Taking out a small business loan may be the right move if you're looking for capital to grow your business. But before you start the loan application process, there are a few things you may want to consider to help it go more smoothly and to determine if your loan meets your needs with a comfortable repayment plan. From assessing your cash flow to understanding your credit scores, here are four key things to consider.
Know your business and personal cash flow
Understanding your current financial position from both a business and personal standpoint is generally essential to determining whether a loan is affordable for your circumstances.
"Ask your bank what the term of the loan is, figure out what the monthly payment is, and then look at your cash flow to see if you can actually afford that payment," says Evan Singer, President and CEO of SmartBiz®.
When determining your business’s cash flow, consider the income you are earning from customers versus the expenses that need to be paid. Having a clear understanding of this information may help you evaluate what kind of loan would best suit your needs. It’s also important to analyze any future cash coming in or going out that could affect your ability to repay the loan in full on time.
When it comes to personal cash flow, look at your monthly salary and other sources of income, such as investments or rental properties. Compare these with any fixed expenses like mortgage payments and regular bills. Additionally, review any lifestyle spending, such as eating out or holidays, that may impact how much money you have available for monthly loan repayment.
Creating a budget to track both your business and personal income and expenditure is one way to gain an accurate overview of how much money is coming in and going out each month. You’ll be able to use this information when applying for a loan to help demonstrate that you have taken the time to assess what type of repayment plan suits your current situation.
Assessing all aspects of your finances before applying for a small business loan may be beneficial in helping you secure an agreement with favorable terms and increasing the likelihood of smooth repayment down the line.
Know your personal credit score
Your personal credit score is a numerical representation of your creditworthiness, and this information is one of the criteria lenders will use to decide whether they want to offer you a loan or not. Generally, the higher your credit score, the more likely you are to be approved for a loan with favorable terms. For instance, SmartBiz looks at the FICO scores of any business owner with more than a 20 percent stake in a company.
"We need a good FICO score," Singer says. "It doesn't have to be perfect, but from a public records standpoint, you can't have any bankruptcies, foreclosures, or judgments within the last three years."
So before you apply for a business loan, take the time to understand your credit score and how it may impact your borrowing power. You can find out what your current score is by checking online with services such as Credit Karma® to view your credit report and make sure everything on it is accurate. Credit Karma will also make suggestions for improving your score, such as paying down debt on credit cards.
Inaccuracies on your credit report may lower your credit score and negatively impact your loan application. So if you see something wrong, you’ll want to have it corrected before applying for your loan, which may take some time.
Know your business credit score
Your business credit score reflects your company's financial health and is used by lenders to decide whether or not you are eligible for a loan. Having an understanding of this number may help you choose the best option for both short-term cash flow needs and long-term financial health. Additionally, having a good credit score may give you access to better terms and conditions on any loan you may be approved for.
Various services are available to check your business credit score, including Dun & Bradstreet®, Experian®, and Equifax®. Having a DUNS number is key to this process. These agencies use your DUNS number to create your business credit file, similar to how they use your social security number to identify your personal credit reports.
It’s important to keep records of all loans associated with the company name in order to ensure that no false information has been reported, which may affect the accuracy of your score. If your company doesn't have much credit history on record, adding good payment history at Dun & Bradstreet may improve your score. "You can actually provide them vendors that you've been paying consistently, and then they will take all of that information and give you a score," Singer says.
Finally, as with your personal credit, taking steps to improve any areas that may be negatively impacting your score will help show potential lenders that you are able to handle repayment responsibly and increase your chances of securing an agreement with favorable terms down the line.
Know that SmartBiz SBA loans offer reliable access to capital
SmartBiz has helped more small business owners like you secure SBA loans than any other platform. With lower interest rates, lower monthly payments, and loans from $30,000 - $350,000, we may have the right option for your business. Check out our current rates and estimate your monthly payments here.