3 Key Factors That Influence the Terms of Your Business Loan
Every business owner, no matter what industry they operate in, will eventually need to take out business loans. These loans can help you cover unexpected expenses, make up for cash flow issues and even finance improvements for your company. However, making sure that you get the best terms on those loans isn’t always easy. You need to understand what lenders look at when creating your loan offer. Here are the most common factors lenders pay attention to.
1. Your Business Plan
Every business should have a comprehensive business plan in place long before applying for a business loan. Think of your plan as an outline of how you run your business. It should detail everything from your organizational structure to your marketing strategy. Lenders look at this plan to see if your business is viable and will be able to repay the loan in full by the end of the loan term. If the plan isn’t detailed, lenders won’t have confidence in your business and will either offer you less than ideal terms or deny your application altogether.
2. Your Credit Score
Lenders will always check your credit score when you apply for a loan. It gives them a general idea of how responsible of a borrower you’ll be. The higher your credit score is, the better the loan’s terms and interest rate will be. However, if your score is low, banks and lenders won’t feel confident lending you the money you need and may offer you a higher-than-normal interest rate to make up for the risk. The best thing you can do is check your score and pay down existing debts and credit cards before applying for a business loan. This will increase your chances of getting a great loan that you can actually afford.
3. Your Collateral
When you apply for a business loan, many lenders will offer you the opportunity to secure the loan with collateral. The collateral is a piece of real, physical property that the bank can sell to settle your debt if you default on the loan. The more valuable the collateral is, the better your loan terms will be. This is because lenders will be able to settle more debt and potentially make a profit if you end up defaulting on your loan. As a general rule, try not to use something for collateral that you’re not willing to lose.
Getting the best terms on your business loans doesn’t have to be hard. Keep these factors in mind and do what you can to set your application up for success from the very beginning.