Business Loan Requirement: Things You Need To Get a Loan
Getting a business or an investment loan is not an easy process. It will take months to prepare documents and attend bank interviews. However, all of that might be worth it as the funds you obtain could help you reach your full business potential or add an investment to your portfolio that generates a lot of ROI.
Before getting a loan, you must understand how lenders think. They will never grant money to someone they believe cannot fulfill their end of the loan agreement. So, to avoid frustration and see whether you can get the funds your need to grow your business, we prepared a list of requirements you will need to obtain a loan, so take a look below.
1. Good Personal Credit Scores
The first thing banks will look at when you ask for a loan is your personal and business credit scores. These scores indicate your ability to repay debts such as mortgages, credit card bills, personal debt, and so on.
Financial institutions use FICO scores, ranging from 300 to 850, and the higher your score, the better your chance of obtaining the loan. Besides that, some types of loans will require you to provide the lender with personal income data. However, other loans, such as DSCR (Debt-Service Coverage Ratio) mortgage loans, function differently than conventional loans as they are designed for real estate investors.
The way these loans work is fairly simple. Financial institutions or private lenders look at the cash flow of the investment property rather than the borrower’s personal income. They use DSCR as a qualification tool, which is derived by taking the total net operating income of the investment and dividing it by the debt service.
In addition, if you are planning an investment in the real estate industry, you will always need a quick option. Conventional loans will take a lot of time before banks approve them, and you might lose out on an investment. As a real estate investor, knowing how to apply for DSCR loan and calculate the ratio on your own is a must. Waiting for a bank to approve a loan request for months might lead to you missing out on a life-changing opportunity.
2. Business Infomation
If you are specifically looking to obtain a business loan, lenders will require you to provide them with information about how long you have been working in the industry. Online loan lenders are not that strict and will usually just ask whether you have been active in the industry for at least six months.
Going on, you will also need a business plan as lenders want to know how you will spend their money. This type of document should elaborate on how you will bring your ideas to fruition and when the lenders can expect you to pay them back in full.
3. A Solid Insurance
Financial institutions are all about reducing risk, so don’t get surprised if they inquire about the type of insurance policy that covers you and your business. Keep in mind that the better insurance you have, the higher the chances you have of obtaining a loan.
This means that it’s in your best interest that both you and your business are properly insured. Banks usually consider businesses with good insurance as low-risk loan seekers and will probably even grant you better interest rates.
4. Collateral
When it comes to start-ups or small businesses, you need to have assets you can pledge to back up the loan that the financial institution will grant you. By pledging hard assets as collateral, the bank won’t hesitate to grant you the loan knowing that they drastically reduce their risk of loss even if you fail to repay it.
However, this might be very difficult as you will have to pledge personal assets to obtain the loan, which might be unappealing. But, if you are confident that the loan will serve you to scale your business and boost profits, you should not hesitate to consult the representatives of your preferred financial institution or lender.
Final Thoughts
Loans can help you scale your business when you just don’t have enough capital or when you want to seize a once-in-a-lifetime opportunity. Not all loans are the same, and you should thoroughly research the options to determine which one caters to your needs the best.
If you are a real estate investor, remember that it’s always better to look into DSCR loans rather than conventional, as seconds can be the difference between a profit and a missed opportunity.
Pranab Bhandari is an Editor of the Financial Blog “Financebuzz”. Apart from writing informative financial articles for his blog, he is a regular contributor to many national and international publications namely Tweak Your Biz, Growth Rocks ETC.
