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What banks are looking for before lending to small businesses

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Maybe you have just created a start-up or a small company. Now you are wondering if you should borrow money from the bank or continue to self-finance. Or maybe you have a growing business and are eager to develop. But you have heard that 8 out of 10 entrepreneurs have applied for some form of financing in 2015. Of these, 58% have been approved by major banks and 71% have been approved by other lenders.

Do you want to borrow from big banks? Be aware that these institutions consider many variables in their lending process. Here are 4 important conditions that big banks are looking for before lending money to small businesses:

Personal credit matters a lot …

Consider your individual credit score before applying for a loan. The big banks require 680-720. Others will accept 640 if you plan on using a personal loan to finance your business. If your score falls below 640, your approval rate goes down. But it is not the end. Some community or local banks give a chance to people with low credit. There are also microlenders who specifically address those who have a low or no score. If you follow this path, pay attention to the interest rates that keep climbing.

Now, is there no hope for those who have accumulated bad credit, auto loans and credit card mortgages? The simple answer is yes. Although there is no shortcut to correct a dismal score, you can start working on it immediately. Pay unpaid debts on credit cards and loans for the purchase of a car or housing, minimize borrowing and regularly review your credit worthiness.

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An established business builds trust

A high credit score is just a component of the big picture. The status of your monthly, quarterly or annual income is another. A profitable business signals banks that it has the means to repay the loan. This condition makes it difficult for new startups and small businesses to qualify. On average, it will take you at least 3 years to show a significant return on investment. In this case, it is better to start your way.

Of course, there are other alternatives. You just have to look closer. According to Pepperdine's private equity index for the first quarter of 2017, those who borrowed from friends and family had a success rate of 67%. If you have more advanced knowledge of entrepreneurship, you can try to get financing from a venture capital or an angel investor. Finally, you can also explore grants and crowdfunding.

Enough guarantee is essential

You probably saw it in the movies. The guys from the bank arrive, announcing that they will grab the property and all it contains to collect the shortcomings of payment. This scenario is not purely fiction. In the beginning, the banks will evaluate not only your income, but also your tangible property.

Recently, they also looked at intangible assets as collateral. According to the Financial Time s, "Under many loans, banks have the right to seize patents and trademarks of a borrower under the umbrella of. a foreclosure proceeding. "

Alternative lending institutions may give some leeway as to what they will accept as collateral. For example, you can obtain a line of credit through your accounts receivable. Jewelery, which is liquid and appreciates value, is another type of guarantee.

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Some degree of preparation is crucial

The Small Business Association emphasizes the importance of preparation. In one article, SBA states that "the best way to improve your chances of getting a loan is to prepare a written loan proposal or a business plan." Although it sounds like a lot of work It is an opportunity for you to describe your strengths. . You can talk about solid finances and solid management. At the same time, you offer proof to your claims.

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To avoid meanders, follow the format required by your target banks. SBA lists the common elements of a loan proposal:

  • Executive Summary
  • Company Profile
  • Management Experience
  • Loan application
  • Loan repayment
  • Collateral
  • Personal Financial Statements
  • Financial Statements of Enterprises
  • Investment in capital
  • Projections
  • Other Objects:
    • Lease (or copies thereof)
    • Franchise Agreement
    • Contract of Purchase
    • Statutes of the Society
    • Partnership Agreements
    • Copies of business licenses and registrations necessary for your commercial activity
    • Copies of Contracts You Have with Third Parties
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