Best Practice: Before applying for a bank loan have a good credit score and business plan to show business success and loan repayment.
Today’s Article: Access to Capital for Branding: Bank Business Loans
Bank loans are typically available for an “established” successful business. Banks prefer to make a loan to an existing business versus a start-up to lower their risk in lending. Banks are in the business to make a profit.
Before applying for a bank loan, know your credit score and complete a business plan. If your credit has some issues clear them up prior to applying for a loan.
Advantages of a Bank Business Loan
1. Open to existing businesses
2. Access to collateral backed capital
3. Interest in investing locally
4. Debt (loan) source of money is at a lower rate of interest than microloans or angel investing
5. Have a structured loan payback period over a number of years
6. Interest paid on the loan is tax deductible
7. Potential future funding
Disadvantages to a Bank Business Loan
1. Debt that a business has to repay – creates more overhead in your business
2. Access to start-up capital is more limited
3. Access to money that ties up collateral to pay back the loan if the loan is not repaid
4. Applicant needs to have good credit and requires running a credit report
5. An outside lender is now involved in your company – choose wisely
6. Can take time to secure
Steps in Applying for a Bank Loan.
First step to applying for a bank business loan is to check your credit score to insure that it meets the standards that a bank is requiring.
The federal government requires the big three credit reporting agencies in the United States, to furnish free annual credit reports.
The three major national credit bureaus are: Equifax, Experian, and TransUnion
To get free copies of your credit reports go to: Credit Bureaus and Credit Scoring | USA.gov
Note: If you don’t have a good credit history or score, clear up your credit problems before you go to a bank for a loan.
Second step is to create a business plan to explain your business, document why the business will be successful and that the business has the ability to pay back the loan.
There are two basic types of loans you might want to consider: business and consumer.
Business loans are secured with company or personal assets. The reason for these assets or collateral is cover the bank’s risk if the loan is not repaid. Business loans have more strict requirements than consumer loans and may take longer for an approval.
Some business owners will take out a personal loan based on personal assets such as home equity line, second mortgage, mortgage refinancing, and credit cards. Personal loans may be easier to obtain for a start-up business than business loans if you have a good credit history.
Note: As a general rule, it is better to take out a bank business loan to establish business credit, for when you need to borrow next time.
Action Step: Review your financial assets to see how much money is available for your business and how much you want to borrow from a bank. Also, look at what assets you have for collateral to use in taking out a bank loan. As a general rule, you need $1 in collateral for each $1 you borrow.
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