Top 10 Tips For Getting A Commercial Loan
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| Commercial Loan |
1. Do your homework
1. Do your homework.
2. Get your financial statements in order.
3. Have a well-written business plan.
4. Present a strong case to the lender.
5. Be prepared to offer collateral.
6. Have a solid understanding of your credit score.
7. Be prepared to make a down payment.
8. Have a realistic understanding of your repayment terms.
9. Be prepared to pay origination fees.
2. Consider all your financing options
Before deciding to apply for a commercial loan, it is important to consider all of your available financing options. While a loan may seem like the logical choice for short-term financing needs, there are other options available that may be more suitable for your situation.
Here are just a few of your financing options:
- SBA Loans: SBA Loans are provided by the US Small Business Administration and offer more affordable interest rates than traditional loans. They also can be more flexible in the repayment period and other loan specific requirements.
- Grants: Grants are available from local, state, and federal government agencies. Grants are typically awarded to entrepreneurs working on projects with potential societal benefits.
- Angel Investors: Angel Investors provide capital to small business owners in exchange for equity. This can be a great option for entrepreneurs who don’t want to take on debt and are willing to part with a portion of their company's ownership.
- Crowdfunding: Crowdfunding is an increasingly popular way to finance small businesses. Utilizing an online platform, entrepreneurs reach out to their network and other potential supporters to fund their project with small individual donations.
- Vendor Financing: Vendor Financing is an arrangement with a company’s suppliers whereby the supplier finances the company’s purchase. This can be great for businesses that need to purchase supplies or equipment but would struggle to pay for them up front.
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3. Shop around for the best deal
Once you have determined that a commercial loan is the best option for your business, it is important to shop around for the best deal. Every financial institution has a different set of criteria and loan process, so it is important to compare offers to get the best possible rate.
When shopping for a commercial loan, make sure to keep the following in mind:
- Interest rate: The size of your loan and the length of your repayment period will determine the interest rate. It is important to take the time to compare rates to get the best deal.
- Fees: Many lenders charge origination fees and other hidden fees that you should take into account. Make sure to check for any hidden fees before agreeing to the loan.
- Flexibility: When taking out a loan, it is important to choose a lender that is willing to work with you and is willing to be flexible with repayment options or other modifications to the loan agreement.
- Reputation: It is important to choose a lender that has a strong track record and a good reputation among its customers. Make sure to do your research before signing a loan agreement.
By shopping around and exploring all available options, you can ensure that you get the best possible deal on your commercial loan.
4. Have a well-thought-out business plan
Having a well-thought-out business plan is an important part of securing a commercial loan. For lenders, your business plan is their first impression of you and your business. It is a tangible representation of your business’s goals and objectives and how you plan to achieve them.
When you are creating a business plan for a commercial loan, make sure to include the following elements:
- Your business’s mission, vision and objectives
- Historical financial statements or projections
- Breakdown of start-up costs, loans, and capital
- A competitive analysis
- An operational plan
- A detailed marketing plan
By taking the time to create a comprehensive business plan, you can make sure that getting a commercial loan is smoother, easier, and more successful.
5. Be prepared to personally guarantee the loan
When it comes to getting a commercial loan, you need to demonstrate that you are ready and willing to personally guarantee the loan. This means that you are willing to accept full responsibility for the loan in the event that you or your business cannot pay it back.
Many lenders will require that you have personal assets, such as additional savings or property, ready to back you and the loan. This is the best way to ensure that they have collateral if the worst case scenario happens.
Make sure you are aware of your personal risks when taking out a loan, and that you have assets available in case you need to back them up. This will show potential lenders that you are investing in your business, and that you are serious about getting a loan and making sure it is paid off.
6. Understand the collateral requirements
Before applying for a loan, you need to make sure that you understand the collateral requirements. This means understanding which assets are accepted as collateral and having ready access to them. It is important to understand that collateral provides the lender with security to reduce their risk in the case that you are unable to meet your repayment obligations.
As a general rule, lenders prefer collateral that can be quickly and easily liquidated. This is why fixed assets, like real estate and equipment, are often required as collateral. Banks may also consider your accounts receivable, inventory, and intellectual property as acceptable collateral assets. Additionally, they may prefer that you back your loan with a lien on another asset.
Make sure to do your research and understand the collateral requirements before applying for a loan. Having a clear understanding of the collateral requirements will help ensure that you are better prepared and have the best chance at being approved for the loan.
7. Have a solid grasp of your financials
Having a solid understanding of your financials is essential if you’re looking to secure a commercial loan. Lenders will need to see proof that your business is financially sound and you are able to meet your repayment obligations.
Make sure to have a good understanding of your projected cash flow, the authorization of financial statements, and your current financial position. It is also important to have an up-to-date financial forecast. Having this information ready and available will demonstrate to potential lenders that your business has the capacity and ability to borrow money and make repayments.
It is equally as important to be able to clearly and effectively communicate your financials to a potential lender. Doing this helps to provide the lender confidence that you can manage the loan and you understand your own financial situation. Make sure to take the time to prepare and understand your financial information and be able to articulate it in an effective manner.
8. Know your credit score
Your credit score is another important factor to consider when applying for a commercial loan. It is an indication utilized by lenders when deciding whether or not to approve an application for a loan. A good credit score shows lenders that you have been responsible with managing your debt, and that you are a reliable borrower.
It is important to review and provide your lender with a copy of your credit score as it helps to make the loan application process easier. Credit bureaus like Equifax and Transunion can provide you with an up to date credit report and score. Make sure to review it prior to supplying it to your lender and ensure that the information is up to date and complete.
If you find errors in your credit report, make sure to dispute them and provide the lender with any updated information. Lenders may also request additional information such as past tax returns and bank statements. Have this information ready and easily accessible in order to ensure a smoother application process.
9. Be prepared to answer questions about your business
Once you have put in the time to build a good credit score and ensure that your tax returns, bank statements and other relevant documents are up to date, it is important to be prepared to answer questions related to your business. The lender may ask questions about your business's financial performance, assets and liabilities, industry trends, and more.
Be prepared to answer questions about your business plan and about the amount that you want to borrow. Have a clear reason for why you need the money and make sure to explain this to the lender.
You should also be prepared to explain your strategy for how you will repay the loan. The lender will need to feel confident that the loan will be paid back in a timely manner with interest. Being honest and clear about your plan to pay back the loan will go a long way in helping you get approved.
10. Have a loan repayment plan
Having a loan repayment plan is essential if you want to get a commercial loan, as having a repayment strategy tells potential lenders that you are organized and that you are committed to paying back the loan as quickly as possible with interest. A good loan repayment plan should include details on the type of loan you are seeking, the purpose of the loan, and how much you are asking to borrow.
It should also include the schedule of payments, term lengths, and the total amount due at the end of the loan period. Be sure to include in your plan the action that you plan to take if you are unable to make payments on time. Detailing your loan repayment plan in advance shows the lender that you are prepared and trustworthy.
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