5 Things that Can Affect Business Term Loans
With a few rare exceptions, every business will need to borrow money at some time or other. Whether you need capital to launch a startup, or need an influx of cash to cover an expense or fund an expansion, business financing is a fact of life for entrepreneurs, so it’s important to understand how lending institutions evaluate risk. Here are five of the biggest considerations.
The type of business
Some businesses are simply a riskier investment than others. A bank will approach a crowded field (like restaurants) differently than it will approach a medical supply company, or a business in a declining industry like film development. The higher the perceived risk, the higher the interest rate you may be charged.
Business financing and consumer lending have quite a bit in common, and one of the biggest similarities is the importance of your credit score. Just as if you were applying for a mortgage loan, the higher the credit score, the lower the risk, and therefore, the lower the rate. It’s important to note that while an established business may have a great business credit score, the owner’s personal credit often comes into play as well.
Your business’ history
The longer you’ve been in business, the easier it is to get business financing in the form of a bank loan. Even though new businesses need the most cash, the longer and more successful your track record, the more willing a lender will be to provide funds.
Down payment amount
Lenders love big down payments. They show that the owner is invested in their success and serious about paying back their business financing. Unfortunately, putting up a large down payment as collateral isn’t very realistic for new business owners. If you can’t put much cash up on the front end, expect a higher rate or a shorter term on the back end.
Your business plan
This is an area where owners with less than perfect credit can shine. A lender is always going to take a business plan into consideration. A well laid out strategy with realistic, measurable goals for success and tactics in place to accomplish them will go a long way, and create a lower perception of risk.
The more potential reward you can show, and the less risk you are exposed to, the better your chances to receive great terms from a lender.