Five Tips to Obtain Credit for
Small Businesses |
By Monique Hawkins |
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As many small business owners know, financing is crucial to the
financial health of their enterprise. While some small business
owners have the resources to launch their business, most look to
the credit market for financial help. Indeed, the banking
industry is an important source to gain necessary capital.
However, many entrepreneurs may not realize that that applying
for commercial credit requires a great deal of preparation. Here
are five tips to assist entrepreneurs in improving their chances
of getting credit approval.
Tip #1: Decide on the type of
commercial loan that is needed. Loan options include short-term
loans, intermediate loans, long-term loans, and lines of credit.
Short-term loans are usually for less than a year. They
typically provide interim working capital for a business
temporarily in need of cash.
Intermediate loans are often
used for business set-up, the purchase of new equipment,
expansion, or an increase in working capital. This loan can be
anywhere from 1-3 years.
Long-term loans are for major
capital improvements, acquiring fixed assists, and business
start-ups. The loan term is usually from 3-5 years and repayment
installments are on a monthly or quarterly basis.
A line
of credit gives a small business the ability to borrow money
repeatedly, up to the credit limit. The lender will usually
perform a review once a year, at which time the borrower is
asked to update financial statements.
Tip #2: Make sure
all paper work is in order. Applying for commercial loans can be
very tedious and requires much more documentation than applying
for consumer credit. So, the key is to be prepared. In addition,
entrepreneurs who have carefully put together the needed
paperwork to include the loan purpose, the amount of money
needed and for how long, and a repayment schedule proposal will
be viewed more favorably by many lenders.
Tip #3: Develop
a well thought out proposal. The proposal should include the
loan purpose, the amount of money needed and for how long, and a
repayment schedule proposal. Points to include are the business
description that tells the nature of the business, product and
service, a personal profile, and a business plan that outlines
the corporate strategy for the next three to five years.
Additional points to add are supporting documentation that
supports the information outlined in the proposal, and
collateral that will be used to secure the loan. Financial
statements, both personal and for the business, are important as
well.
Tip #4: Seek advice! It is important for
entrepreneurs to talk with someone who has gone through the
process of obtaining commercial credit before a lender is
approached. This is especially important for the first time
buyer. Entrepreneurs can approach mentors, qualified business
counselors, business support groups, and the U.S. Small Business
Administration. This step will increase the chances of getting a
favorable credit decision.
Tip #5: Be prepared to pursue
various options. Sometimes, financial institutions will say no.
Once again, obtaining credit can be difficult, especially for
entrepreneurs who are first-time borrowers. However, since
financial institutions have different standards, an inability to
meet the standard of one lender does not mean one fails the
standards of all. It is highly possible that credit approvals
can be gained with another lender. So, it is important to keep
seeking until a lender is found.
Obtaining credit is
necessary for many small businesses. Knowing what steps to take
in this process can greatly increase an approval from a
financial institution. Now, put these five tips into practice
and be on your way to getting the credit you need for your
business venture.
Copyright 2005 Monique Hawkins |
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