Startups lack cash. In the initial years, bootstrapping is their only option to survive. Only after a certain level of growth can they expect round one VC funding. And that too only when they are deemed worthy by the VC firm.
Securing VC funding is tough. Most startups fail to meet the qualifying criteria.
No wonder 90% startups in the US failed within just one year of starting their operation.
The ones run by smart and ambitious owners, refuse to give up. Their owners look for alternative ways to garner money. Crowdfunding is one such way. However, the problem with crowdfunding is the product/service offered by the business must be innovative, original and useful to be able to attract fund from unknown investors.
A rather easier and simplistic solution is to apply for a business loan. I am not saying it’s in the arm’s reach because it is not. Getting a business loan is less hassle some than getting seed funding or launching a successful crowdfunding program.
But that in no way means it’s like purchasing candy. Banks and financial agencies look for few things when they approve a loan request. Read on to find out whether your business meets these requirements.
Prospect, not desperation
Nobody likes desperate people. If you sound desperate to get a loan, lending agencies will begin to suspect. Businesses often apply for a loan so that they don’t go bankrupt. This kind of loan is the dictionary definition of a bad loan. Banks want to avoid the bad loan. Subprime mortgage loans were bad and caused the economy to suffer immensely. If you push them hard, chances are your application would be declined.
So, don’t be desperate. Instead, show them your business has some prospect. For that, you need a strategic approach. Check which businesses secured loans in the past and the industries they belong. If your business doesn’t belong to the same industry, at least have a client whose business does.
If you operate in the B2C sector, securing a loan is a bit easy. Because in B2C, prospect means pulling in as many end customers as you can. If everyone’s buying your product, or at least showing interest in, getting a business loan would be easy.
Never lie about anything
Whatever you do, never put anything on your application that’s factually incorrect. Some loan applicants have done this in the past, they purposefully lied and ended up facing dire consequences. Not only were they rejected by the bank to which they applied, but were shown the door by other banks as well when they applied to these banks.
Simply put, if lying on a personal loan application is bad, then lying on a business loan application is worst. The future of your business depends on it. Banks or financial institutions hold a lot of power. They can put your company on the blacklist. If that ever happens, it’d be indeed difficult for you to operate, let alone expand your business.
Don’t ask for too much, or too little. Understand your needs. How much money do you need for your business? And what are your plans to do with this money? Lenders want you to have everything figured out. If you sound confused, they’d think you lack a clear vision and probably reject your application.
We suggest you talk to a business consultant who knows how much money a startup might need in the initial years. The advantage of hiring an advisor is you get to know the hidden expenses. An experienced advisor has seen hundreds of businesses grow and fall. Talking to them could give you a fair idea of how much your operating expenses could be – both the high and low end of the spectrum.
Your credit score matters
You may not want to hear it, but for securing a business loan, credit score matters big time. You have to have excellent business credit and decent personal credit. There’s a threshold limit. If your score falls below that limit, chances of getting a business loan are slim.
If your score is above that limit but below the next threshold limit, you will secure a loan but the interest rate will be pretty high.
Business credit scores are of different types. Startups typically aim for a small business loan, which may be hard to secure if you don’t have any previous credit history. In this case, the highest FICO trademark SBSS score would be 140, given your personal credit is outstanding. There are two things you can do if you couldn’t progress beyond 140:
First, wait for your business to grow and gain credit. Second, improve your personal credit. A combination of both is also not a bad idea.
Securing a business loan is hard, but what’s even harder is to put the borrowed money to right use. People often forget that the money is not there and they’d have to repay it sooner or later. Don’t be one of them. Follow the tips here to secure a loan for your business and operate wisely, so that you could pay the money off quickly.
Avery Richardson is a blogger and writes about personal finance, frugal living, money management, and innovative money-making ideas. When she is not writing you can find here experimenting with cooking. You can read here the latest article on how Small Businesses Can Save Money.