If you are running a business, you may need an immediate injection of cash. It is not feasible all the time to have enough money in your cash reservoir, but there is nothing to panic about as you can seek a business loan, thanks to online lenders.
These loans work differently from small cash loans taken out to tide over. A lender will peruse your profitability to lend money. If you are a start-up, you will have to submit a business plan that outlines how your project will likely generate money in the coming years.
A lender would want their money back, so they would like to see if the project is profitable. Getting a business loan is not a cinch, but it is a widely spread thought that these loans carry high-interest rates. The fact is that all kinds of debts are expensive, whether they are personal loans or business loans.
It is often suggested that you do proper research about business loan rates of interest so you choose a good deal, but this is not enough.
Tips to avail of a favourable deal on a business loan
Here are the tips to follow to get a business loan at a lower interest rate:
Improve your company’s profitability
Profitability is a paramount factor that a lender will look at to decide whether your application should be signed off on or not. You are highly likely to be approved when you have high profitability as it shows your company’s ability to pay off the debt.
Note that you are borrowing money for your business, not for yourself, and therefore your business’ profitability will be taken into account, not your personal income.
As a start-up, you will likely be worried about your profitability. It is likely that you need money for initial capital. Well, you are still eligible for taking out a business loan, provided you prove that your project is profitable. Submit a realistic business plan that outlines how you grow down the road.
If the project which you are borrowing money for does not seem to be worth profitable, no lender will give the nod to your application. Therefore, if you are a start-up, try to have a strong business plan that proves that your business will likely generate profits soon, and if you have an established company, your profit and loss statement and balance sheet should be able to reveal your true profitable situation.
Raise your credit score
It is crucial to have a solid credit score to get competitive interest rates. Even if your profitability is high, your lender will charge a higher interest rate if your credit rating is not good. You should check out your credit report from all credit reference agencies as you never know which one your lender will look over.
Try to scan through your credit file, so you are sure that it does not record erroneous information or any defaults that you do not recognize. It is crucial to fix errors before you apply for the loan if you spot any.
Keep the following points in your mind so as not to let your credit rating affect your ability to borrow money to fund your business.
- Try not to have any current debt, especially if you are a start-up.
- Your debt-to-income ratio should be lower than 30%.
A good credit score proves your loyalty, so do not underestimate it.
Offer collateral to secure the loan
A business loan can be unsecured or secured depending on the amount you borrow. However, you can also propose to offer a valuable asset to secure a business loan to avail of lower interest rates. Note that it is just a chance to get a better deal because lenders may or may not accept the collateral.
They follow their terms and conditions strictly. For a small business loan, they do not seek collateral and therefore levy higher interest rates. Do the research and try to get a pre-approval letter from a couple of lenders. Your credit score will not be affected by getting a pre-approval letter. Ask them if they are ready to lower the interest rate if you offer collateral or arrange a guarantor.
Build a good relationship with a lender
Although lenders are notorious for making profits by charging high-interest rates, they may lend you money at favourable interest rates. Borrowing money from a new lender will definitely charge higher interest rates than the one who you have applied to earlier many times.
However, it is vital to building a good relationship with them. If you do not pay off the debt on time, of course, you will end up getting money at a higher interest rate. Try to borrow money from the same lender and pay off all debts on time. You will become their good customers, and then you can take advantage of affordable interest rates.
The bottom line
Getting a business loan at affordable interest rates is not impossible, but you should look beyond interest rates to gain a competitive deal.
Look for flexible terms and conditions that help your company keep going. For instance, choosing an interest-only deal can allow you to have more flow in cash, reducing the chances of hinging loans all the time.
Try not to have a tunnel vision at the time of choosing a business loan with a favourable deal.