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5 Strategic Ways to Get Loans for Your Small Business

Image: 5 Strategic Ways to Get Loans for Your Small Business

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Friday, 26 January 2018 07:38 AM Current | Bio | Archive

One essential avenue for small businesses to raise funds for business is through loans. This is usually for expansion or for increase in capital with a potential increase in turnover in anticipation.

The truth of it is that loans, whether from bank or any other financial institution, are becoming increasingly hard to access.

The economic climate of the day has made it such that requirements for accessing loans are getting stiffer. Financial institutions have stepped up their preferences when it comes to selection of businesses to give loans.

Notwithstanding that getting a small business loan is seemingly a herculean task now, I will guide you through some strategies that will make the banks or any financial institution consider your business as loan worthy.

1. Assess your business from the lender's perspective

A good understand of how banks and lending institutions think will help your prospects of accessing a small business loan. Think of yourself as a lender and ask yourself; "If I were a lender, would I want to give my business a loan?" A good answer to this question helps you begin to package your business as such.

One grave mistake most business owners have made is to downplay the high risks their business portends if a loan is obtained. They only focus on the prospective gains and focus less on the risks. As a matter of fact, if your business is suffering and you are looking to revive it, taking a loan might not be the best option. It has a higher risk compared to when you are looking to expand your business.

The lender, whoever it may be, is more interested in understanding the risks of lending you money than he is about the potential profits you would quote on your proposal. They want to know all that could go wrong when he gives you the money.

Thinking like this will make you see all the places that might pose as bottlenecks in your quest for a small business loan.

2. Maintain a DSCR greater than 1

The Debt Service Coverage Ratio (DSCR) is a ratio used by financial institutions to ascertain if a corporate body, government or business venture is loan worthy. For a business venture, your DSCR is the ratio of your annual cash flow to the annual payments to be made in one year (including interests and principal put together).

If your DSCR is less than 1, it is indicative of negative cash flow. For insurance a DSCR of 0.9 means that the cash that flows into your business is only enough to take care of 90% of the loan repayment.

According to Debt Consolidation, “To maintain a reasonable DSCR, you either need to increase cash flow by cutting unnecessary cost, or readjusting the quoted loan amount.

On the other hand, a DSCR that is too close to 1 is also very dicey as most lending institutions consider the business as vulnerable. The minimum DSCR that businesses need to maintain is 1.25.”

3. You should have a Low DTI Ratio

Beyond your business being able to care of the loan you are to get, lending institutions are also very interested in your personal capability to offset debts. Hence, your Debt-To-Income (DTI) ratio must not be higher than 33%. No lender would want to give a loan to someone whose personal income is insufficient to pay the loan according to the monthly repayment plan.

To calculate your DTI is quite simple. The sum of all your monthly debts (mortgage, automobile loan etc.) divided by your gross income for a month. You need to have this data ready, because lenders will definitely demand for them and it is a critical factor that can make your small business loan worthy.

4. A High Credit Score is Important.

The banks or any traditional lending institution will definitely request a credit report from reputable credit bureaus to ascertain your compliance to basic payments required of your business.

Your credit score determines the interest rate you’re going to enjoy from your prospective loan. Usually, credit scores above 700 attract some of the favorable interest rates of about 7% for loans under $100,000.

On the other hand, if your credit score is below 600, you’re most likely not getting considered for a loan. It’s going to be too much risk for them. So you need to keep a really high credit score. Even if you use the best credit cards in the market, going down below 600 shows them that your company stands at a risk of not returning the anticipated funds.

To cub this, ensure you promptly make payment for services rendered to you, fix any discrepancies in tax, and you’ll stand a chance of getting a loan for your small business.

5. Have Valuable Collateral Handy

Let's face it, no matter how good your numbers are, it is no guarantee that you’ll eventually repay the loan. Therefore, there will always be something that the lenders will hold on to, should you fail to meet up with your loan obligations.

It actually may not be the primary factor to be considered, but it is necessary. Collateral can come in different forms and an added advantage for getting business loan. With these strategies, I believe your small business will be a top consideration for a loan.

Richard Agu is a researcher, entrepreneur and freelancer, passionate about entrepreneurship and self-development. Currently, Richard writes for Entrepreneur.com, Goodmenproject.com, among others. Follow him on Linkedin.com by clicking here now.

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One essential avenue for small businesses to raise funds for business is through loans. This is usually for expansion or for increase in capital with a potential increase in turnover in anticipation.
strategic, ways, loans, small, business
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2018-38-26
Friday, 26 January 2018 07:38 AM
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