Securing financing for your business can be a daunting and elongated task if you’re new to the industry, or have trouble with your past credit history. Business financing is not entirely different from that of personal loans, because in most cases the owner will still end up liable for the principal, and not be shielded by a large corporation or legal entity.
Most business are small businesses. Small businesses keep countries and economies alive, and they’re an important part of any nation. Large, well-known corporations may not have any issues or even lengthy discussions when it comes to securing loans, but for smaller to mid-size businesses this can sometimes be more of a hassle, especially if you’re a startup.
It’s important for your business to be able to obtain the financing you need to keep operations not only afloat, but thriving and growing in the long-term. Businesses operate on expenses, and there’s no way around them. Sometimes, however, that requires a bit of extra help, and that’s where loans come in.
There are many choices available when it comes to sourcing your businesses financial needs. You’ve got government SBA loans, hard money lenders, peer to peer lending, private investors, traditional business loans, and perhaps most prominent of the mix, personal loans taken through private money lenders.
Private loans are one of the best and most popular ways to secure a loan for your business, and may be your first choice when investigating your options. They’re widely available, and the approval process is relatively simple.
Getting Approved For A Private Loan
Private loans are simple in terms of their purpose and intent. They’re not guaranteed or government backed, nor are they angel investments from venture capitalists, crowd-funding or donations; they’re just straight-up loans.
A traditional private loan from a for-profit private lending financial institution’s intent is to provide you with the money you need at a reasonable interest rate, to ensure they can profit as well. With private loans, the interest rate will of course vary based upon the type of loan and your credit-worthiness, but this is situational.
In order to qualify for a private loan, you’ll want to check several boxes financially before you step into the lender’s office, or visit their website. Both your business’s and your own financials will likely be looked at closely in most cases where you’re using the loan for business purposes, and the following is exactly what they’ll be looking for.
Qualifications For A Private Loan
The approval process when it comes to applying for a private loan will involve a number of steps being taken by the lender to examine and analyze your credit history. This loan will likely be in your name, and thus your credit history will both be used and on the line in terms of this specific loan.
To get approved for one of these loans, you’ll need to provide some details. If it is a small loan, specifically for your business, you’ll likely be asked for some information about the business and what your intentions are for the loan.
The lender may inquire about your business first. They will likely ask you things along the lines of:
- How long have you been in business?
- What is your annual revenue?
- What are your yearly expenses?
- How many employees do you have on salary?
- Is it a C Corp, an S Corp, an LLC, or a partnership?
The list could go on, but the point is that they will want to do some digging.
They’ll likely ask for some paper work and legal documentation of your business structure, ownership, titles, building permits and financials. The financial aspect can be a big deciding factor in determining not only your qualifications for the loan, but the details of it when granted.
A lender may want to check through your accounts before proceeding with the loan analysis. They’ll want to take a look at your expenses, employee salaries, revenue, gross income, how much you paid in taxes, what the frequency of your transactions are, and even how consistent your income is. If the business is making a varying amount of income from month to month, this can be unstable, and this can have an impact on the terms of the loan.
Good numbers with consistency over time will appeal to the lender. Try to have your business’s history be clean, both financially and business-wise. Doing good consistent business and showing a positive revenue each month for many months will make a strong case for your eligibility.
This can be difficult for a startup, because your business doesn’t yet have the history needed to meet some of these desired qualifications. That’s okay though, because private lenders will often take this into consideration, and sometimes even cater specifically to startup entrepreneurs. This is where your personal finances will come into play even more.
Because this loan will likely be in your name, the lender will also want to see some details about your own financial situation too.
The qualifications also usually require the borrower to have established employment. This is not a guarantee of future employment, but it does indicate that you have a regular job with an employer that has provided benefits for at least two years. An employer is required to provide this, and if you have any questions regarding it, you should contact this person.
It is also required that the applicant provide financial information. This can include a breakdown of income from several sources, such as from a job or various others, and an explanation of how you intend to pay back this money.
They’ll likely take a look into your history, not only to see how long you’ve been employed and where your income came from, but if your income has been consistent. They will study which fields you’ve worked in, how long you’ve kept your jobs and if you’ve ever been fired from a job.
Your income will always be a factor, with lenders looking for consistency on a monthly basis; this shows stability, and a likelihood of paying off the loan in the allocated time frame of your new loan. Even if you have several thousand stashed in savings, and close to or more than enough to pay back the loan, lenders still love to see that money coming in on a monthly basis for installment-type loans.
Lenders will often look for certain metrics in terms of consistency with your income and credit scores. They may ask for recent bank statements, and pull your credit report as well from one of a few credit reporting agencies, likely FICO.
There are some who are considered a better credit risk than others, and those with less than perfect credit ratings will need to prove their worth in order to obtain a loan. The best way to do this is to have proof of all of the details in your financial history. The most common of these is bank statements and paychecks.
In addition to being deemed a higher credit risk, those who have had late payments on their loans may need to demonstrate a personal credit score higher than that of their current scores. This is usually done by providing proof that you have paid your bills on time every month. If you are unable to provide this proof, then you may be unable to obtain a private loan. Make sure that you always pay your bills on time, as failure to do so may lead to the lender reporting this to the credit bureaus.
What they find will depend on how you’ve handed your financials in the past, and what still shows up on your record today. Paying off credit cards and loans in a timely manner will have led to a positive credit rating, and likely a great credit score by now if you’ve done this consistently, whereas the opposite may be true if you haven’t.
Getting It All Together: Being Prepared
All of this information will be combined to assess your qualification for the private loan, and ultimately determine if it’s granted to you; if so, it will also decide the terms of that loan.
Make sure that you take the time to scrutinize your own financials before your lender does. You want to be aware of any potential pitfalls in the financial history of yourself or your business, which could cause a private lender some concern, and make sure that you can account for these in formal discussion.
Since you’re going private and not obtaining a loan via any public or governmental agency like the SBA, the terms will of course be more lenient, especially if you pick an option that’s tailored to more risky borrowers. Despite this, to make the whole situation as smooth as possible for yourself, it’s good to walk in with the best financial report-card you possibly can.
Take some time to do your own research and thinking, then examine your financial history before making the call. It’s a decision that could alter the entire future of your business.
Read my newest guide on how to start a construction business here