Which Factors Can Affect Small Business Loans?

January 2, 2020

Starting and maintaining a business is exciting and essential to the global economy. There comes a time when you want to expand your business. Having access to financial capital will make it easier to pay employees, buy equipment and have a satisfactory cash flow.

Policy Changes

Once you obtain your business loan, it is important to understand any changes to your loan policy. Banks will consider the overall business health in offering an extension of credit. Exceptions can be made for the banks’ policies and procedures in extenuating circumstances. Financial institutions will analyze the risk assessment for your business, check external loan commitments, and examine the availability of collateral. Upon approval, credit files are meticulously maintained. Moreover, some financial institutions have loan policies that will cover the business loan in the event of bankruptcy or a failure to pay. The financial representative for the entity is responsible for these payments. You should discuss financial policies with your loan officer.

Unfunded Commitments

Financial institutions make loans available for future funding for budding businesses according to their policies. Based upon the creditworthiness of the business, you may or may not have to put down collateral. Banks can provide loans for a business in one lump sum or as a revolving line of credit. However, this is not the same thing as letters of credit. There are two main types of unfunded loan commitments: multiple advanced, or closed-end, loans and revolving, or open-end, loans. In multiple advanced loans, the bank will give you a loan in increments up to an established limit. As you are making principal loan payments, you cannot come back and draw again upon the principal. For revolving loans, once you make principal and interest payments on the business loan, the principal payment is added back to the credit limit. You can immediately re-borrow the principal payment for business purchases. Experts suggest that you should expect loss 25 to 30 years in the future due to unfunded commitments.

Business Loan Requirements

There are four essential requirements you want to consider when you are ready to make a business loan to purchase inventory or to make capital improvements.

Business Establishment: A financial institution will check your business profile. Be prepared to provide bank statements, balance sheets, and federal tax returns.

Business Credit: It is important to establish several trade lines with multiple suppliers. Ideally, you will want to have a business profile established with Dun & Bradstreet, Experian, and Equifax. With Dun & Bradstreet, businesses are scored between 0 to 100. Making monthly on-time payments is essential for the best score.

Personal Guarantee: If you have insufficient established business credit, then you will need a personal guarantee. The financial institution will check your credit file as criteria for the loan. It is good to have a credit score of at least 600 for an acceptable loan with a decent interest rate. Preferably, a credit score above 700 is ideal for the best interest rates.

Loan Purpose and Amount: Loans can be made for a variety of purposes. You can use the funds to supply your office with furniture or to put tables and chairs in a restaurant. For an online business, you can use the funds to supply inventory for POS transactions. Banks prefer to make loans to small businesses at a minimum of $250,000.

Entrepreneurs ideally should be in business for several months before applying for a business loan. Understand your lender’s qualifications before the application process. Review all pertinent financial documentation. Make certain to have a strong business plan.

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