How Your Personal Credit Affects Your Chances of Getting a Business Loan
by: John Williams

As much as we look to forming a business to create a fresh start, our pasts can follow close behind. Make sure your personal credit is in order before applying for a business loan. --Editor

Your business idea first begins with a dream, and then extends to a passion. The passion to do what you love leads you to need financial assistance. Having the means to expand on your passion will bring hope to your livelihood. Does your personal credit affect your chances of getting a loan to begin the business of your dreams? We will explore this question.

All lenders, especially local banks, will do a thorough check of your personal credit history. It most likely will affect your chances of receiving or being declined for a business loan.

You can increase your chances of receiving approval for a business loan by paying close attention to the following personal credit factors:

• Show a steady source of income. Changing jobs prior to or not having employment will decrease your chances. Lenders need to see stability.

• Credit card balances should be paid off or carried at low amount. Never cancel a credit card or apply for a new one prior to applying for a business loan.

• Obtain credit reports from all credit bureaus to check for accuracy. Almost half of the reports have been found to contain errors.

• Determine a manageable down payment amount. It may mean rejection or approval.

Lenders want to be assured the person they are loaning funds to is capable of managing personal finances because it will reflect spending habits within a business. Always be honest with lenders about your personal credit history. Anything you cover up can be deemed as fraud and will further you from getting the financial assistance you need. Honesty about past financial failures with explanation is your best investment for getting a business loan. Finally, before you approach a lender concerning your business, financial needs need to be organized with key documents, a business plan, financial statements and a repayment plan.

In order to get a business loan, a business owner must think like a bank. If he or she is not prepared, most likely, the loan will be turned down. Business loans are somewhat different than personal loans; in addition to having a good credit standing, usually banks and financial institutions require business owners to supply a well thought out business plan. Banks want to be assured that the business owner will repay the loan, even if the business goes into default.

A well-thought out business plan should include the following:

• Cover letter or executive summary

• Photographs of the business, if possible

• A description of you, your business and the history of the business, along with your background regarding the business.

• Any collateral or fixed assets to be acquired with the loan and their cost (include appraisals on real estate and recent tax appraisals).

• Market or target audience, potential or existing customers; competitors and supplier information

• A good marketing plan, which should include advertising and public relations

• Financial soundness of the plan, which includes Cash Flow Projections, projected Profit/Loss summaries, any business credit reports, copies of any business tax returns, lease agreements, any contracts with customers, etc.

• Business license, Franchise Agreements (if applicable), any other construction contracts, partnership agreements, employment agreements; environmental assessments if necessary, and copies of any other financial paperwork of worthiness

• Summary, which lists the benefits from the loan and a brief statement indicating how the loan will be repaid

In addition to a well-thought out business plan, a business owner will most likely find that most institutions require personal financial information as well. Be prepared to present the lender with personal financial statements, personal tax returns, an up-to-date credit report, and resumes or letters of recommendation from former partners or proprietors. It is the business owner’s responsibility to ensure the lender that the business is of little risk, because after all, they are in a business for profit as well.