If your business is suffering due to lack of funds, applying for a commercial loan may be your best option. However, you need to consider a variety of important factors before signing the dotted line.
The commercial business loan is very important to small business owners. The survival of your venture may even depend on this. Nevertheless, it is not that simple to borrow a big amount of money without studying the consequences. More importantly, you have to determine the terms and capacity for repayment. There are several factors that you should go over before applying for any loan.
Assessing Yourself Through the Commercial Lender’s Eyes
The most important is the borrower’s credit history. Remember that the first thing that commercial mortgage lenders will scrutinize is your credit score as well as the status of your personal and business standing. You can get a copy of your credit report from the primary credit bureaus and review this for any possible mistakes regarding the reporting. It is vital to fix inconsistencies before starting your application process for the commercial business loan. Your personal credit score is tied up to your number in Social Security. On the other hand, the business credit is related to your tax identification number. The tax ID can be obtained from the Office of the Internal Revenue Service.
The next essential factor is payment capacity. Banks and lending institutions will check your repayment sources which are cash flow and collateral. You can expect the banks to go over your financial statements. The other documents that you have to prepare include assets and liabilities (personal); tax returns and balance sheets for the last three years; profit and loss declaration for the past three years; and, accounts receivables. When the commercial mortgage firm finds out that you have a steady profit stream, it will most likely approve your application. However, if the profit statement is not encouraging, you need to show exhaustive information on new opportunities, fresh contracts, or information which points out that your outfit is not a “hazardous enterprise.” Proof of collateral is compulsory for all SBA loans although the Small Business Administration seldom turns down a loan where insufficient collateral is the only adverse factor. The collateral can come in the form of business and personal properties. When you intend to procure equipment with your loan, it is presumed that this will be used as mortgage collateral.
Applicants for commercial loans need a sufficient amount of equity invested in their enterprises. Lenders will want to know that you have strived to generate success. At the same time, strong equity plus the right amount of debt can help any business undertaking to endure the difficult economic conditions. Inadequate equity or the absence of it makes a business defenseless and adds to the possibility of default. Take note that working capital is current assets minus liabilities. The deficiency of working capital enhances the danger of business collapse and means that lenders will hesitate to approve your commercial mortgage loan. Also, working capital is interpreted as cash on hand. It can be interpreted as the means of paying existing debts and ensure the survival of the business. With these factors in mind, you can now come up with a decision to file your business loan.