Business Loans

Business loans are risky ventures for commercial lenders. A large proportion of startup businesses fail within the first five years, and the protections that corporations and other structured business entities provide for business owners make repayment a significant uncertainty for lenders. Whereas an individual may be reluctant to file for bankruptcy except as a last resort, businesses can wind down and enter state receivership with less repercussions for the owners of the company. Thus, the lenders are often the ones who end up footing the bill for failed ventures.

The key to securing financing for a business loan is to prove to a lender that you’re a safe bet. There are a couple ways to do this.

Create a Business Plan

For residential mortgages, proof of income and ability to repay can be furnished simply by showing that you are gainfully employed. But with businesses, you have to show that your business model is viable, that there is a market for your services and that you have the leadership to make your business a success. Crafting a business plan that demonstrates your expertise and experience and specifically delineates how you intend to turn a profit is one of the key aspects of instilling confidence in your lender. Prepare a proposal that maps out how much money you need, what you will do with the money and how and when you intend to repay the loan.

Put Your Own Money Down

Investing your own money into the venture is a vote of confidence as well as reduction in liability for the lender. Many business owners seed their startups with home equity loans, personal savings or grant money. By showing that the commercial lender is not alone in funding your enterprise, you can build a case for the reliability of your business.

Build Business Credit

Just like individuals have credit, businesses have credit, too. Corporations, partnerships and other entities can incur debt, make payments and demonstrate credit-to-debt ratios. If you’re seeking a business loan to expand your business, a history of timely repayment and responsible utilizing of commercial credit will go a long way in reassuring loan officers.

Post Collateral

With a home mortgage, your property is the collateral. Such secured loans are much less risky and therefore much more affordable, since the bank has a tangible asset it can repossess if you can’t come up with the cash to pay them back. With business loans, you can use your company’s assets as collateral. For example, a commercial mortgage uses your businesses premises, equipment or buildings to secure your loan. Securing a commercial mortgage will require up-to-date assessments, environmental reports and valuations.

Conclusion

For most startups and small businesses, commercial financing is a must. But obtaining business credit is often more complex and involved than securing a personal loan. Follow the above guidelines, consult with banks and lenders with whom you already have a foundation of trust and build a strong case to ensure that you get the best rates.