Factors for Obtaining a Business Loan
We are going to discuss the factors that are involved when a bank is making decision as to whether or not to provide a loan to a entrepreneur or small business owner. Foremost, they're going to look at the individual entrepreneurs credit score. While it may seem as clear-cut as simply just looking at the credit score and going from there – a number of financial institutions will take a complete look for issuing a approval or denial letter. For instance, many individuals that are engaged in the continuing buying and selling of real estate will often have very high debt to income ratio was given that they have a number of loans secured by a number of different properties. As such, this can have a slightly negative effect on a independent real estate entrepreneurs credit score and thus might bring their score down to a point where they would otherwise not be accepted for a loan. Again, this is not provide the whole picture of an individual's finances given
that the realist the entrepreneur may have very appropriately leverage these properties and is within completely normal range for this type of business activity. As such, many banks will look – again – at a total financial picture of the individual borrower before making a decision. In certain cases, other factors such as a previous bankruptcy may impact the individual's ability to obtain a conventional business loan or a business loan that is backed by the small business administration. Generally, any individual prior three years is not eligible for however, there are a number of specialty lenders out there that are willing to take the risk on a higher lower quality borrower if they have substantial assets or collateral to back the financial instrument.
The second factor that the financial institution is going to look at is the collateral that is used in conjunction with the business loan. Banks and lenders are not really in the business of taking a risk or generating a profit from capital appreciation or profit. Banks are in the business of lending money for a specific interest rate with the intent to receive these payments on a monthly basis without fail. As such, the financial institution is going to want to see that nearly 100% of the money that their lending is going to be used for the acquisition of tangible assets for banks to provide extensive working capital loans to individual small businesses. However, there are exceptions to this rule especially among professionals such as doctors, lawyers, dentists, certified public accountants, and other individuals uphold a professional license that generate revenues from their professional services. In these instances, a financial institution may be
willing to accept a much lower collateral amount given that the individual is going to be able to generate substantial revenues by providing their services to the general public. Again, working capital loans are primarily geared towards high-margin businesses and individuals uphold professional licenses. Prior to submitting an application to a bank for a loan, a full list of the assets are going to repurchase with the loan proceeds should be provided so that the bank understands exactly what their funds are being used for. In some cases, a financial institution may actually purchase the assets directly themselves and then provide the items to the individual entrepreneur so that the appropriate titling and collateral can be held directly by the bank. This is primarily reserved for companies that are engaged in the large-scale acquisition of equipment and specialized assets.
The other factor that is going to come into play as it relates to receiving a business loan is the character of the borrower. Usually, a criminal background check is done against every borrower that is seeking a business loan. As such, previous criminal history maybe impede an individual's ability to receive a small business administer. If it walks per
Newark and they should speak with an attorney as well as an accountant to ensure that they are able to properly qualify for a business loan given any past issues with the law.
Finally but certainly not least – the financial institution is going to want to see your very well-developed business plan. As we have discussed throughout this website, the business plan should have a three-year to five-year overview that will allow the bank to make a decision as to whether or not to provide the borrowed funds. As always, this business plan should have a profit and loss statement, cash analysis, balance sheet, and other financial metrics that a lending institution is going to want to see to render a lending decision planning materials that you have developed in order to make sure that they fall in line with industry standards and that they are appropriate for the amount of money that you are seeking. The certified public accountant will also assist you with putting together a personal financial statement that a bank is almost always going to want to say as a relates to your current assets and current outstanding liabilities. Your
personal financial statement is going to need to list everything you own such as a home, car, retirement accounts, and other assets that are considered to have tangible value. All of your debts are also going to be showcased within this financial statement including credit cards, existing business loans, mortgages, and any other type of liability that you are able to get the funding you are seeking.
In closing, if it seems that there is a lot of documentation that is needed in order to get a business loan then you are not wrong. All banks and lenders are going to want to see that their investment is secured by a substantial amount of collateral and that the individual entrepreneur is qualified to operate the business on a day-to-day basis. As such, it is imperative that an individual entrepreneur is extremely prepared as it relates to making sure that everything is organized, neat, and can be easily followed by a loan officer or a lending committee. Throughout this website, were going to continue to discuss some of the issues that are involved with obtaining business financing through financial institutions such as banks, credit unions, and independent lenders.