Over the past few years, the popularity and utility of short term loans have increased exponentially as compared to their long term counterparts.
However, quite a few entrepreneurs are still not sure what they need to qualify for this type of loan. Obtaining short term business loans with bad credit is supposed to be even more difficult.
Why are Short term loans more attractive?
There are several reasons why short term loans are deemed to be more attractive than long term loans. They offer more financial flexibility in the future since the borrower does not need to set aside loan repayment amounts for more than a year at maximum. Long term loans, on the other hand, would require repayments for the next five to ten years. This becomes an unwanted burden especially if the company is in a struggling phase. However, there is also a downside to the equation; short term loans are usually highly-priced compared to medium term and long term loans. Repayments for short term loans must also be made more frequently.
How to Qualify for Short Term Business Loans
A business would require a short term loan for many reasons. It could be seeking a technology upgrade, equipment procurement, or an entry into a new niche market. There are certain things that a lender will seek to ascertain before an application for the short term loan is approved. In the following article, we will discuss these things, and also advise our readers on how they can take care of these important points.
Revenue
Revenue generated by the business is the first thing that catches the eyes of a potential lender. First of all, he would be looking for a steady income of the business in the form of regular collections being deposited into the business account. The regularity of the revenue allows the lender to conclude that the income streams of the business are healthy, and it will have no difficulty in making loan repayments in the future. Steady revenue also means a strong cash flow which trickles down into the ROI of the company.
Track Record
The track record of the company is very important. The track record of the business consists of its financial dealings in the past over a specific period. How has the business fared? Has it been discharging its financial liabilities consistently?
The track record allows the lender to analyze the past behavior of the business, and based on this knowledge, predict how it will act in the future. Take for example a company that has been consistently late in making its loan repayments. This will allow the lender to assume that he should not expect swift repayments from you. If you have ever defaulted on a loan in the past, it can become very problematic because the lender will think that you might default on this new loan too. If your business receipts over the past few years have not been steady each month, the lender will understand that your business is still in the struggling phase, and there is a possibility that his loan remains unpaid for a long time. Such an inherent risk will compel the lender to mark you as a highly risky client. If this happens, your interest rate will also increase proportionately.
Credit History
Lenders check the credit history of all loan applicants whether they are applying for a short term loan or any other kind of facility. The credit score of every person and/or entity can be seen through their credit report which is available from at least three sources. The credit report shows the lender your credit score. The credit score threshold varies from lender to lender, but it can be safely assumed that most of them would require a score of more than 550.
Every business must keep its credit history clean at all times because lenders – especially banks and financial institutions – do not offer loans to any customer unless their credit report is satisfactory.
Favorable Debt to Income Ratio
There is a concept used by lenders and it is known as debt to income ratio. The concept is used to measure the monthly debt repayments of the borrower against his monthly income.
For the majority of lenders, this ratio should be fifty percent or even lower. As a practice, lenders would be very reluctant to offer a new loan to a borrower who already has other loans payable at the same time. Besides the debt to income ratio, the lender will also want to analyze the most important document pertaining to your business; the balance sheet. What they are looking for is whether your assets equal the sum of your equity and liabilities.
The balance sheet allows the owner of the business to determine whether he can undertake a growth activity, or follow a conservative approach, at any given point in time.
Preparing and maintaining a balance sheet regularly is a daunting task, however, if you can present one to the lender, it will have a positive effect. Also keep in mind that from the lender’s perspective, every debt is equal. Whether it is a personal loan, credit card, home loan or mortgage, anything that is payable by you or your business is taken into account while calculating your debt to income ratio.
A few Other Notable Points
While a high credit score, a strong balance sheet, and a great credit history are favorable when you are applying for a short term business loan, there are a few things that harm your prospects.
If you do not have a bank account, it can become very troublesome. There are many reasons why every business must maintain a bank account. If you do not have a business bank account, there is a strong possibility that you are mixing your funds and that of your business. Lenders don’t like this commingling of the fund and would see it as one of your negative points.
If you are slow in your responses to the bank at the time of loan processing, it will also be seen as a lack of seriousness on your part. If the borrower is showing continuous laziness, the lender may decide to decline his application because he may pose some risk in the future at the time of repayments.
The Final Word
Many reasons may compel you to opt for a short term business loan. You may want to explore some new business opportunities, or your equipment may have become outdated, and you want an update, etc. Whatever your reason may be, a short term loan is an option that is always available, and extremely beneficial for your business.
In the above article, we have told you how you can qualify for a short term business loan. If you take care of these points, there is no reason why your loan application will be declined.