Things to Keep in Mind While Applying Commercial Loans

Thousands of small business borrowers and startups place commercial loan applications with their preferred bank or private lenders.

However, it is only a few who stand a good chance of getting their loan request sanctioned. Not many borrowers understand the odds that can increase their prospects of getting commercial loans.

Here are certain factors to keep in mind when applying for commercial loans.

Credit scores

Financial institutions review the credit history of a borrower when determining the loan applicant’s eligibility to get funds from them. Poor credit scores can hamper the chances of a small business borrower to get adequate funding.

Delayed payments of bills and interest rates or defaulting on repayment of previous loans can worsen credit scores and lessen the chances of traditional lending sources to sanction the borrower’s loan. Brush up your credit records and clear out discrepancies in the credit information before applying for a loan.

Documents

Banks and lenders require records about your balance sheet statements and cash flow records when reviewing the loan request.

Tax returns of the last 4- years will also be assessed of your business and the individual who guarantees the loan. Often lenders require small business borrowers to make covenants and promises that their business will come up with certain growth results in the future.

Certified financial statements have to be produced before the lending agency to show your repayment capacity of the loan amount.

Strong business plan

Prospective lenders will be convinced to offer funding solutions to support your small business or startup if you can show a successful business plan.

Mention in great detail the business idea for which you require a commercial loan. In case the loan is being taken for improvement or purchase of an asset or machinery then elaborate on how the improvements will bring about enhanced productivity, increased competitiveness, and higher profits.

Projections of profits in the future will only evoke further interest of banks and lenders to sanction the commercial loan request.

Collateral

Small business borrowers or startups with valuable assets pledged as collateral against the loan amount stand higher chances of securing loans from traditional sources.

House, non-agricultural land, factory, jewelry, property, or any other valuable asset can be put up as a guarantee against the loan amount.

Ownership of the asset pledged as a guarantee against the sanctioned loan amount gets transferred to the lending agency when the borrower defaults on loan repayment terms.

Stable financial conditions

Often commercial loan lenders require business borrowers to possess a certain cash flow and show a certain debt-to-cash-flow ratio in order to prove their capacity to take on high interest rate loans.

In case you are unsure about achieving a certain business cash flow limit then it is best to opt for non-bank loans. Non-traditional lending agencies may offer you a loan despite an uncertain profit projection and waive all covenants except for timely repayment of the loan but it may come at a slightly higher interest rate.

Meeting other criteria and proving the worth of the idea for which the loan is being taken can help a business borrower find solutions for cash flow problems and fund shortages.

When applying for commercial loans, understanding the key factors that influence lenders' decisions can significantly improve your chances of approval.

Maintaining a strong credit score is crucial, as it demonstrates your financial reliability and repayment capability. Clearing any discrepancies in credit records before applying can enhance your eligibility for funding.

Comprehensive documentation, including financial statements and tax returns, is essential to provide lenders with a clear picture of your business's financial health and repayment capacity.

A well-developed business plan outlining your objectives, strategies, and projected profits can instill confidence in lenders and increase the likelihood of loan approval.

Offering collateral can further bolster your loan application, as it provides security for the lender in case of default.

Assets such as property or valuable equipment can be pledged to secure the loan, improving your chances of securing funding.

Additionally, maintaining stable financial conditions and meeting lenders' criteria for cash flow and debt-to-cash-flow ratios can strengthen your loan application.

Exploring non-traditional lending options may also be beneficial for businesses facing cash flow challenges, albeit at potentially higher interest rates.

By carefully considering these factors and presenting a compelling case for your loan application, you can improve your prospects of securing the funding needed to support your business growth and success.