Starting up your own business is an exciting, scary and often stressful time. This can be especially difficult if you have little to no credit history or have a bad history of credit. Even established small businesses need a helping hand from time to time and if you are really struggling you may feel like all doors are closed to you.
This doesn’t mean it’s impossible though as there are lenders out there willing to give you a chance. Here is a step by step guide on how to present yourself to a lender and get the most out of the experience.
Step 1: Do Your Research
The first step in any loan process is to do the basic research and find out if a lender offers the right kind of loan for you. There are many government backed loan options out there depending on what you need.
Government services are available online to provide a search tool as well as funding assistance. This can help you find programs that can help your business by building your skills and knowledge. There are also other comparative sites like Finder.com.au that will not only help you find these loans but also compare them to many others in a way that is quick and easy to reference.
Additionally, companies like Canstar make yearly awards on who they believe delivers the best product for customers and includes helpful lists like…
Things to look for in a business loan:
- Fixed or variable interest rate
- Split loan facility (part of loan on a fixed interest rate and part on a variable rate)
- Switch facility (ability to switch interest rate between fixed and variable)
- The loan size you need
- Ability to make additional repayments to pay off your loan faster
- Redraw facility (ability to withdraw additional payments)
- Ability to make lump sum repayments to pay off your loan faster
- Portability (ability to keep the same business loan when you switch office or store locations)
Another thing to research is what obligations your chosen lender requires you to meet to obtain their loan and how to present yourself in the best light possible. And always keep in mind that the lowest interest rate isn’t always the most suitable, or even the cheapest option.
Step 2: Gather Your Documents.
All loans, no matter what type, require a lot of supporting documents. So be prepared.
On top of the basics like identification and bank statements for both you and your business, you will most likely be asked to supply things like:
- your businesses projected income
- sales and expenses
- customer references
- personal character witnesses
- your current position in the local market
This might seem like overkill but each of these documents proves the worth of not just your business but also you as a person. If your credit isn’t up to scratch, these supporting documents can and will make your repayment options more favourable.
This is reinforced by the experts at Bright Capital Finance who say that “Typically your lender will require 100 points of ID to apply for any form of loan. Researching which specific documents are needed will ensure your business finance goals are met without roadblocks that slow you down.”
Step 3: Got Collateral? Use it!
The best tool you have for getting your business a loan is assets which can be used as collateral for the finance. This means that if you fail to make payments that the lender has something to fall back on, hence reducing the risk for them.
Finance is all about risk. The less risk to the lender the more likely they are to provide you with the money you need. Collateral doesn’t always mean you need to risk your home either. In some instances, your lender may accept other balance sheet assets to secure a loan, including your cars and equipment.
Obviously, the larger the collateral the better your loan amount or rates will be. So if you are confident that your business will thrive and you just need to get a leg up to get going then, by all means, use your commercial property or even your residential property as security.
What About No Collateral?
If you don’t have any collateral to put towards securing your finance then it makes things a little more difficult but yet again not impossible. A strong history of on-time payments for all your expenses will help.
A strong personal savings account will also be of great benefit, especially if you are applying for a start-up loan for your business. There is also the potential for some of these loans to have a line of credit attached which will let you charge to a credit card to cover expenses.
The main thing here is to take your time and create a history that proves you are safe to lend to and if you are able to find a partner/family member/friend willing to put their good name to work for you and go, guarantor.
Step 4: Applying
So you have done all the research, have chosen a lender you are happy with, and collected all the relevant paperwork… Now it’s time to apply. Keep in mind that every application you do will have a credit check done and a rejection of these applications can have a negative effect on your credit rating.
Some lenders will do pre-approval checks and let you know if you qualify before running credit checks. These pre-approvals typically only take a few minutes and give you a good basic idea of how much to apply for with the full application. According to finance experts at BMA Consulting, “if you’re worried about your bad credit, consider bringing along a co-signer. The strength of a co-signer with a strong history of qualified payments can help you move past bad credit.”
If you have filled out a few applications already and continue to get a negative response it may also be worthwhile getting your credit score assessed yourself and finding out what is having the negative effect.
Sometimes it can be as simple as a bill you thought you had paid on time but on your record, there is a late fee that hasn’t been paid.
Once you have all of your paperwork in and have met with your lender, depending on the lender, it can take anywhere from 24 hours to a couple of weeks to get your finance finalised and the cash in your account.
Are you ready to move beyond your bad credit?
These 4 steps to getting a small business loan even if you have a less than great credit record can ensure you don’t defer your dreams.
Keep things simple. Do your research. Organise your collateral. And apply with all your documents and finances in order.
Remember, your business goals exist on a long-term timeline. So keep your eyes on the prize and take small steps to turn your history of bad credit into a thriving and successful business.
Julian Parsons is an Australian writer and a business administration student living in Sydney. He is passionate about financial data and project management. Julian enjoys photography and when he’s not studying or writing, you’ll find him outdoors capturing shots of nature.