So you want a bank loan for your business? It’s not all that easy since banks are entrusted with depositors’ money and therefore have to be very careful as to when and where they disburse these funds. Nevertheless, without disbursing loans that they charge interest on, the banks can’t really be in business which is why they can and indeed do give loans to business owners. Following are some key points to take into consideration when applying for a business loan:
1. Double check your credit score
Whenever you apply for a loan from a bank the very first thing they will check is your credit score. This is why it is absolutely essential that you know your credit score in advance before applying for a loan from ‘any’ financial institution whatsoever. Check and double check for any errors or discrepancies. Such errors may include any late payment that you may have made on time but that had erroneously being reported as late. Once such mistakes have been noted down, contact the relevant agency or credit bureau and get them rectified as soon as possible. Preferably before applying for the loan in the first place.
If you have a very high credit score (hovering around 900 in Canada), There is an excellent possibility that you will be able to acquire that coveted loan at an extremely attractive rate. However if your rating is average (If you have a mid-level score (650 to 700), you may certainly get a loan but the interest rates may be higher. But a credit score below 600 may make it very difficult to acquire a business loan because the bank will term you a high risk factor. In this scenario, even if you do manage to get the loan, the interest rates may be so high you might need to seek recourse to an alternative form of financing (such as borrowing from friends and family etc.), or you may reconsider your business expansion plans at this point in time.
Another important consideration to keep in mind is that having your loan application rejected would mean a drop in your overall credit score, effectively making it more difficult for any future borrowings later in life. So be very careful when applying for such a loan.
2. Figure out how much you need beforehand
Before applying for a loan it is necessary to figure out just how much money you need as a loan. You would have to show the bank precisely how you will utilize the amount so that they would be reassured that you would be able to pay back what you have borrowed, on time and with interest. You might need to create monthly cash flow predictions and then follow them to the letter if your loan request is approved by the bank.
3. Think long and hard
Before applying for a loan think long and hard as to why you need a loan and if it’s possible to do without it even if it leads to slower expansion of your business. Check for any alternative to borrowing from a commercial institution if a loan is absolutely necessary. This is because in the eventuality of anything going wrong the bank would be compelled to take legal action to recover its funds and that may include foreclosing on any mortgage or property that you might have put up as collateral.