.
#4. Double-Check Your Credit Report
Many a time, it is possible that you end up having errors in your credit report. This can cast a negative impact on your score and ultimately on your chances of getting a loan. So, make sure you have been monitoring and correcting the credit score on the go.
It is also advised to hire a credit reporting agency for immediate correction and raise the score.
If the discrepancies are not taken care of, it will hurt your chances, and no bank will grant you a loan.
#5. Go Through all the Lending Options
It is time to assess all your lending options at disposal now that you have your credit score checked.
Come up with a list of banks and research about their approval guidelines and interest rates. Do not just jump on the first bank you meet. Run through some search for your safety. And, once you do the investigation, choose the one which aligns best with your need and offers the loan on low-interest rates and flexible guidelines.
This way, there shall be no regrets or miscalculations to sob over later in the future!
#6. The Financial Records
Maintaining proper financial statements make it easier for you to get a loan. These financial statements speak a lot about your credibility as well as reliability. A conventional lender, again, a bank would want to see your balance sheet, cash flow statements in addition to income statements.
Out of these, the balance sheet will reflect the business’s financial health that it puts forth what you possess, i.e., the assets and what you owe, i.e., the liabilities. It is the most analyzed sheet by the lenders and hence, of crucial importance.
Overall, this is to be sure that upon being granted the loan, you would be able to repay it in time.
Yes, you are thinking, right! If you haven’t been maintaining these financial records, it is high time that you start doing so to attain a loan.
#7. Identify the Industry
This point is subjective but quite essential to note. There are some industries to whom most lenders don’t grant loans. The reason is that a lender has concerns about reputation getting tarnished.
Other than this, the type of industry also helps in the assessment of the business credit score. These include sectors like firearm businesses or adult entertainment businesses. Not only this, but most lenders even disallow activities like law, childcare, health care, or even apparel companies.
So, when you do your research, make sure to explore this area at length. Make it a point to ask and check with the lender you are interested in whether or not they have any restrictions regarding loan eligibility.
Also, be sure that you have mentioned your industry when you prepare your loan application. Even a minor error here or there could end up delaying your processes and ultimately jeopardize your chances of getting a loan. And, we are sure you would never want that to happen even in your wildest dream!
#8. The Employer Identification Number (EIN)
The EIN is a unique, nine-digit number that is used to track a business’s tax returns. It stands synonymous to a social security number. And, while a lender may not ask for it, you should have it in case they categorically ask you to mention it.
You see, prevention is always better than cure. It would be better if you on your own accord specify the EIN on your application to avoid any hassle later.
As we speak, it is essential to mention that not every business requires an EIN. However, if your company has the following characteristics, you may need one if:
- It is a corporation
- It is a multi-member LLC
- It has employees
While there is no denying that not every business requires an EIN, it will only be fruitful if you get one. The advantage of having one is that it makes it easier to differentiate between personal and business finances.
It will, in turn, make it easier for you to convince the lender that what you have is a legitimate business entity.
#9. A Copy of Your Commercial Lease
If you have a tangible base for your business, you got to show it on paper when applying for a long term business or commercial loan.
To be precise, it becomes imperative on you to attach a copy of your lease alongside other loan documents if you are running a brick and mortar based business.
It works as a shred of evidence or proof that you will be able to use the property for the entire duration of the lease no matter what happens to the owner or landlord of the property.
This copy will keep your lender’s mind at peace that you will not be shown your way out amidst the tenure. If you haven’t got the copy done yet, it is time to get it and, in fact, keep it handy.
#10. Ownerships/Affiliations
Bear in mind that you would have to disclose every ownership you or your partner might have in other businesses, and so is the case with any affiliations. Whether you are a consultant or a board member, be ready to put it all on the table!
When you do this, you put all the potential conflicts at rest that the lender may point out during the evaluation of your loan application.
Furthermore, it is a bit challenging to both apply and qualify for a loan if you have a business with multiple owners. Hence, you got to be sure of having all the owners on board beforehand you head out to apply for a loan. Take them into confidence that they will have to disclose their personal financial information so that you get all the necessary signatures for the loan agreement as well as information as and when you need.
Since we are on the topic, let’s list out everything that would be required in order to authorize a loan. In addition to personal financial records, a copy of their photo ID alongside a resume and of course the personal credit score would be mandatory.
To Sum Up
The aforementioned factors really need to be checked before a loan application is processed. Everything should already be sorted and collected to avoid any mishaps.
Just remember, if you missed out on anything, you just might not be pleased with the consequences!
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