Business loans provide you with the capital that your business needs. If your business needs investment to expand or is struggling with making ends meet, acquiring business loans is a viable option.
Even though personal loans are easy to procure, if you’re eligible for a business loan, you have the benefits of lower interest rates than personal loans. Interest rates of business loans have a range of 2%-13% whereas personal loans offer around 6%-36% interest rates. Business loans also have a higher lending limit. But as they involve a higher risk for the lender, they have stricter eligibility requirements.
Business loan requirements :
- Credit score
Professional lenders always check the credit score of the borrower to check if they have been paying back their loans on time. This is just to confirm if the borrower is capable of paying back the loan. Additional background checks can be run on the borrower.
- Annual income/Cash Flow
The annual income of the borrower must be at least $20,000. For new businesses or startups, the minimum income can be $10,000.
- Collateral
Collateral-based business loans are way easier to procure as the lender has a guarantee in case the borrower fails to pay back the amount on time. They even have lower interest rates than usual.
- Assessment of business
The type of business the borrower runs is analyzed. Some businesses have more of a chance of approval.
- Existing debt
Any existing unpaid debt is a red flag. Unpaid debt increases the risk for the borrowers and there is a lower chance of approval if the lender has a lot of existing debt to pay back.
- Age of business
The older the business, the greater the chance of approval of a loan. New businesses have to be evaluated to determine if the business is capable of making a profit.
Things to keep in mind when taking a business loan :
Taking up a loan is no child’s play. Once you are confident that you are to take a business loan, you must assess the amount that you need.
Borrow too less and you might have to take up another loan. Borrow too much and you might have trouble paying it back. Here are a few things you should be wary of :
- The amount needed
An estimate of your financial requirements is the first step to taking a business loan. These include the cost of new equipment, the salary of employees, or even money for renting out a building.
- Maintain a good credit
Make sure you pay your bills on time because your existing bills and payments will be considered by the borrower. If you have been late on your repayments there is a good chance that your loan request will be rejected.
- Research before applying
Different banks offer different plans with varying interest rates. It is only common sense to look for the lowest interest rate possible. Do NOT make the mistake of borrowing from loan sharks that provide guaranteed loans but offer very high-interest rates. Every bank is different, there is bound to be more attention provided by small banks. Small banks build up personal relations with their customers. So look around and choose what suits you best.
- Decide on the collateral
Collateral is provided as a form of security to the lender. Collateral must be of the same or more value than the loan. It is advisable to refrain from choosing a personal residential property as collateral if you have other options available. If you choose your own house as collateral, make sure you are confident in your ability to pay back the loan.
Conclusion: If you are to borrow a large amount of money to support your business, opt for a business loan. Mentioned above are the requirements for a business loan as well as things you should keep in mind while applying for one.