The 3 Cs of Funding for Small Business Loan Approvals
When I was starting my practice, I needed a loan. I found myself bouncing from lender to lender hoping to find one that would approve me for a loan. Unfortunately, I never found one.
It wasn’t until much later that I discovered why I couldn’t qualify for a business loan. I didn’t have the 3 Cs of funding that I will share with you below. Getting a good understanding of what lenders are looking for can help reduce the guessing game and increase your approval ratings.
When seeking a business loan, it is important to understand that you are looking for someone to invest their money into your idea. As investors, lenders have to make sure they put their money into a vehicle that will give them high returns. The best way for you to ensure you get funding is to position your idea as a no-brainer investment opportunity.
Before you go apply for a loan, there are steps you can take to make the business loan process easier. You may need to do a little research. However, your efforts may pay off and help to streamline the overall loan process. Here are the 3 Cs of Funding to help you get a business loan approval and achieve your goals.
Credibility
Your personal and business credit scores are essential to a lender’s decision. These scores show lenders how responsible you are with finances and how likely you are to repay a loan. Your personal score, typically the FICO score, can range from 300 to 850. The higher your score the higher your credibility. If you already have an established business, your business score, the FICO SBSS score, can range from 0 to 300. Again, the higher your business score, the better you look to lenders.
While you can generally find financing unless your credit score is extremely low, pushing your score opens doors to lenders. You can improve your credit scores by regularly repaying debts like, credit cards, home mortgage and student loans. You should go over your credit reports every year and dispute any errors to make sure your rating isn’t getting needlessly dragged down.
Collateral
Collateral is an asset accepted by a lender as loan security. If you, as the borrower, defaults on payments, the lender can seize the collateral and resell it to recoup losses.
Any business asset that has value and that can be sold by a lender to pay off a loan, if necessary, can be considered collateral. Examples of collateral include:
- Equipment
- Buildings
- Inventory
- Cash in the bank
There are business loans out there that don’t require collateral, but approval may be more difficult than others.
For a loan without collateral, some lenders will still require some type of guarantee. Examples of these type of guarantees include:
- A personal guarantee – A personal guarantee makes the business owner responsible for paying back the debt. Since the loan is unsecured, a personal guarantee is not tied to a specific asset.
- A blanket lien on business assets – This type of lien gives the lender the right to seize all types of assets you owned in the event of nonpayment. A blanket lien, theoretically, gives a creditor a legal interest in all of your assets.
Remember, when a bank gives you a loan, they are investing in your idea. They have to make sure, it’s a sound investment for them and they have to secure a backup plan in case your idea doesn’t work out. That’s why they need collateral.
Consistency
Lenders will look for inconsistencies in your financial and personal history before agreeing to fund a loan. Here are some of the areas they will review:
- Income history
- Address history
- Employment History
- Debt repayment history
- Business Net profit and Cashflow history
Consistency in the areas mentioned above will positioned you as a safe investment for potential lenders. Whereas inconsistencies will increase your likelihood of getting a denial. This is another reason why it’s important to review your credit history to make sure it gives an accurate portrayal of your personal and financial patterns.
Conclusion
The best way to reduce the guessing game when looking for a business loan is to make your idea an attractive investment to potential lenders. The 3 Cs of funding I discussed above will help you improve your chances.
The best way to implement the 3 Cs is through a sound business plan. Lenders will want to know how you plan to use their financial backing before signing off on your loan. This way, they can be sure that their extra capital will earn you the profits you can use to repay the loan.
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