Financing your small business is a balancing act. You need money to grow, but you don’t want to overextend yourself or deplete your working capital. If you’re looking for business financing, you’ll want to make yourself attractive to lenders. Here are a few of the most common mistakes business owners make when they look for a loan, as well as tips for avoiding these pitfalls.
Bad Credit or No Credit
Lenders look at your personal and business credit when you apply for business financing. Before you speak with a lender, get a copy of your personal credit report. A free copy of your personal credit report is available from the three major credit-reporting agencies once a year. After getting your report, make sure that everything is accurate. Correct any mistakes you find. If you have bad credit, you can gradually work to improve your rating by paying all your bills on time. Your credit will also improve if you don’t carry a high balance on your credit cards. If you don’t have much of a business credit history, you can take steps to build a history. Begin by opening a bank account for all your business transactions. You can also get a business credit card. You may also be able to get credit cards from stores where you purchase your supplies. Charge something on your cards every month and pay off the balances before their due.
Lenders turn away some business owners because they have insufficient collateral. You may have the option of using personal property such as your home for collateral, but that’s a risky move. Having insufficient collateral is a tough situation to improve in the short term if you’re also looking for cash. Here are some things to consider when you’re assessing your collateral.
- Banks use the fair market value of your assets, not what you paid for them.
• If you already have a loan against your collateral, a lender can refinance the loan so the property can be used.
• A lender may loan on 70 to 90 percent of your accounts receivables. They won’t lend on the full amount.
Short on Cash
Lenders look at cash flow when you apply for a loan. Not enough earnings will signal the bank that you may not be able to pay back the loan. Try to improve your cash flow before you apply for a loan.
Getting a loan can take some time and planning. Don’t wait for the last minute to do your homework and make yourself attractive to a lender. Even if you’re not quite ready for business financing, get your accounts in order now so you’ll have a better chance for qualifying down the road.