Don’t Borrow Money to Get out of Debt
Many people view debt-consolidation loans as a way of helping them get out of debt. However, consolidation loans simply combine debt. You could end up losing everything because you’ve tied it all up in one loan. If you must borrow, see if a friend or family member can lend you money, since the interest rates should be low or nonexistent.
Invest Your Own Money to Improve Loan Odds
Investing your own money is a great way to get banks to take you seriously. Lenders typically like to see owners have at least a 25 percent equity stake in the businesses they finance. When you put your own money on the line, banks assume that you will work hard to make the business a success.
Avoid Prepayment Penalties in Business Loans
If all goes according to plan, your business will soon be flourishing, and you may have the funds to pay down your loan more quickly. But if your loan agreement contains a prepayment penalty clause, you may end up paying significantly more than the original loan amount. Some lenders include prepayment penalties to prevent you from refinancing a high-interest loan.
Don’t Take On More Debt Than You Can Handle
If you have exhausted all other available credit, maybe taking on more debt is a bad idea. When lenders see that you are overextended, you will likely be required to secure the loan with assets. If you are having difficulty paying your existing financial obligations, you are entering risky territory by gambling with your facilities, inventory, equipment, or even worse, your own house.
Write a Sound Business Plan to Improve Loan Odds
Having a solid business plan is your best shot at getting a loan. But it also must be a complete and well-presented plan. It’s especially important to polish your executive summary. This one- to three-page summary of your business is what bankers look at first — if they like what they see, they might read on.
Impress Your Lender by Renting Your Office Space
Bankers favor businesses that plan to rent rather than purchase a building. That’s because lenders prefer that you invest in assets that generate income, like inventory and equipment. Bankers also frown on high renovation costs.
Check Out Your Credit Report Before Applying for a Loan
Reviewing your own credit report before you start the application process can also put you ahead of the game. Lenders use your personal credit history to help them decide whether you’re a good risk for a loan, so it pays to know what they’ll find. If your report shows a mistake, contact the credit reporting agency and demand a correction. If your credit report shows legitimate late payments or bankruptcies, you should include a letter with your application explaining the circumstances and how they have changed. This can soften the impact of these black marks against you. Always be honest about your credit history — covering up problems is the fastest way to get shown the door.
Shop Around Before Selecting a Loan Offer
Although there are many lenders available, many people still head to their local bank first without shopping around. Credit unions and other sources are worth investigating. For example, if you are a small business owner, find out what the Small Business Administration can do through one of their loan programs.