Small business owners can benefit from learning what information to gather and review before applying for credit.
Whether your business is just starting up or preparing for expansion, credit can help support your short- and long-term financial goals. You’ll find there are a number of benefits to having business credit. However, before you apply, it’s important to determine whether your business is ready for credit.
Follow these steps to ensure your business is fully prepared to obtain financing:
Review your credit history
When assessing creditworthiness, both your personal and business finances matter. On the business side, a bank will determine if your business is generating a positive cash flow. On the personal side, a bank will want to know if you are generating enough income to support not only your current debt, but also the debt that you’re requesting.
Before you approach a lender, request a copy of your personal credit report and your business credit report, and review them carefully for accuracy. If you spot an error, file an online dispute with the three credit reporting agencies within 30 days of receiving your report.
Gather financial documents
Before filling out your application, locate this information and double-check it for accuracy:
- Business revenue reports
- Personal income reports
- Tax returns for the past three years
- Asset and bank account information
- Proof of ownership
- The correct legal name of the business
Providing comprehensive and accurate information can help your application move through the process as quickly as possible.
Determine how much capital you need
Be prepared to tell the lender how you plan to use the money. For example, you may explain that you will use the capital to pay for additional office space and furniture or for a website redesign.
Also be sure you are asking for a realistic amount to fulfill those particular goals. Construction materials, for example, have been impacted by recent supply chain issues, which has driven up costs — so a remodeling project this year may be considerably costlier than the quote you got two years ago. If you’re not sure how much capital to request, consider seeking bids from several companies before filling out your loan application. This information will help your financial professional determine whether your business is currently able to take on the debt required to fund such improvements.
Understand all your lending options
It’s important to identify all the lending options available to you and determine which one is the best choice for your business. You will also want to consider the process and the timing. For example, loan decisions below $100,000 may be based on your credit profile and basic information, while larger amounts may require a detailed review of your finances. Some things to keep in mind:
- Credit cards may be used for everyday purchases, including office supplies, meals, and travel.
- Lines of credit can help with working capital needs (such as paying for inventory) and maintaining cash flow.
- Term loans are designed for making specific purchases, such as equipment, vehicles, real estate, or renovations.
If you’re unsure which credit product is right for your needs, discuss it in detail with your banker before you apply.
Consider terms and interest rates
You also have to decide how long you will need to repay your credit. There are short-, medium-, and long-term loans, and they all have positives and negatives. For example, if you expect to be able to pay back the money quickly, a short-term loan may be the best choice. Interest rates can also have a big impact on your decision. For example, loans with fixed interest rates may make it easier for you to budget, as you’ll likely have fixed monthly payments.
Bottom line: Just as planning and preparation can help you set the business goals that will help you succeed, planning and preparation can help you apply for and secure the funds needed to reach them. This is a good time to consult your accountant and/or financial advisor, who can explain the various trade-offs of loans and credit products — and how their rates and terms can impact you now and in the future.